Demand For Flex Offices Exploded In Q2, A Sign Of What's To Come In The Office Market

Last quarter was a watershed moment for the flex office market’s recovery. 

With significantly less supply on the market than there was at the beginning of the coronavirus pandemic, the providers that survived the past 15 months are seeing soaring demand and deal signings, albeit at lower prices than before, especially in gateway cities.

“This segment of the market is very twitchy, meaning it's a very interesting leading indicator of what tenants will do,” Ben Wright, founder of flex office data and analysis platform Upsuite said in an interview. 

Demand for flex office space increased 41% nationally from Q1 to Q2 of this year, according to Upsuite, which defines demand as average views per location for each of the over 50,000 spaces it tracks. Average flex office listing views were up 9% from the first three months of 2020. 

“Where the story is interesting is in how markets are behaving differently,” Wright said. 

In gateway cities like New York, where office markets were hit hardest, the recent uptick is most dramatic. There was a 156% increase in New York City flex office deals signed in Q2 compared to the quarter prior, according to Savills’ flex office arm, Workthere. Demand is 67% higher than its pre-pandemic level in New York, according to Upsuite.

Companies that operate millions of square feet of flex-office space across the country told Bisnow they have seen demand come back, but the largest spikes have been in the Big Apple.

Industrious saw a 156% increase in total number of seats sold in the city last quarter compared to the first quarter of the year, which was already up by 20% of its pre-pandemic levels, according to a spokesperson. A WeWork spokesperson said the company booked 1.3M SF in New York City last quarter, including massive enterprise deals like an 80K SF lease at 620 Sixth Ave. and a 98K SF deal at 115 West 18th St.

Mom-and-pop operators are seeing progress, too. Primary co-founder and CEO Lisa Skye said the occupancy of her 75K SF coworking space at 26 Broadway in the Financial District ticked above 30% for the first time since the pandemic, reaching 40% as of June. The company is on track to hit 50% after Labor Day in September, she said. 

“I see the overarching sentiment amongst the local or Manhattan operators is similar — the faucet of client interest has been turned back on, and the landscape is a mix,” she said. 

Daily use of the space has risen too, she said. Whereas 40 to 60 people came into the space during the majority of the past 15 months, this number reached over 100 on some days in June. Pre-pandemic, Primary was hosting between 350 and 450 people "on a daily basis," Skye said.

Companies and workers are starting to get comfortable setting up shop in new spaces after moving around during the past year, not to mention the decades-long trend toward flexible offices, Industrious CEO Jamie Hodari said. 

“At the most zoomed-out level, this big rush in demand for workplace as a service or for flex office is a combination of a short-term tailwind and a very long-term tailwind,” he said. “When you put those two things together, it resulted in some pretty dramatic increases.”

Even when looking for traditional office space, tenants now want a flexible office option, so landlords are more open to having those spaces at their building, whether they operate it or someone else does. 

“A lot of these companies need to flex up and flex down,” Brookfield Properties Senior Vice President of Development Alireza Esmaeilzadeh said at a Bisnow event last week. “So whether you're solving that through a coworking operator or you're solving that through your own product, they want to see that kind of turnkey space be available for them.” 

Flex office leasing, long the domain of Google searches and each location's management team, has also increasingly become territory for traditional office brokers, said Gene Kansas Commercial Real Estate founder Gene Kansas, who owns shared workspace facility Constellations in Atlanta's Sweet Auburn neighborhood.

Before February, Kansas had only ever worked with a broker on one deal at Constellations, he said. Now, he estimates 30% of the deals he signs are through an office broker. 

“It’s basically the market, meaning the people occupying the space, telling representatives what they want,” he said. “Their representatives are listening in, so now ... we're seeing more and more brokers, on a weekly basis, reaching out for interest.” 

With the surge in interest, after over a year of industrywide contraction, some operators, even small outlets that were hit particularly hard, are planning to grow. 

Houston-based boutique flex office operator, Sesh Coworking opened a 2K SF coworking space in February 2020, but after an onslaught of new demand last quarter, co-founders Maggie Segrich and Meredith Wheeler told Bisnow they are looking to double or triple Sesh's current footprint.

But while demand for flex offices may be back, operators have dropped prices to capture it.

Around the country, average price reached $375 per seat last quarter, an 8.6% dip from the pre-pandemic rate of $410, according to Upsuite. The drop in flex-office rent was far steeper in gateway cities. New York desk prices have dropped by an average of 25% since Q1 2020, tumbling from $520 per seat to $392 at the end of June. 

Atlanta — which has seen a wave of tech companies opening up offices there over the past year — bucked this trend altogether: The average price per seat in Georgia's capital increased 1.6%, from $444 per seat pre-pandemic to $451 last quarter. 

Part of the pricing dynamic is a result of supply. New York City has by far the most coworking space of any market in the country, and the combination of competition and low occupancy for over a year drove hundreds of locations to close — 36% of New York City’s 526 locations have shuttered since the pandemic started, including 11 between April and July, according to Upsuite. 

National supply has also dipped, but not as dramatically: Only 4% of Houston coworking locations closed, while Atlanta lost 22% of its flex office spaces and Chicago lost 25% since the start of the pandemic.

“Essentially, what we're starting to get as a picture here of how the twitchy flexible market behaves in market cycles,” Wright said. “Demand falls, pricing falls, folks close, it hits the bottom, pricing starts to rise, new locations happen — but it's all preceded by demand.”   

But while the rise in demand for coworking reveals a demand for office generally, leaders in the sector say the uptick is more evidence of a permanent shift toward flexible, shared office space. 

“A typical office market, anyone who was working in it knew that had to change, and this was before the pandemic,” Kansas said. “What the pandemic did, because it made evolution conspicuous and because it was so rapid, it very quickly uncovered dinosaurs and sped up their evolution … I think that typical office needs to evolve or it'll continue to be a dinosaur, and it’ll become extinct.”