San Francisco On Verge Of A Coworking Explosion And Landlords Are Taking Note

The rapid growth of coworking in San Francisco among both large, branded providers and small independent operators has led to a shifting attitude among landlords. 

Two to three years ago, landlords were less willing to consider this type of tenant, but now they are actively seeking to partner with coworking providers to create a better tenant mix within their portfolios.

While many landlords have been actively leasing large blocks of space to the likes of WeWork, which is now the fourth-largest San Francisco tenant, many are seeking high-end boutique providers that target specific demographics. Coworking sites also double as a building amenity and service. 

Some building owners, such as Rubicon Point Partners, have started offering turnkey offices. Rubicon created a spinoff company to provide these options within its properties and is planning to work with additional landlords as well.

“None of [the landlords] are willing to put all their eggs in one basket — or lease a tremendous amount of space in one building, but they are not as anti-coworking as they have been previously,” Newmark Knight Frank Regional Workplace Manager, West Coast Lead Evelyn Lee said.

She said landlords aren’t going whole hog, and they are spreading out coworking within their portfolios. Since coworking providers spend a lot of time and money on tenant improvements, even if the provider goes belly up, the landlord is left with a high-end spec office it can re-tenant easily. 

Nationally, 41% of landlords agreed that flexible space is a long-term real estate solution, and 72% said they believe working with coworking providers with a strong brand will benefit their developments, according to a recent survey from The Instant Group. Landlords said coworking providers attract new types of tenants and provide more flexibility for prospective clients.

The Instant Group is a workplace innovation company that has placed over 7,000 companies in flexible workspaces and offers a listings platform with over 12,000 flexible workplace sites around the world.

“In the U.S., the success of Knotel and pre-boxed space opened people’s eyes,” The Instant Group Managing Director Michelle Bodick said.

NKF estimates there is over 500K SF of coworking demand in San Francisco, Lee said. Coworking currently makes up about 2.6% of the office market, or just over 2M SF.  

The Instant Group Head of Marketing John Williams said coworking grew 13% in San Francisco last year and there is definitely more room for supply to come to the market. Among the providers to expand in the city have been Canopy, Werqwise, Spaces and Mindspace.

The average coworking lease is about 29K SF, Lee said. Originally coworking sites were close to the workforce and targeted offices close to Market Street and Bay Area Rapid Transit.

Now that demand has grown, and offices in the central business district are less available, some providers are proving that geography doesn’t matter as much, she said. Providers like Canopy are targeting older entrepreneurs and have offerings in areas that don't have large office high-rises such as Jackson Square and Pacific Heights, Lee said.

The Benefits Of Coworking In San Francisco

Coworking has become increasingly used by enterprise clients and not just small startups, Lee said. These clients want to try a new office or market without making a long-term commitment, and due to new tax laws, coworking leases don’t show up as a liability on the company’s balance sheet, Lee said.

The Instant Group Business Development Director Marie Phillips said there has been a lot of demand for space not only in WeWork but throughout coworking because the cost of office space is so high in San Francisco, especially for companies that don’t know how fast they might grow in the coming years.

Cost savings, flexibility of terms and amenities are among the reasons why coworking has become increasingly popular across multiple industries. Even though San Francisco has some of the highest coworking desk rates, annual costs for rent are still cheaper compared to a typical office, Williams said.

Occupancy costs per workstation in a typical San Francisco office were $16,205 in 2017, according to data from Cushman & Wakefield. The Instant Group estimates that flex office space costs about $12,552 per workstation annually, which is a savings of 22%, or about $3,500 per workstation.

Williams said hybrid providers, which offer traditional coworking space and private designated office areas, are dominating the flex office provider space. He classified WeWork in that hybrid group, saying pure coworking models of strangers working at desks in an open office only make up a small portion of the market.

Landlords Seeking Boutique Coworking Providers

Independent operators make up 93% of the nation’s coworking market and about 60% of San Francisco’s coworking market, according to data from The Instant Group.

Independent providers, which typically occupy a handful of locations, are staying competitive by targeting a particular demographic or profession and offering high-end design. These providers not only offer turnkey office space, but also offer all-inclusive services, uses of conference rooms, snacks, networking events and other services that would not be available to a startup working in a small office.

Despite the demand, expanding in the Bay Area is still difficult for smaller coworking firms. NKF's Lee said an independent provider with not as much capital can take two to three years to find a location in San Francisco whereas WeWork and other coworking giants with a ton of capital have an easier time and are less likely to go belly up.

Still, those coworking providers with proven concepts are expanding rapidly.

Such is the case with Canopy, which recently opened its second location in Jackson Square and has a third location in the works in the Financial District.

Its third location came to be after a landlord reached out to Canopy, Canopy co-founder Steve Mohebi said. The timeline for the third site has yet to be determined.

“The [coworking] space is wide open for boutique providers with an elevated approach to satisfy a differentiated product for landlords and market demand for an elevated product,” Mohebi said.

Landlords are starting to be more mindful of the type of coworking provider they will partner with and some don’t want WeWork types in their buildings because it creates massive traffic and more wear and tear on the space, Mohebi said.

Canopy has heard from landlords across the world looking to include the provider in their buildings. Mohebi said he has spoken with landlords in Mexico City, Australia and Japan.

Canopy offers a luxury premium office less dense than WeWork and targets professionals and entrepreneurs with experience in creating startups or with an already established company. He said a bulk of its members are 35 to 49 years old. Memberships start at $275 per month.

Demand for this type of space has been strong, he said. Three weeks after opening its Jackson Square location, the location  has already resulted in $1M in annual revenue, Mohebi said.

Attracting Global Coworking Providers

While Canopy may consider expanding outside of the U.S., Israeli-based Mindspace is working on its expansion into the U.S. Its first location will open in Washington, D.C., followed by its first San Francisco location at 575 Market St., where it has leased 30K SF across three floors, in mid-August. Its niche is to provide a funky, unique design that is not replicated in any other location, Mindspace co-founder Yotam Alroy said.

Mindspace’s demographic goes from startups to large corporations, venture capitalists, freelancers and agencies. Even though Mindspace is a global company, it will use local brokers and creative agencies for its sites. Alroy said its locations have art from local artists as well. He said no two Mindspace locations are the same.

Alroy said the U.S. is leading the growth of coworking globally. Mindspace expanded into six countries within four years after its initial launch in Tel Aviv, Alroy said. He said Mindspace came to San Francisco because the booming tech industry and expensive office rents are increasing demand for coworking.

The focus of landlords has been to make sure they have the right operator with a track record, he said, noting it can be hard for new operators to get into this segment because it can be difficult for them to get big leases in prime locations. 

A growing need for employee retention also has led to additional demand for coworking, which can provide the hip office environment with amenities that some small and midsize companies may not have the budgets to provide, Alroy said.

“Coworking is not a passing trend. It’s here to stay,” Alroy said.

A New Type Of Coworking Landlord Is Emerging

It is not just office landlords adding flexible office and coworking spaces. Retail landlords also are adding coworking options. Westfield San Francisco Centre opened a designated coworking space, Bespoke, in 2015, targeting retail companies, Bespoke Director Judith Shahvar said.

She said about 80 retail companies, including direct-to-consumer startups, business-to-business retail tech companies, venture capitalists and small innovations teams from well-known brands work at the space each day.

Bespoke members have to be operating in the retail tech community and the company offers networking opportunities specific to retailing, Shahvar said. She said companies look to Bespoke to be paired with startups or technologists in its network to problem solve and come up with new ideas. The provider also matches members with stores in the Westfield network to test new technologies and services.

She said Westfield San Francisco Center is one of the first shopping centers to open a coworking space.

“More industry specific spaces will emerge with people sharing resources focused on a common challenge or goals — or a specific client base,” Shahvar said in an email. “We are already seeing this with makers spaces with shared kitchens and tools, spaces for artists, and more. The benefits of coworking are so vast that companies large and small are seeking shared community spaces for their employees.”