Jay Nugent

The co-working trend is finally hitting Orange County. During the final quarter of 2018, Orange County saw an increase in co-working leasing activity, according to a new market report from Newmark Knight Frank. During the same period, however, direct office leasing absorption slowed, down 74.7% year-over-year. Despite the slow down in leasing activity, absorption remained positive for the eighth consecutive quarter, driving the vacancy rate down slightly to 12%. Co-working users signed major leases throughout the year, with WeWork taking up 150,000 square feet in the market and Regus picking up an additional 62,000 square feet.

“In addition to the co-working trend happening all across the US, I believe the primary reason it is increasing in our market has been the incredible success of the existing co-working operations that have come to Orange County,” Jay Nugent, senior managing director at Newmark Knight Frank, tells GlobeSt.com. “I know the two biggest,  WeWork as well as Spaces, have achieved very successful lease up rates at the locations that have opened and those locations have performed better than projected.  This has given them as well as their competitors confidence that this Orange County region right now is “under supplied” as it relates to co-working space.   It is simple economics, when you are at or close to 100% leased the only way to drive more revenue is to open up more locations and that is what we are seeing.”

While there was this dynamic of increased co-working leasing activity and decreased overall office absorption, the two trends are unrelated. Co-working has yet to have a substantial impact on overall leasing activity. “At this point I think it has been all positive as it relates to the overall the leasing market,” adds Nugent. “Like most things in business when the economy is strong everybody wins.  Coworkers have leased considerable space in many of the County's most prominent development or redevelopment projects and this in turn has taken quality inventory off of the market—this leaves less space for traditional office users as well as having a trickle down affect to the rest of the market.”

In fact, co-working may have a positive impact on office leasing activity. The model attracts people into offices and office buildings and helps to fuel business growth. Co-working spaces bring many professionals into office buildings that may traditionally work from home,” says Nugent. “Companies that have sales people regionally may typically have not leased office space but now you are finding they have national agreements in place with these co-working companies and in turn are now giving those regional employees an office to work from. This is especially important as it relates to today's working environment especially with the millennial generation that enjoy having a place to go to and be productive as well as socialize.”

While some have seen co-working has being a new competitor for office owners, Nugent says the co-working can actually be a benefit and an additional amenity. “The success of the co-working phase we have seen sweep our nation is due to some of the ideas they have implemented and that has been very well received by tenants,” he says. “Things such as open and creative office space, collaboration workshops with other tenants or certain field experts, community fitness classes, and amenities are all things that co-working companies have been at the forefront of and provided for their tenants and I think the landlords that embrace these ideas and figure out how to implement them at their office projects will be able to capture tenants who either are too big or prefer the benefits of having a more traditional office lease while keeping their employees happy.”

The co-working trend is just taking off in Orange County, and Nugent expects more growth and co-working leases to come in 2019—especially considering the current strength of the economy. “I would not be at all surprised to see the amount of co-working space possibly triple in Orange County in the next 12 to 24 months,” he says. “If you look at other major markets such as NY and SF and others, I think we are still relatively small in terms of the amount of space these tenants occupy as a percentage to the overall market.  The success of the existing co-working spaces in Orange County is fueling that growth.”