- Manhattan’s coworking market is “getting more fragmented”
- Any “retrenchment” experienced by WeWork could leave a hole in Manhattan’s office market
- Coworking has prevented the Manhattan office market from hitting its highest rate of vacancy
A Savills Studley report on the New York City office sector was released last week. In its wake, a number of publications seized on the suggestion that Manhattan’s flexible workspace market is “ready to hit a wall”.
Keith DeCoster, director of U.S. real estate analytics at Savills, told Bloomberg that coworking “is heading for a peak in Manhattan in the next couple of years” as the market is “getting more fragmented” with hybrid models and landlords jumping into the act.
In its report, Savills refers to coworking as a rapidly growing portion of the Manhattan real estate market that will likely reach 8 million sq ft, or roughly 2% of existing office stock, by year-end 2018. As a percentage of office-using workers however, the research finds that shared office space only accounts for approximately 1% to 1.5% of office workers.
Given that coworking is attracting more interest and investment than ever before, why the low take-up? Has it maxed out in Manhattan already? Or is the market simply re-grouping for a second wave?
A Coworking “Fallout” or a Flexible Friend?
As noted by CBRE earlier this year, the flexible workspace market is currently Manhattan’s fastest-growing industry. Every market has a peak, and with this in mind Savills questions what would happen if there was a major reversal in the economy or a drop-off in membership.
“Even without a recession, coworking will reach a saturation point in the next several years, forcing some level of retrenchment in the footprint of these trailblazers.”
Its data shows that the sharpest growth in Manhattan happened between 2014 – 2015, when the coworking market leapt in size from 394,000 sq ft to 1.6 million sq ft. Many of these are new centers and operators that haven’t experienced a downturn — including WeWork, which is responsible for a large chunk of recent leasing activity in Manhattan. Industry experts have for a long time criticized WeWork’s questionably high valuation, uncertain as to whether or not the 8-year-old company could survive an economic downturn. And as the second-biggest private office tenant in Manhattan with nearly 50 locations, any “retrenchment” on WeWork’s part would leave a significant hole in the office market — not to mention the company’s future.
WeWork and other operators aside, in times of uncertainty, flexible workspace is actually hugely beneficial to companies that are negotiating difficult market conditions.
One example is in the UK, where demand is soaring for flexible space as companies prepare for the inevitable turbulence and ongoing uncertainty surrounding Brexit. This is happening right alongside organic growth in coworking and flexible space, which goes some way towards explaining London’s current position as the largest flexible workspace market in the world.
The “Ultimate Commodity Space”
During times of crisis, coworking can be every company’s ‘flexible friend’ — and the same goes for real estate companies themselves.
Case in point, coworking is actually preventing the Manhattan office market from hitting its highest rate of office vacancy since the recession. Yes, you read that right.
The same report from Savills found that since the start of 2017, net absorption in Manhattan has totalled just over 3.0 million sq ft and flexible workspace firms have leased at least 2.7 million sq ft in this same period.
Without those coworking leases, availability would be at least another 100 basis points higher, approaching 13%, and the highest mark since the recession.
What’s more, many coworking operators take up ground and lower floors, which are traditionally harder to lease. As such, Savills refers to flexible space operators as “the ultimate commodity space bailout” as without these leases, many landlords in Manhattan “would have been saddled with lower floors that can rarely command a premium.”
Coworking is Spreading
Another positive offshoot of high leasing activity in Manhattan is that owners and operators are now actively seeking alternative locations outside of New York.
According to DeCoster, speaking to Bloomberg, “Many shared-office-space providers are already starting to direct their attention to other markets that are not as saturated, such as Denver, Charlotte, Miami and Atlanta.”
The same can be said for the UK, which is benefiting from flexible workspace growth in regional cities as competition in the Central London market continues to intensify.
And while Savills debunks the widely-shared suggestion that flexible space will soon take over 30% of the traditional office space market, it claims that flexible workspace will have a “lasting impact” on the workplace.
This much we can be sure. But what we don’t know is just how far coworking will spread, how it will evolve over the coming years, and who will lead the charge — particularly if (or rather when) economic conditions turn sour. Right now, flexible workspace is continuing to grow and with real estate companies racing to incorporate flexible space in their portfolios, the trend has become firmly rooted.