CREJ - Building Dialogue - September 2015

How Much is Too Much Co-Working Space?

Top-tier U.S. cities, like San Francisco and Chicago, have boasted co-working office space since before the first-generation iPhone was released in 2007, whereas co-working office space is a relatively new phenomenon in Denver (began in 2010).

What lessons can Denver learn about co-working office space from markets that are five years more established and 10 times its size? For starters, the demographic profile of co-working clientele or “members” is important to understand. Co-working attracts entrepreneurs, who believe that the old models of making a living are not as reliable as they used to be. Mainstream entrepreneurship sprang from Pres.

Obama’s Startup America Initiative in 2011, during the Great Recession. Today, the average age of the larger tech industry is 39.8 years old. Entrepreneurs are recruiting millennial hustlers, hackers and hipsters through co-working office space, but that’s only a fraction of the appeal. Although there is an age and income differential between “members,” practically everyone has an MBA (24 percent of most recent Harvard MBA grads are employed in consulting; another 18 percent are employed in tech). Other co-working perks include: bicoastal offices, charging your Mac with wind energy, 3-D printing, summer camp with venture capitalists, health insurance and a social community for startups.

There is approximately 500,000 square feet of co-working office space delivered or coming on line by early 2016 in the Denver metro area. That’s 1.5 percent of downtown Denver’s office inventory. Traditional office metrics support 150 to 250 square feet per employee; however, co-working office space is designed to accommodate 48 square feet per employee. At full capacity, Denver’s current supply of co-working office space will house 10,000 “members.” Comparatively, Lockheed Martin Corp., Colorado’s fourth-largest private employer, has 7,100 employees in the state. Where are these co-working “members” coming from? In 2013, Colorado had over 837,000 entrepreneurs, earning nearly $25.7 billion in income. In the past, these entrepreneurs would have operated out of their own kitchens or garages, or hopped to different coffee shops and libraries to get work done. Now, they can rent a desk from Creative Density, Converge, Galvanize, Green Labs, Green Spaces, Industry, Modworks, Shift, Uncubed or WeWork (to name a few in alphabetical order) for approximately $500 per month. Whether “members” find themselves in San Francisco, Chicago or Denver, the rates for co-working office space (not including any a la carte services) are flat across the board, which explains why operators are clamoring to break into Denver, where direct lease rates are half as much as San Francisco.

Chicago has 868,000 square feet of co-working space in a 257-million-square-foot office market, which is 0.03 percent of its inventory. DTZ researchers attribute Denver’s rapid growth of co-working office space to two factors: 1) Forbes ranked Denver as the second-best city to launch a startup business, and 2) historically, Denver is not a corporate HQ destination.

The cranes busy at work above Union Station are not building office towers for startup companies; instead they are constructing massive floor plates for large tenants with credit and long-term leases. Even Big Four accounting firms have recognized the draw of collaborative space, like KPMG’s first-ever Ignition Center at 1001 17th St., employing 125 people in Denver.

Co-working is a preliminary disrupter to the commercial real estate industry with limited measures of success. The keys to profitability for co-working operators across the U.S. are awareness, niche appeal and a booming population. Tenant rep brokers predict that 30 percent of 3,000- to 5,000-square-foot tenants will lease co-working office space in the future. They also cite security and company culture as deterrents.

Commercial real estate experts have recently grown weary of the legitimacy of demand for co-working office space, as well as oversupply and cannibalization. However, as long as there are limited creative spaces available to lease from traditional landlords near rail transit, there will be short-term demand for up to 1 million square feet of co-working office space in metro Denver.

whitney.hake@dtz.com