Co-Working Now Fuels the US Office Market

CHICAGO—The US office market slowed down in the first quarter, partly because activity in the tech sector, which has recently fueled much of the market’s growth, was uncharacteristically slow. Overall, the market recorded just 3.7 million square feet of positive absorption, according to a report on the first quarter by Chicago-based JLL.

Another factor that had tenants throughout the nation tapping the brakes a bit was the drive to shrink office footprints by using space more efficiently.

“These days all you need is a Wi-Fi connection and a chair,” Scott Homa, JLL’s director of office research, tells GlobeSt.com. Electronic data storage has eliminated the need for physical storage space, and many separate offices have also disappeared as more companies choose collaborative strategies. “Offices look so dramatically different today than they did a short time ago, sometimes since the last lease was signed.”

But the new ways of using space have also created demand from co-working providers such as WeWork and Spaces. And as traditional offices vanish from the landscape, these groups are picking up the slack.

“Co-working is absolutely driving the office market right now,” Homa says. He points out that this group of companies, including flex office providers, were responsible for around six million square feet of absorption nationwide. So, if they were removed from consideration, “the office market would have contracted.”

He adds that the expectations of office users have changed so drastically that co-working providers will continue to play a key role in the market. “There is a significant cannibalization of traditional office demand.” Small office users of around three thousand square feet, for example, will need to decide if they want to sign five- to ten-year leases, “or purchase a group membership with a co-working operator.” The latter option provides flexibility to expand, or perhaps grow the corporate headcount without expansion by allowing people to work from home, all without the worry of renegotiating a lease.

Aside from shrinking footprints, the office market faces another headwind. The unemployment rate has fallen to about 4%, and the rate for those with college degrees now stands at less than 2%, Homa says. That makes it difficult for firms to find enough qualified workers to expand. Obviously, a low unemployment rate is not a bad thing. Still, it does make it more difficult “to fill up new office buildings, and that’s a national challenge as we enter this stage of the business cycle.”

But co-working and flex use show no sign of slowing. Since 2010, this sector has grown at an annual rate of 23%, Homa says. And the top providers still have a great deal of potential to expand. After years of signing up small firms, start-ups and entrepreneurs, “they are setting their sights on the big users.”

Currently, large firms take up about 25% of the sector’s space, but some co-working companies want to shoot for 50%. “WeWork is very aggressively going after the top corporate users,” Homa says, “but really everyone, including Spaces and IWG plc, formerly Regus, is doing it.”