Co-working Operators Expand Rapidly in OC

The co-working market is finally making a big splash in Orange County. Co-working operators have been active in Los Angeles and San Diego, and now the Orange County market is seeing an increasing demand for co-working space. The market has grown to more than 680,000 square feet. While the market is still said to be in its “infancy,” it is expected to grow thanks to the millennial population and adopting of technology in the workspace. We sat down with Bob Thagard, executive managing director in Cushman & Wakefield’s Irvine office, and Eric Kenas, research director of Greater Los Angeles and Orange County, to talk about how the co-working sector in Orange County has grown.

GlobeSt.com: What is driving the expansion of co-working space in Orange County? Bob Thagard: The strong millennial presence coupled with technological advances utilized by a multi-generational workforce, has placed a much stronger emphasis on on-site amenities and the employee experience in the workplace. Co-working spaces provide resources and infrastructure to a generation that, increasingly, makes their living outside of the traditional office. As companies seek to enhance their workplace experience, co-working facilities have become an attractive concept to both corporations and freelancers alike. This type of flexibility and service is most advantageous for smaller users as well as those looking for a short term commitment.

GlobeSt.com: Co-working space has already seen tremendous growth in markets like Los Angeles and San Diego. Why has the trend been slower to catch on in Orange County?

Eric Kenas: Some trends occurring or have seen rapid growth in larger markets such as Los Angeles tend to trickle into Orange County slower. The driving factor in this case could be more attributed to how the ‘business” of each co-working company determines the markets to penetrate. See how they are performing and then move to more conservative markets. Los Angeles is a more than 200 million square foot office market, while Orange County is just about 90 million square feet.  The most recent leases have trended towards the newest product to hit the market, which is also reflective in the 55% occupancy positioned in Irvine Spectrum, which has delivered the newest and most creative office product that many co-working companies seek out.

GlobeSt.com: How has co-working space impacted or how could it impact direct leasing activity? Thagard: Accounting for only a fraction of Orange County’s 90 million square feet of total office inventory, co-working has not really impacted direct leasing activity to any significant degree, but it is a concept that appears to be in expansion mode. As facilities like Premier Business Centers, WeWork and SPACES, continue to expand and new facilities like Industrious come to the market, it is likely to play more of a role in adding to positive net absorption; however, I still anticipate co-working should continue to make up a small portion of the market’s total office inventory.

GlobeSt.com: How have Orange County landlords responded to co-working tenants, and has there been hesitation to lease to these users? Thagard: Like many new business models, there is always a degree of hesitation. While co-working dates back to the 1990s, the concept did not really begin to erupt, at least regionally, until after the Great Recession so we have not been able to test its durability and longevity during challenged market conditions. To some degree, securitization for co-working facilities is similar to that of a start-up, however, co-working facilities have a unique build out, which often requires significant capital and each location presents its own set of potential financial risks.  The challenge among Landlords in Orange County and throughout the country is to determine the appropriate level of securitization based on a unique and expensive build-out and the stability of the facility location. Overall, landlords and tenants do appear to be working more closely together to meet each other’s needs.

GlobeSt.com: How do you expect the co-working market to continue to grow this year?

Kenas: Co-working will greatly depend on how aggressive these companies are in seeking additional locations along with their success of leasing to good quality and sustainable tenants. The tech industry is strong in Orange County and these start-ups could gravitate towards co-working space, which allows for flexible future growth/space options. Another factor could be a major co-working player such as WeWork and what they decide to do in Orange County. WeWork has already been aggressive in the Los Angeles market and typically occupies larger space footprints. However, our study in Orange County only shows them in two locations, with smaller footprints. Combine that with landlord interest, and any potential growth from them (or perhaps other active players such as Regus + SPACES or Premier Business Centers, etc.) and the needle could move further in this market too. There are also some new office developments that could be nicely suited to house these co-working concepts given their modern, creative design.

Seeing that independent/freelance and mobile workers, millennial influence, corporate partnerships, and start-ups are having increased impact in the co-working sector, we would expect there to be further co-working growth and expansion ahead assuming continued favorable economic and overall real estate growth.