After moving his architecture firm's office among downtown WeWork locations seven times over the past five years, Andrew Volckens recently went hunting for new, larger workspace to accommodate his growing team, figuring it would be more affordable to sign a traditional lease rather than sticking with co-working.
But after polling his staff, he ended up at another WeWork.
"Everyone was kind of in the mindset of, 'We want to get our own space eventually, but we want to stay in WeWork now,' " says Volckens, managing director in the Chicago office of San Francisco-based Huntsman Architectural Group, which moved last month into a 2,500-square-foot co-working space at 448 N. LaSalle Drive in River North. Its short-term lease would buy more time for COVID-19 to subside, and sharing communal amenities with other tenants—plus the free snacks and other co-working hallmarks—would encourage his 10-person staff to show up for in-person collaboration, Volckens says.
"Being surrounded by other people just makes it feel like you're more invested in a community or part of something bigger,” he says. “There's something to that."
Huntsman is a small part of a broader surge in demand for co-working space that began last year and picked up in recent months with COVID-19 restrictions waning. Companies struggling to figure out their workspace needs and trying to lure employees to work from the office rather than home have been a boon for shared office providers like WeWork, Industrious, Convene, and others offering plentiful workplace perks and monthly leases.
Some locations downtown that were mostly empty in 2020 are now entirely full, and many have recovered to their pre-pandemic occupancy levels.
It's a movement that includes both smaller firms that have traditionally leaned on co-working as well as big corporations that haven't. A recent national survey of companies by real estate brokerage CBRE found that just 17% of respondents have a "significant" amount of co-working or flexible workspace in their office portfolio today, but that 51% of respondents expect to fit into that category over the next two years. The 51% figure was up from 35% in a similar CBRE survey last year, an indication of growing demand.
The growth in demand comes as Chicago office building owners face record-high vacancy and a wave of space-cutting by tenants embracing the rise of remote work. While some landlords are happy for now to fill space, a sustained trend toward shorter-term leases would be bad for building owners, which count on income stability from long-term leases.
Many landlords contend traditional, long-term leases will regain popularity once companies can operate without COVID interruption. Still, the run toward co-working is an early sign of how different the post-pandemic office landscape may look, with far more space leased on a short-term basis and with hotel-like amenities. That evolution has implications for how offices are designed, how much they cost to rent and even how properties are valued.
"If companies are not looking at leveraging a (co-working) space or something that supports that flexibility, they're asking, 'How do we build something like that within our space?' " says Megan Mackinson, executive vice president of workplace planning and projects at brokerage Jones Lang LaSalle, who has spent much of the past two years discussing the meaning of "hybrid work" with more than 600 companies. Most firms that are in the market for new space are prioritizing buildings that have co-working or pre-built office suites that would allow them to easily expand as needed, she says.
Co-working offices popped up all over Chicago before the pandemic, peaking at around 3.6 million square feet in early 2020, according to data from brokerage Cushman & Wakefield. That number fell by about 8% by the middle of last year—slightly more than the average national drop-off during that span—with many smaller co-working providers succumbing to a lack of demand during the public health crisis. For some skeptics, the shrinking inventory showed that shared office providers relied too heavily on risky, short-term leases and couldn't withstand an economic downturn.
But closures mostly stopped during the second half of the last year, and the rising demand has pushed other co-working providers to expand. Chicago-based Workbox, which caters primarily to early-stage companies, had one downtown location at the beginning of 2021 but has since opened three more. It has grown from 30 to 150 member companies during that period and is 95% occupied at two of its locations, says CEO John Wallace.
New York-based WeWork, which has 11 locations in Chicago, saw its average occupancy drop from about 80% in mid-2019 to 45% at the end of 2020, but bounced back to 70% at the end of March, according to the company.
Big companies, which typically take more space in shared offices than startups, are driving a lot of the growth. New York-based Industrious, which plans to open a new location at the redeveloped Marshall Field building on State Street later this year, said corporate demand has increased the average size requirement of its user base by nearly 20% compared with pre-pandemic levels. "We're getting an opportunity with most of the Fortune 500 right now," Industrious CEO Jamie Hodari says, adding that employee disdain for commuting is pushing more companies towards a "hub-and-spoke" model with co-working space serving as satellite office space.
A joint venture of Chicago-based Glenstar and Philadelphia-based Rubenstein Partners recently bet that one of its suburban office properties could be such a spoke, especially after COVID sped up a millennial migration to the suburbs. The owners teamed up with 25N Coworking on a new 23,000-square-foot shared office location slated to open this summer at the Continental Towers office property in Rolling Meadows, Glenstar's first local suburban coworking offering.
JLL predicts that flexible office space—including co-working and other spaces rented on low-risk deals with flexible terms—will account for around 30% of all office inventory by 2030, compared with less than 3% today.
Such a rise would have major ripple effects on the local office market. Some real estate investors before the pandemic looked at co-working space in an office building as though it were space leased to a traditional tenant with below-investment-grade credit, making it a higher risk and lowering a property's overall value. But in a post-COVID era, where many tenants crave both lease-term flexibility and spurn costly and lengthy buildouts, co-working could be seen in a better light and potentially increase what a building is worth.
More demand for flexible office space could also accelerate a recent trend of companies flocking to the highest-quality buildings they can to recruit and retain talent, says CBRE Senior Vice President Mark Cassata. Smaller companies may opt for co-working space in a trophy office tower—where they might not be big enough to merit a traditional lease—instead of taking offices in an older, less expensive building with fewer amenities like they might have done in the past. That could exacerbate the already substantial problems plaguing landlords with outmoded buildings.
All landlords must "solve the need for how people plan to work in the future," which likely includes traditional offices, homes and other locations like co-working, hotels or private clubs, Cassata says. "The trends we're seeing across all segments are how the market can provide the ability to work efficiently in a hybrid work model."
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