WILL COWORKING SPACE CONTINUE TO DISRUPT THE OFFICE MARKET?
BY KARINA ESTRELLA | TREPP, LLC
According to research from JLL, the volume of coworking and shared office space continues to increase across the world and is transforming global office markets as a result. The flex-space office market is quickly becoming an important part of commercial real estate and portfolio strategies, as many medium-sized and large companies have realized the potential of “leveraging flexible space arrangements to better manage their liquid workforces, which is evident through some large-block corporate leasing.”
Coworking spaces in cities such as London, New York, and Chicago have expanded at an annual rate of 20%, and shared workspaces worldwide have grown by more than 200% over the past five years. The flex-space/coworking sector claimed almost 30% of the total US office absorption over the past two years. With WeWork expanding by more than 1 million square feet per year, the sector’s growth is unlikely to slow anytime soon. JLL also reports that tech-inspired modern workspaces are actually cheaper to build than traditional office space designs, costing approximately $30 less per square foot.
A major catalyst for this skyrocketing demand is that increasingly mobile and tech-enabled employees want greater flexibility to work remotely. Forbes notes that modern workplace technology allows for more online collaboration than ever before, including the ability for people to work on different projects from different time zones. As a result, many companies have less need for office expansion and smaller companies can get by in coworking spaces. It seems that the idea that everyone “has to sit face-to-face is becoming a thing of the past,” and office owners and developers may need to prioritize designated flex space in order to keep up with shifting fundamentals.
According to NAREIT, office REITs posted -3.8% total returns last month, while the overall REIT sector returned-3.2% in January. In comparison, the 23 office REITs returned a modest 5.3% in 2017. Forbes reports that the US office market softened in 2017 as tenant expansions slowed down and supply growth was relatively stagnant. This lower net absorption may be tied to the office trends of rising flex space and increasing numbers of remote employees. Looking ahead, REIT investors should closely monitor the geographic focus of office REITs, as some markets are poised to outperform others significantly given these changing corporate preferences. Some of these markets include Atlanta, San Francisco, Seattle, and Nashville, which are all reporting major leasing activity from the tech sector and growth in flex space development.
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