As DC's Largest Co-Working Space Opens, The Sector Is Poised To Continue Its Rapid Growth

In a relatively sluggish leasing year, co-working has been a driving force behind demand in the DC Metro office market. The booming sector has signed nearly 500k SF in leases during 2016, amounting to nearly 40% of the year's net positive absorption, according to Delta Associates. DC now has the second-most co-working space in the US behind New York, and industry leaders and researchers expect its growth to continue at a similar pace next year. 

The largest co-working space in DC, WeWork's 120k SF Metropolitan Square, opened last week (we take a look inside further down). That a co-working company would sign such a massive lease just steps from the White House may have seemed unfathomable a few years ago, but now it serves as a symbol of how far the sector has come. 

The co-working leader also opened its 33k SF K Street location in May in the heart of the CBD. WeWork president Artie Minson said at WDCEP's annual luncheon last month that these two locations prove that co-working has become more attractive to corporate and government-related tenants, not just tech startups.

"These openings are prime evidence that not all creators wear hoodies," Artie said. "Even if they all like free coffee." 

WeWork's biggest competitor, DC-based MakeOffices, has also signed a flurry of leases this year. It opened its first space in the CBD this week with a 35k SF location at 1015 15th St NW. It also announced a 45k SF location at The Wharf's 800 Maine, and it opened a 40k SF space in Clarendon. 

MakeOffices CEO Raymond Rahbar says he doesn't expect this growth to end anytime soon. MakeOffices has also benefited from the shift away from traditional technology tenants. When it opened its first location in Rosslyn, Raymond says 90% of the members were tech companies, but after expanding to 11 locations, he says that percentage is down around 15%. 

"We used to just be a place for every hot tech startup to go" Raymond says. "Now, everyone wants to work in co-working, literally everyone. From Fortune 500's like IBM and Booz Allen to Capital One who have all joined our community. As more companies have heard of the benefits of co-working, our opportunity has only sky rocketed."  

The broadening of co-working's appeal has driven its growth in the DC market. The District will soon get its first co-working space south of the Mall after WeWork recently signed a 69k SF lease at 80 M St SE. Other competitors are also entering the market, such as Regus' co-working concept Spaces, which signed a 44k SF lease at Douglas Development's Uline Arena and a 45k SF space in Rosslyn. 

JLL SVP Andy O'Brien, right, says he is seeing tech companies and large corporate users both increasingly attracted to the flexibility of co-working. He expects the co-working spaces that opened this year will quickly fill to at least 95% occupancy, and he sees the demand continuing to rise next year. 

"These spaces are going to continue to grow," Andy says. "Especially locally, we’re going to see the demand jump higher after the election with the executive branch aligned with the legislative...you’re going to see even more growth in the co-working sector especially downtown and in Arlington."

Delta Associates senior associate Jonathan Chambers agrees leasing activity from co-working operators in DC is not slowing anytime soon.

"We’re seeing big leases on an almost monthly basis now," Jonathan says. "This is definitely a burgeoning industry, and I expect to see growth continue at least at the same pace next year."

Even at the same growth rate, though, it will likely be less of a driver behind DC's office demand than it was this year. Jonathan expects overall leasing activity to rise as government contractors look for more space. 

"They’ve driven much of the positive growth in the office market this year," Jonathan says of co-working companies. "So as tenants from other industries become more active in the office market, their slice of the pie will decrease."

An improved leasing market could accelerate rent growth in Class-A space, making it harder for co-working companies to compete, but he notes that they have often sought out converted space in more affordable, non-traditional submarkets, like WeWork's Wonder Bread and Manhattan Laundry locations and Spaces' Uline Arena location. 

As for Metropolitan Square, there is no doubt WeWork's new 120k SF space occupies prime real estate, with its rooftop deck (above) offering views of the Washington Monument and the White House. Bisnow took a look inside on Friday to see how the region's largest co-working space is outfitted. 

The space has a huge common area, above, with a bar that serves coffee, cold brew, fruit water and beer on tap. The common area has dozens of available desks, which WeWork offers for $350 per month. The second floor, connected by the staircase above the bar, will open to tenants next week.

A sign of how co-working is attracting larger tenants, Metropolitan Square has a 146-desk office (still seeking a tenant) that offers private executive suites and conference areas. 

Showing off the company's creative flourish, the hallway features leafy designs on the walls and plants next to the seating areas. That hallway leads to a second common area, which features another bar and much more open workspace.