Forget the coworking hype and headlines for a second. Let’s just talk facts.
The average lifespan of companies on the S&P 500 in 1965 was 33 years. It’s expected to drop to 14 years by 2026.
Businesses change fast.
The goods and service providers for those businesses have had to change along with them. Nearly every resource a business touches has adapted to be more flexible and variable. Subscription-based software models give access to more or less features based on the needs for that month. Freelancers allow elasticity in HR spend. Access to capital is easier and more flexible than it’s ever been.
Despite all that, businesses are still expected to sign 10-year leases on office space. Why?
If the current growth of coworking and flexible office space is any indication, those restrictive terms may not be around much longer.
The coworking headlines have focused on the freelance and startup element, but industry experts say the trend line points to something much bigger—a fundamental shift in how commercial space is leased, managed, and consumed.
So, what’s a commercial landlord to do?
New Lease on the Commercial Real Estate Life
It’s easy to see why the commercial real estate sector has operated the way it has for so many decades. 10- to 15-year leases on spaces provide stable, long-term revenue and predictable returns for investors.
So why would a building owner even consider trading that sort of predictable revenue for something like coworking and flexible workspaces?
“There’s a disproportionate flow of growth to flexible spaces right now,” says Scott Homa, director of U.S. office research for real estate investment firm JLL. “It speaks to the fact that companies are trying to be a lot more agile. Companies typically only have 24 to 36 months of revenue projections, so why lock people into 10-year leases?” In new company research, Homa’s team found that square footage of flexible office space has grown at a rate of 22% across the last 7 years. Compare that to the 1% growth rate of traditional office space in the same time period, and it’s clear the industry is keen to grab a piece of the growing freelance market.
“There’s very strong demand for short-term options, which has turned this into a viable, sustainable segment of the market.”
That growth isn’t just in the usual spots either; flexible office space has grown significantly in cities like Houston, Atlanta, and Miami. In 2016 and 2017, coworking spaces accounted for all of the net absorption rate in Houston and Miami.
“The trend line is people need flexibility,” says Convene’s VP of Real Estate Development Michael Burke. “Because of that faster lifespan of a company, everything they consume has some level of variability. Freelancers allow companies to scale up and down quickly. But they couldn’t do that with their real estate because the vehicle didn’t exist, until now. In that sense, coworking and flex spaces work like an expansion joint for businesses.”
Despite the fast growth, there’s still ample room for more expansion. In every major metropolitan area studied by JLL, flexible spaces make up a very small portion of the total stock, ranging from 0.8% in Houston to 3.3% in Miami, with most cities hovering around 1.5%.
“The fundamental shift is a supply shift, not a demand shift,” says Burke. “Demand is pent up, and supply needs to address it.”
A less examined aspect of the trend is the brand boost coworking spaces can bring to a commercial building. Flexible office space can bring more foot traffic, activate spaces in new ways, and attract the type of young, hip visitors that can make a building the “it” spot in town. This in turn can help generate valuable retail and food tenants on the lower floors and adjacent buildings.
“Real estate is entering the era of customer-centricity,” says Burke. “If you can align yourself with an experience, it’s worth more. Why does a Lexus cost more than a Toyota? It’s the same car made with the same parts. But brand matters.”
“If a building is trying to redefine its image, coworking space can be very attractive from a marketing perspective,” says JLL’s Homa. “It helps create a dynamic environment that many users are drawn to and gives the building a certain stamp of credibility.”
Coworking Is More Than Startups
As industry after industry has found itself turned upside down by a rapidly changing economy, the early growth of flexible spaces seems poised to do the same to the commercial real estate world. “The real estate industry is not immune to the changes that have effected every other industry,” says Burke. “A lot of people hear ‘coworking’ and just think startups, but they’ve got to get off that. Companies want to use real estate as a tool to drive business results, as opposed to another burdensome cost. There’s inherent value in eliminating that distraction for them.”
JLL’s Homa is bullish on the future of coworking as well. “Right now, less than 5% of office supply fits into this model. Based on current growth rates and where we think the market is heading, that could be 30% in the near future, which would be billions of square feet.”