San Francisco’s Robust Coworking Market Keeps Growing, But Lack Of Available Space Could Be A Problem

As 2018 approaches its close, it is turning out to be another active year for flex office providers in the San Francisco Bay Area. Demand for space is rising as more providers enter the San Francisco market, but a low vacancy rate and lack of new construction could put a crimp on future expansion. 

San Francisco is quickly becoming one of the nation's most robust coworking and flex office markets, especially as demand has risen. It currently has more coworking spaces per capita than the 23 other major cities listed in a report from SimpleTexting, with 54.45 per 100,000 people. Comparatively, Miami has 49.21 coworking spaces and Atlanta has 47.91 spaces per 100,000 people. SimpleTexting gathered shared office listings off Yelp and used U.S. Census Bureau data to determine these numbers.

The growth in San Francisco is part of a larger trend of rapid growth in the industry. The coworking industry has been on a rapid growth trajectory since the start of the cycle, reaching 15,500 coworking spaces globally in 2018, according to SimpleTexting, which used data from Statista to find these numbers.

A Tightening Office Market

San Francisco coworking and flex office providers have increasingly leased more space since 2015, when 187K SF was leased, reaching a high of 922K SF in 2017, according to CBRE data. So far this year, providers have leased 555K SF and the industry could come close to matching 2017 leasing activity, CBRE Director of Research and Analysis Colin Yasukochi said.  

In the Bay Area, these companies have leased about 850K SF, most of which was in San Francisco, Newmark Knight Frank Regional Workplace Manager, West Coast Lead Evelyn Lee said. Her company is tracking about 650K SF of demand in San Francisco, not all of which will be fulfilled by the end of the year.

Even with all the new locations and expansion in San Francisco, the industry’s growth could stall.

“One of the issues is a general lack of available space in San Francisco as our vacancy rate is 4.7%, so that is a somewhat constricting factor,” Yasukochi said.

He said coworking is attractive to users because providers can offer short-term leases and take care of all the construction costs and build-out to get a space ready, which can be a very expensive and time-consuming process.

While flex office providers have been looking at additional Bay Area markets, they have been mainly concentrated in San Francisco and parts of Silicon Valley, Yasukochi said. Tenants are focusing on areas where a potential workforce lives and works.

Flex office or shared workspace providers typically offer turnkey office solutions for a company or enterprise client that may or may not share their specific space with another member. Coworking providers typically offer spaces to individuals through enterprise companies and the spaces are often shared depending on the memberships provided.

With more tenants going after fewer spaces, office rents and net absorption set record highs during the third quarter, according to the CBRE MarketView San Francisco Office Q3 report. The average office rent is now $77.60/SF, an increase of 2.7% quarter over quarter and up 6.3% for the year.

Net absorption has reached 3.3M SF year-to-date, the highest annual amount ever recorded in the city. Even with 3.2M SF of office under construction, about 92% is pre-leased, leaving few new office options for coworking providers until 2022 when a couple of large-scale office projects are expected to deliver.

Coworking and flex office companies are competing directly with each other and big tech and other companies for the limited space, Yasukochi said. Tenants that are the most creditworthy and are willing to pay the going rate or slightly above end up getting the space, Yasukochi said. That may put niche startup flex office providers at a disadvantage.

Flex Office Providers Continue To Eye San Francisco

Space constraints haven’t stopped some of the large, well-known flex office brands from growing their existing footprints in the market. Knotel’s San Francisco portfolio has grown to 130K SF after six leases were inked earlier in the year. Mindspace opened its first San Francisco space and second U.S. location in late September, occupying 36K SF across three floors at the Market Center Building at 575 Market St.

Industrious will open its first San Francisco location Oct. 22 at 1700 Montgomery in Embarcadero. WeWork’s Bay Area footprint is around 1M SF after aggressive leasing activity this year. Spaces and Canopy are among the providers to expand into new locations this year.

Knotel was among the most active workspace providers during the second quarter when most of its growth occurred. It first entered San Francisco August 2017 with an 11K SF lease at 972 Mission St.

 “After establishing operations in San Francisco only a year ago, we are now growing rapidly as we strive to meet the strong demand for high-quality but flexible office space here,” Knotel Head of Expansion Kwame Spearman said in a press release. “Most fast-growing companies do not want to tie up financial resources while trying to guess what their space needs will be in the medium- to long-term future.”

The company leased 13,236 SF at 785 Market St. for the 10th and 12th floors. It also leased 17K SF, which included the first and second floors, mezzanine and basement, at 321 11th St. from landlord Birmingham. It also leased 11,579 SF on the second and seventh floors at 550 Montgomery St. from Downtown Properties.

It leased roughly 8K SF for the fifth and sixth floors at 221 Pine St. from Pine Street Ownership Group and another 8K SF for the second floor at 160 Pine St. from landlord Britphil & Co. It will occupy another 5K SF on the third and fourth floors of 701 Sutter, owned by Reed Moulds.

Knotel designs, builds and operates custom headquarter-quality spaces for companies with 50 employees or more. It was established in 2016 in New York to cater to established and growing brands. It now operates over 80 locations, including sites in London and Berlin.

UPDATE, OCT. 11, 2:34 P.M. PT: The article has been updated to include additional data from Newmark Knight Frank.