The office sector continued to grow in 2018, according to the Federal Reserve Bank of San Francisco, which represents the 12th district. The 12th district is comprised of nine western states, including California.
In the 12th district, absorption rates — the amount of space becoming occupied — for top-tier office properties rose the most in 2018: 3.4% compared to 0.7% and 0.5% for mid- and low-tier properties, respectively.
While office vacancy rates have generally declined across the 12th district since 2009, the commercial data information service CoStar forecasts that vacancies will rise in 2019. This forecast stems from a slowing jobs market, which negatively impacts office occupancy rates. As vacancy rates rise, CoStar forecasts that rent growth will slow.
The rising significance of co-working leases
While large trends in employment and the economy are important in forecasting the future of the office market, success for many leasers of office space surprisingly comes down to one big player: the co-working giant WeWork.
Co-working is a piece of the sharing economy which has grown exponentially over the past decade, alongside the increasing number of workers who work remotely and as freelancers or independent contractors. Co-working spaces also lend legitimacy to small businesses that are just starting out and need the use of a conference room, printing services or other office amenities that are too costly for fledgling businesses to lease or buy outright. Co-working makes these services and spaces cheaper for everyone by sharing the space and costs of office life.
WeWork is the largest co-working organization in California, with dozens of spaces located across the state. Workers pay monthly membership dues for an office or desk space and use of the space’s amenities, with prices ranging around $400-$800 a month.
The share of total office absorption in the 24 months spanning 2017-2018 which can be accounted for by WeWork is roughly:
- 15% in San Francisco;
- 9% in Los Angeles;
- 5% in San Diego; and
- 1% in San Jose.
For example, WeWork signed leases on 800,000 square feet of office space in San Francisco during 2017-2018 and 400,000 square feet in Los Angeles.
This rapid growth doesn’t even account for other growing co-working companies across California. Co-working space leased has increased 500% in Los Angeles alone since 2008, according to the Real Deal.
As co-working continues to carve out a wider niche of the office market, commercial real estate professionals can expect to see this type of space emerge as a defining force in the market. Technology makes hiring remote workers and freelancers easier for employers, and co-working spaces offer community and accountability for this growing, independent workforce.
However, co-working spaces are not immune to the economic downturn we are starting to feel in 2019. When vacancies rise in other office sectors, expect co-working spaces to feel the same crunch. The office market is especially vulnerable to economic recessions, and the next one is forecasted to arrive in 2021. The period leading up to 2021 will see first rising vacancies and falling absorption, followed by a decrease in construction.
