Companies Ramp Up Coworking Expansions, A Rare Office Market Bright Spot

Office owners nationally are still struggling with high vacancy rates and uncertainty around future tenant demand, but one growing segment has begun to emerge this year.  

Coworking operators are seeing big companies expand their investments into flexible workspaces and bring employees back at higher rates than traditional offices, and some are growing their own footprints to meet the rising demand. Market experts said this could help fill some of the millions of square feet of office space sitting vacant. 

Of the 1,100 corporate real estate decision-makers surveyed in JLL’s The Future of Work Survey 2022, 43% said they planned to accelerate investment in flexible space over the next three years.

“The shift that we've seen post-Covid has been a shift towards flexibility," WeWork Senior Vice President Errol Williams said. "What we are seeing and hearing more and more is that companies are increasing the share of flexible real estate that's in their overall real estate portfolio strategy."

WeWork's occupancy reached 72% across the company’s real estate portfolio of more than 700 global locations in the second quarter, according to its earnings report.

The company said U.S. bookings for WeWork All Access, a membership that allows customers to use any of the company's coworking spaces, grew 64% year-over-year in September and 81% during the week after Labor Day. It said U.S. bookings grew 62% year-over-year in September for WeWork On Demand, a pay-as-you-go model that doesn't require a monthly commitment.  

This growth has occurred even as WeWork's stock price has fallen 71% since the start of this year. But Williams said the market pain doesn't reflect the company's solid fundamentals. 

“There's macroeconomic things happening right now, but that does not change the fact that we have fundamentally shifted and the idea of how important flexibility is in the world of work right now,” Williams said.

The coworking market has been expanding across the U.S., with even some less populous states like Nevada, Minnesota and Utah ranking among the top 25 markets with the most coworking spaces, according to CoworkingCafe’s Market Study released last week. California, Texas, Florida and New York had the most coworking spaces, according to the study. 

Doug Ressler, senior research officer at Yardi Matrix, parent company of CoworkingCafe, said that in the first half of the year, utilization of coworking space was up 25% nationwide.

“We really believe that coworking is one of the creative solutions that office owners and developers are going to use to be able to better utilize their office space,” Ressler said.

“There's different types of creative solutions that are out there that people are looking at,” Ressler said. "Coworking is probably the most important one, and we really think that it'll be in the double digits in terms of improving the office occupancy utilization this year."

More than half of the respondents to CBRE’s Spring 2022 U.S. Office Occupier Sentiment Survey said that flexible office space will make up a significant portion of their portfolio in the next two years.

Industrious CEO Jamie Hodari said his company’s footprint grew 60% in the last year to meet the growing needs of office employers looking to provide their employees with more workspace options. Industrious has over 150 locations globally, according to its website. 

The company last month partnered with Mitsui Fudosan America to occupy 40K SF on the 12th floor of the Homer Building in Washington, D.C. Industrious has also branched out into residential buildings, including in D.C. and California, through partnerships with AvalonBay and Greystar to bring coworking spaces closer to employees. 

“So much of what’s going on right now is that the actual ways people want to work and the actual workplace strategies the companies are trying to deploy borderline require a flex partner to pull off,” Hodari said. "It’s not just that people are scared of long-term leases."

Industrious isn't the only coworking operator seeing the need to expand. 

In May, IWG said it plans to open 500 to 700 new coworking spaces through its Regus and Spaces arms. This comes after the firm was hit hard during the pandemic and filed Chapter 11 bankruptcy for a dozen of its U.S. locations.

Smaller operators are also seeing that same pattern of growth. Boston-based Workbar recently expanded out to the suburbs surrounding Boston because most of its clients wanted to give employees options to work closer to home. The operator now has nine locations and a partnership with Synergy, a Boston-based developer, to bring coworking space to some of its buildings.

“I'd say the biggest trend that we've seen coming out of the pandemic is the larger Fortune 500 companies utilizing more of our space and more of our locations to provide a solution for their employees,” Workbar CEO Sarah Travers said.

The company last month opened a new Workbar location in Woburn, a suburb of Boston, and Travers said it opened 50% full and continues to beat the company’s financial benchmarks.

“I do see demand outpacing the overall market,” Travers said. “Even throughout the pandemic, our landlords would tell you that we've always had a significant amount of foot traffic coming into and out of our spaces. I think that absolutely shows that the demand for coworking is surpassing the demand for traditional leased space.”

Big brokerage firms are seeing the trajectory of the demand for coworking spaces and are buying into the market.

Last year, CBRE acquired a 35% interest in Industrious, transferring Hana, its own flexible workspace brand, into the company. In May, CBRE invested $100M more into the company as another sign of its confidence in the industry.

“Part of what we were excited about in that investment was not just the capital itself but the partnership with CBRE and the message in the sense that it's not a traditional real estate ecosystem or flex,” Hodari said. “You don’t have to pick one or the other, but rather these two things can live side by side in a building.”

JLL has also fast-tracked the growth of its Flex by JLL coworking arm, opening a new location in Seattle and gearing up to open a 15K SF flex office in New Jersey in the second quarter of 2023. The firm has already opened multiple locations in the U.S., UK and Australia. 

“The reason why we're into flex is as we look at where the future office is going, we expect the industry to continue to grow," said Jacob Bates, head of Americas for Flex by JLL. “We expect 30% of office space will be consumed flexibly by 2030.”

Some office owners are taking coworking spaces into their own hands. BXP has pushed its own flexible workspace offering in a handful of its properties in Greater Boston, including one in the Hub on Causeway, and Irvine Co. launched its Flex Workspace+ brand.  

“In terms of [office owners'] sentiment towards flex and coworking, it has changed drastically,” Bates said. “We have seen asset owners realize that this is part of not only an occupier strategy, but it needs to be part of asset owners' strategy.”

Bates said he thinks the coworking sector's growth will help bring down overall vacancy in the office market. 

“It's gonna help significantly,” Bates said. “It's also becoming a big part of the amenity package of an asset, which also leads it to be a part of the leasing strategy for an asset.”

CORRECTION, NOV. 2, 3:15 P.M. ET: A previous version of this story inaccurately stated the number of global WeWork locations. The story has been updated.