The top-10 markets account for more than 70 percent of the nation’s flexible-office inventory (25 percent in Manhattan alone). With nearly 4 billion square feet of traditional office space in the 54 major metros tracked by CBRE, continued growth of flexible space is inevitable even under conservative estimates.
The top-five operators by square footage are WeWork, Regus, Spaces, Knotel and Industrious. The We Company (WeWork) and IWG (Regus and Spaces) hold 50 percent of the U.S. flexible-office inventory. Knotel and Industrious have another 10 percent.
Other CBRE Research findings include:
- In 2018 alone, flexible space in the top-10 markets grew by 25 percent, with Manhattan growing the most on an absolute basis (+4 million square feet) and Seattle growing the most on a percentage basis (44 percent). Growth since the start of this cycle has been constant and is showing no signs of slowing. Flexible-space operators are currently in the market for more than 6 million square feet of space.
- Flexible space as a percentage of total office inventory is around 2 percent, with San Francisco and Manhattan being the most saturated (over 3 percent each). In some foreign markets, such as London and Beijing, flex space accounts for more than 5 percent of total office inventory.
- Only 15 markets have more than 1 million square feet of flexible-office inventory. Many U.S. markets have not even scratched the surface of this sector, including high office-using employment growth markets like Nashville, Austin and Charlotte.
- The Fortune 500 is engaged and intrigued. 85 percent of real estate executives plan to implement flexible-office solutions into their portfolio strategy, according to the 2018 Americas Occupier Survey. Enterprise customers are early in the implementation stage of flexible-office solutions as a portfolio strategy. If these strategies prove successful, there is potential for more explosive growth of coworking.
- The top flexible-space markets are also the highest for technology industry growth and office rent. With many coworking operators expanding in these mature markets, there are valid questions about their potential profitability. Those that deliver a well-operated, experiential product will have the best chance to achieve good margins.
- Despite the rise of flexible office space, there was still more than 19 million square feet of small, traditional-office deals (under 5,000 square feet) transacted last year in the top-20 markets. And there is more than 140 million square feet of space coming up for renewal over the next 24 months in these markets (more than half of them for 50,000 square feet or less). Given these statistics, there is clearly more market share to be gained.
- CBRE Research found that nearly 40 percent of office building sales with some flexible-space component achieved values greater than the average for office buildings in their markets that had no flexible-space component. Higher capitalization rates seem to correlate with higher amounts of flexible space occupancy — a signal that long-term lease commitments are still preferred by investors, yet a portion of flexible space is acceptable to them.
- The flexible leasing trend is not limited to offices: Medical labs, industrial facilities, housing and retail are promising areas to watch. Niche operators catering to specific businesses or demographics also are emerging. There is potential for diversification of coworking across niche players, asset types and geographic submarkets.