How Are SoCal’s Secondary Markets Adjusting to Co-Working

Co-working is finally taking off in San Diego and Orange County. This year, both markets saw significant expansion of co-working operators, and many market experts expect the flexible office model to grown in 2019. However, the two markets have a very different view of co-working space and its impact on direct office leasing. Just as Los Angeles—on of the top co-working markets in the country—had to evolve around the space, San Diego and Orange County are experiencing growing pains.

In Orange County, many players in the office market are concerned that flexible office space could usurp small-tenant direct leasing activity. “It’s a double-edged sword. Orange County is a small-tenant market, so there’s an argument that flexible office space is stealing small tenants from landlords,” Scott Wetzel, VP at JLL, tells GlobeSt.com. “There’s a counter-argument that that it is healthy because it allows smaller companies increased flexibility, the ability to move-in quickly, and when they reach a mature phase, they will have enough runway to build out and lease an autonomous office space.”

However, the high cost of co-working space could actually help to fuel direct leasing activity, rather than stall it. This is especially true for start-ups expanding to the next phase of their business. “With ease comes expense,” says Wetzel. “Flexible office space is significantly more expensive than traditional office space, particularly for mature companies who can predict their office needs over the next three to five years.  For fast-growing companies or small satellites, flexible office space is an easy way to get up-and-running by next week, as opposed to next quarter.”

In San Diego, however, co-working options have had an impact on the direct leasing market. While initially, small users primarily used co-working offices, now larger corporations have entered the market for flexible office space. “With larger corporations turning to flexible office space to test out new markets, provide flexibility for traveling employees, or reduce capital expenses, landlords may start to feel the pinch,” Scott Schindler, a senior associate at JLL, tells GlobeSt.com. “We haven’t seen a direct correlation between increases in flexible office spaces and occupancy and a reduction in leasing activity or lease rates. We are finding it more difficult for tenants to sublease out space, which they’ve either outgrown or no longer need. Subleases used to provide the main outlet for a company to have a reduced lease term at a great rate, with furniture included.”

As the markets adapt to the new office competitor, co-working will continue to expand. Wetzel estimates that the model will grow slowly over several decades in Orange County and San Diego. In primary markets, like Los Angeles and San Francisco, co-working already accounts for approximately 3% of the total market share. In Orange County, the market is about 1.5% of the total market share. “Flexible office space will continue to grow over the next several decades, maturing in some markets at as much as 30% of the total market share,” he says. “A ten-times increase from where primary markets are today is quite the leap, but it indicates that leasing velocity by these firms is here to stay, and because flexible office space helps bridge the gap for businesses looking to make the leap from their garage to an office, it will help improve leasing velocity in the small-tenant sector.”