Coworking continues to drive office leasing, but is saturation near?
The fast-growing coworking sector has been a boon for landlords in many markets across the U.S. As coworking operators continue to expand and take over large blocks of space in major cities, landlords are benefiting from the added leasing momentum and stable rent flow. As investors evaluate this pivotal growth force, however, some are questioning whether the market is reaching a saturation point.
According to RCM’s 2019 Office Investor Sentiment Report, 87 percent of survey participants view coworking as a moderate to high risk investment. Furthermore, 37 percent of that total said the market could be saturated. In the event of a downturn, investors are questioning additional risk from assets with a heavy concentration of coworking tenants.
A global report by The Instant Group, a flexible workplace provider, predicts continued growth in this sector and notes that the market is finding its equilibrium following years of significant growth. Several factors are at play, with rents slowing as supply expands and strong growth predictions continuing as providers move beyond Central Business Districts. The report examined flexible space — identified as coworking and hybrid centers — in 18 global cities, including New York City, London, Los Angeles, Madrid, San Francisco, Chicago, and Sydney, to name a few.
One benefit of coworking is that it allows smaller businesses or individuals access to shared amenities in large buildings, including everything they would need or want, by paying for just their share of space. This “rent per desk” is one barometer of this segment’s well-being. The global report notes that rent declined by an average of 5% over the past year in those 18 cities, in part due to increased supply.
New York City ranked as the most expensive place to rent a desk, with an average rent of $1,063 per month, a 4% decrease from the previous year. Chicago was a relative bargain, at $707 per month, a 17% decline.
Overall, industry experts peg the growth in the coworking sector at between 15% and 30% over the past year, depending on the market. This steady growth is also impacting the office market in more subtle ways. Aside from the added absorption, coworking is creating an incubator mindset for some large owners and REITS, according to the RCM report. These owners like the growth pattern of these smaller tenants and are focused on building relationships. The ultimate goal is to support their growth and convert them into traditional tenants in their portfolios.
Coworking has created significant disruption in the office sector and there is likely more growth and perhaps uncertainty to come. Given the rapid expansion in coworking and the potential exposure to any market downturn, investors are keeping a close eye on this sector. How much more can it grow? How much is too much? Will it reach a tipping point?