Los Angeles has the second largest supply of flexible office supply in the country. According to a new report from CBRE, Los Angeles flexible office supply increased 15% last year to 4.23 million square feet, and now, the flexible market accounts for 2.1% of the total office market in Los Angeles. New York City is the only market with more flexible office space—a substantial 13.5 million square feet, according to the report.

Large companies are using co-working operators to expand and test new markets, and this trend has been the primary driver for the expansion of flexible office providers in Los Angeles. “More and more companies are looking to expand their offices,” Chris Penrose, first VP at CBRE, tells GlobeSt.com. “The economy is doing well, and companies are hiring more people. In certain markets, companies are dipping their toe in the water as they are trying to expand their business, and we are seeing co-working companies are moving to those areas. The Arts District is a great case study of co-working groups doing two- to three-year service agreements with companies that are trying to figure out if that is a market they want to be in. Co-working provides companies the flexibility to decide if they want to be in a market.”

While the niche office sector is growing, it hasn’t negatively impacted direct leasing. In some instances, Penrose says that co-working has created opportunities for landlords, although that has not become a widespread trend. “Every now and then, you do get a company that grows out of the co-working group and needs there own space,” he says. “It is easy, in those cases, to do a direct deal with the landlord of the building you are currently in. I don’t think that happens as much as we wish it would, but it does happen.”

While it co-working could serve as a conduit for landlords, in some cases, small users are actually preferring co-working over direct leasing. “I think that it has hurt some buildings in terms of smaller transactions, unless the landlord has plug-and-play suites. Most small tenants will gravitate to a co-working space,” adds Penrose.

Overall, co-working hasn’t had a significant impact in either direction in terms of leasing activity, but landlords do see the benefit of cutting deals with operators. “A lot of landlords have worked with co-working groups, and we are starting to see more instances where the two are working on management agreements,” he says. However, landlords are still requesting 10-year deals with co-working groups. In terms of occupancy in buildings, that helps,” says Penrose.

It isn’t surprising that Los Angeles has a healthy supply of co-working operators. The market is set up for it. “The average deal in Los Angeles is 5,000 to 7,000 square feet, so it makes sense that more co-working companies are popping up,” says Penrose. “Because L.A. is so spread out, having co-working satellite offices throughout Los Angeles might help companies retain talent so that employees aren’t spending and hour-and-a-half getting to and from work every day.”

While 2018 was a strong growth year for co-working users, Penrose isn’t sure 2019 will match the activity. Still, he expects the market to continue to grow. “I think that it will continue to grow, although maybe not to the extent that we saw in 2018,” he says. “We are seeing more niche and specific co-working groups come to the market, like cannabis groups, female-driven groups, or other very niche groups. I think that we will see more of these smaller groups pop up.”