RESEARCH TRIANGLE PARK – Recent expansions announced by HQ Raleigh and Loading Dock in the Triangle are just two examples demonstrating the growing strength of the coworking industry despite the setbacks encountered by WeWork.
A new report from Morningstar and PitchBook estimates that coworking space will increase by what they say is a “staggering” amount: 2.5 billion quare feet worldwide by 2028.
Flexible space also is growing.
Here are the key highlights from the report:
- In the U.S., we forecast that coworking square footage will grow from around 80 million square feet in 2018 to 360 million square feet by 2028, an increase of 4.5 times. Accordingly, flexible office space will account for an ever-greater share of total office space, rising from 2% in 2018 to 8% by 2028.
- Globally, we estimate that coworking square footage will increase from 363 million square feet to a staggering 2.5 billion square feet, an increase of 7 times. Coworking will go from 2.5% of occupied office space in 2018 to around 15% by 2028.
- In the U.S., we expect total demand for office space to increase by a 0.5% CAGR through 2028, reflecting slower working-age population growth and the continued shift toward office-using employment.
- Globally, demand will increase by a 1.5% CAGR in our estimates, with sluggish growth from developed economies being offset by elevated growth from developing countries with higher population growth, continued urbanization, and a shift to office-using employment.
- Remote work arrangements should provide a headwind to office demand, but the effect will be muted by the tendency for employees to work from home only part of the time, meaning they are still allocated office space. The rise of the gig economy should provide a tailwind. Incremental demand resulting from the availability of coworking will more than offset attrition of office employees due to gig employment.
- The coworking industry is currently dominated by a few large players, such as WeWork and Regus, with many smaller firms. Competitive pressures and more judicious venture capital money should result in less-concentrated market share. We also expect the coworking industry to shift from treacherous traditional long-term lease agreements exemplified by WeWork to operating agreements that feature a management fee to operate space.
- Because of the real estate focus of coworking firms, moats will be exceedingly hard to come by amid a struggle to find avenues for differentiation. However, a focus on real estate services rather than exposure to real estate economics remains the best bet.
- At current prices, we think SL Green and Jones Lang LaSalle are compelling options for investors, with Boston Properties Group and CBRE meriting attention in the event of a pullback. Our office REITs stand to benefit from the rise of coworking in the form of increased demand for office real estate, but they should be wary of added risks attached to that exposure.
- The commercial real estate brokers should see increased competition, but narrow-moat CBRE and JLL will share in the spoils because of their position atop an industry benefiting from tailwinds related to consolidation and a rising appetite for real estate outsourcing.