January 18, 2019

The flexible office market is flourishing in the United States.

The sector – which includes coworking and similar amenity or meeting-focused operators – has emerged as the office market’s strongest driver of leasing activity, with a growth rate that doubled year-over-year in 2018. It has ballooned by an average of 23 percent every year since 2010 and accounted for nearly two-thirds of occupancy gains nationwide in 2018.

Landlords are hyper-focused on structuring deals with coworking tenants, particularly at a time when legal, financial and other professional service industries are seeing subdued growth and are leasing less space. Owners are also exploring new deal structures and “do-it-yourself” models to supply more flexible space options for their tenants.

“This sector represents the office market’s purest source of growth and we see continued expansion potential in 2019,” says Scott Homa, who directs U.S. Office Research at JLL. “Based on insatiable levels of demand for this product among both small users and large corporations alike, we anticipate growth rates to accelerate and don’t view any local market as oversaturated.”

Alliances with coworking aren’t without risks, however. Their occupancy may put more strain on building infrastructure than a typical tenant due to higher seating density and greater foot traffic, impacting things like elevator wait time and security throughput. Creditworthiness remains another key consideration for owners, as flexible space operators deal with highly variable income streams that have historically struggled in economic downturns.

Coworking operators can also be effectively competing with landlords after lease commencement. However, on the flip side, “they can serve as incubators for direct leases with landlords as coworking members expand and outgrow their shared space,” Homa says.

Pros and cons aside, what’s clear is that the sector will continue to grow. While flexible space and other short-duration lease formats currently represent only 5 percent of all U.S office stock, it’s set to mushroom to encompass 30 percent by 2030, JLL Research forecasts.

Based on demographic and market conditions, JLL Research expects some markets to be more active than others.

“Cities with strong industry drivers, attractive consumer demographics, an entrepreneurial workforce and an abundance of walkable, mixed-use developments are especially primed for growth,” he says. “So are areas around the headquarters of major technology companies, where new hiring is expected to be brisk and outperform the nation as a whole.”

Below is a list of the 10 markets in the U.S. that are most likely to see an uptick in flexible office real estate.

1. New York

New York is home to several of the coworking industry’s largest operators and currently leads the nation in terms of existing flexible inventory, at over 13.7 million square feet. Still, expect to see more growth here, Homa says. The city has an increasingly diverse economy and has the country’s highest concentration of freelancers, small businesses and creative entrepreneurs – prime candidates for flexible space.

2. San Francisco
The global epicenter of the volatile tech world, this progressive city has seen a surge in flexible inventory. San Francisco ranks sixth in the U.S. in terms of existing flexible stock, at 2.7 million square feet, but its potential for additional growth puts it in the No. 2 slot on our list.

The Bay Area’s ongoing profusion of start-ups and venture-funded companies are a natural fit for flexible spaces, which allow for sudden or short-term growth without a long-term lease commitment.

3. Silicon Valley
Widespread mergers and acquisition activity in tandem with a wave of new supply have markedly altered the Silicon Valley office market in recent months, but sustained regional growth and investment in the tech industry continues to translate into demand for space. A recent pair of full-building leases in Mountain View spanning nearly 500,000 square feet for a single tech user may be a prelude to continued enterprise account activity in the region.

4. Austin
Austin is known for a lower cost of living compared to other major U.S. metropolitan cities, and its exuberant local culture, arts and food scene is a draw for a younger population that gravitates towards coworking spaces.

Tech companies based on the West Coast continue to eye Austin as a city to house contract workers and to manage staffers on a more short-term or flexible basis. The current 1.5 million square foot of existing flexible space in this market could be easily multiplied with minimal risk of oversaturation.

5. Boston

The Boston economy’s continued shift toward tech and innovation has presented new challenges for tenants seeking flexibility to better manage their growth. This challenge is exacerbated by a sheer lack of space, especially in Boston’s Central Business District. Among gateway markets, Boston’s development pipeline is unusually low for how little space is available. Flexible space provides a temporary reprieve for companies that are waiting for space to open up – though there isn’t that much of it. With just over 2.7 million square feet of coworking space, Boston ranks the lowest among U.S. gateway cities in terms of the percentage of inventory that’s allocated to flexible use.

Home to renowned colleges like the Massachusetts Institute of Technology, Wellesley and Harvard, Boston also has an extensive and well-educated millennial and student population, which has contributed to the success of existing coworking providers in this market.

6. Northern Virginia
Although its current flexible office stock is limited, Northern Virginia is home to a vast tech talent pool and is primed for continued growth given headquarters expansion activity into the region and projected increases in federal procurement spending.

7. Washington D.C.
With the density of non-profit agencies, political advocacy outfits and lobbying groups in the country’s capital, flexible spaces provide an attractive and affordable option.

The number of technology tenants, freelancers and independent contractors is also growing in the area, translating to hot desks and flexible spaces in the areas around Dupont Circle, Logan and Gallery Place.

8. Seattle
The 9.2 million square feet of new office construction in Seattle, much of it initiated by the city’s tech industry, is spilling over into coworking space. The city already ranks fifth in the country for existing flexible office stock, at 2.6 percent of inventory.

9. Denver
What once stood as parking lots and industrial areas in this scenic city are now being transformed into creative office spaces. Also worth noting: the city is among the fastest-growing metropolitan areas in the country, with a population rising by 13.6 percent since 2010 to nearly 2.9 million today.

10. West Los Angeles
Expansive growth in new media and digital content production is fueling demand for creative spaces in areas such as Santa Monica and Playa Vista – west of Los Angeles.

With a three-year trailing rent growth of 17.5 percent, and restrained new office development, flexible spaces are fast filling a need.

Click to find out what investors need to know about U.S. Opportunity Zones.


Scott Homa

Director, U.S. Office Research

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