CREJ - Office Properties Quarterly - December 2017
Denver’s embrace of the co-working movement is proving to be beneficial for users and the city’s commercial real estate industry as a whole. The concept of co-working space has taken off in the Mile High City in recent years, providing an environment for a unique niche of users to easily enter the market, thrive and, ultimately, expand into the traditional office model. Although the rise of co-working space in Denver has had a positive impact, it certainly isn’t without its growing pains. Just as Uber disrupted the taxi industry and Airbnb disrupted the hotel industry, the commercial real estate sector now has to grapple with changes of its own as the U.S. workplace evolves. Technology has connected and mobilized more people than ever, accelerating the rise of freelancers, independent contractors and remote workers. As millennials enter the workforce and demographics shift, changes in office tenants’ requirements become more pronounced every year. Environmentally friendly, open-plan spaces in amenity-rich buildings are becoming more of an expectation than a luxury. But to the millennial generation, how they work is just as important as where they work. According to the U.S. Census Bureau, there are 83.1 million millennials, making them the largest living generation of Americans. By 2020, this generation alone is projected to make up half of the U.S. workforce. At face value, co-working spaces offer people a place to conduct business. However, this description does not fully capture why co-working has become so popular. The intangible benefits of co-working space are the reasons why workers (particularly millennials) continue to sign up in large numbers, even when working from home could make more economic sense. Co-working has achieved a high level of popularity because it creates a sense of community, a strong culture and opportunities for serendipitous interactions with like-minded professionals. Although some aspects of the co-working community may seem trendy, the rise of this practice represents a fundamental change in the workplace. From a cost-savings perspective, co-working space really began to gain momentum during the Great Recession in 2008, when occupier appetite for flexibility increased dramatically. In a tough economy, small businesses preferred flexible daily or monthly leases compared with fixed commercial leases. From 2009 to 2012, there was intense scrutiny on cost-cutting and employee-footprint reduction. Even though the financial crisis is behind us and Denver has enjoyed years of incredible economic expansion since then, companies have remained cautious, preferring to grow their office footprint in a more methodical way. Reduced employee footprints and shorter, more flexible lease terms have become the norm in the commercial real estate world. At the same time, office asking rates in the Denver market have skyrocketed with tenants leasing high-end space to attract and retain a talented workforce. With the war for talent intensifying, it is especially important for companies to understand the workplace needs of their employees. The co-working movement was once confined to creative types and independent workers. However, corporations and smaller companies alike are beginning to notice it and have become more comfortable with implementing certain aspects in order to remain competitive in recruiting talent. Some corporations, including a few Fortune 500 companies, are even leasing co-working space for a portion of their employees. With the co-working concept gaining popularity and acceptance in mainstream America, it may seem as though the model is on track to overtake traditional commercial real estate. We project that this isn’t the case, and the co-working model instead will strengthen the local commercial real estate industry. Independent and contract workers, who are projected to make up 40 percent of the U.S. workforce by 2020, are returning to work in office buildings whereas, in the past, they were largely working from home. Co-working companies are leasing an increasing amount of office space to keep up with the strong demand. Many freelance and independent workers would not be in an office environment at all if it were not for shared spaces. Some corporations are opting to bring the co-working model home by turning excess space into shared space. Office landlords are doing the same, leading to increased occupancy in their buildings. Everyone benefits when businesses grow quickly and intelligently. When co-working facilitates growth for new businesses, those businesses, in turn, bring vibrancy to their cities and help grow the real estate market. Co-working space provides a place for small businesses or entrepreneurs to establish themselves and, therefore, helps them become more reliable tenants should they move on to rent more traditional office space. If a company is growing a successful business, it eventually will outgrow co-working space. Markets like Denver, which embraced the co-working movement early, have the most to gain. The Denver office market totals more than 148 million square feet of space. We estimate that co-working space in Denver totals nearly 1 million sf. Although the local co-working footprint continues to grow rapidly, it still only makes up roughly 0.7 percent of Denver’s total office supply. Therefore, co-working space in Denver has had the benefit of offering a new and creative approach to commercial real estate – while remaining small enough to not disrupt the traditional office model.