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How Coworking Companies Delayed a Reckoning in the NYC Office Market

‘Where there was empty space, they would take it up.’

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New York City’s office market was probably in trouble long before COVID-19 hit.

A flight to quality and away from a glut of Class B and C properties was already starting to hammer the market before the pandemic arrived in early 2020. But that pivot wasn’t a problem because there were a number of tenants gobbling up space in the older crop of buildings: coworking companies. 

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Those firms helped bolster the lower end of the office market. Without them, New York would have been forced to confront a higher availability rate a whole lot sooner than COVID-19, said Andrew Lim, director of New York research for JLL (JLL).

“There would have been higher vacancy. A lot of the spaces, especially on the lower end of the quality spectrum, would have been vacant for longer, and so [coworking] kind of saved a lot of buildings and landlords who had more exposure to this asset type,” Lim said. “But what that means in terms of the health of the market is that you kind of kick the can down the road.”

Back in 2018, coworking companies were riding high. WeWork (WE) sealed seven deals for nearly 360,000 square feet in 2018 alone, making it the largest private tenant in New York City with more than 5.3 million square feet of space as of September 2018, Commercial Observer reported. Even big companies like IBM got in on the coworking game, taking all of WeWork’s space at 88 University Place.

Spaces, a coworking brand owned by IWG, inked 100,000 square feet at 287 Park Avenue South, 111,000 square feet at the Chrysler Building, and 33,000 square feet at 413 West 14th Street during that same year. Knotel scored 17,000 square feet at 560 Lexington Avenue and another 45,000 square feet at 261 Madison Avenue, holding around 1.7 million square feet as of November 2018.

While coworking had been around since at least the early aughts, 2018 saw leasing activity peak in the sector at just under 5 million square feet in Manhattan, according to CBRE (CBRE) data. Savills pegs the year’s leasing activity at just under 4 million square feet, but both firms agree: 2018 was a good time to be a coworking company. 

But those companies weren’t leasing space in the highest-quality buildings. Savills estimates that between 2017 and 2019, coworking companies leased 75.9 percent of their spaces from Class B and C buildings. During that same period, coworking companies represented an average of 15.7 percent of the new leases and relocations signed in Manhattan.

Today, coworking companies still take more space at properties that are a little worse for wear: Coworking firms represent 4 percent of commodity tenants in Manhattan compared to 1 percent of tenants at so-called “better buildings,” according to CBRE. (CBRE defines a commodity building as a property that’s less desirable due to age, location, the amount of natural light, and other factors.)

From 2017 to 2019, coworking firms leased 4.3 million square feet in Midtown — nearly half of their leasing activity during that period — 2.95 million square feet in Midtown South, and 1.35 million square feet in Downtown, according to Savills. And, when coworking firms’ leasing activity peaked in 2018 and 2019 in those areas, it also peaked overall in Manhattan, according to Savills and CBRE data. 

The pre-pandemic boom in leasing overall in Manhattan came even as the city was still feeling the lingering effects  from the Global Financial Crisis of 2008 and as technology companies had begun to replace financial services tenants as the Manhattan office market’s animating force. 

In 2008, financial, insurance, real estate and legal (commonly known as “FIRE”) tenants represented 55 percent of firms leasing in Lower Manhattan. By 2016, that portion had shrunk to 37 percent, while technology, advertising, media and information (TAMI) tenants had taken up some of the leftover space, rising from 5 percent to 12 percent in that same period. 

As technology tenants filled the gap left by the banks in higher-quality buildings, coworking companies were taking space in the less desirable ones. Coworking firms occupied 1.71 million square feet in Manhattan in 2009 and steadily rose to surpass 5.7 million square feet by 2015, according to CBRE data. In 2018, coworking represented 18 percent of all leasing activity in Manhattan, according to CBRE data.

“Where there was empty space, they would take it up. The retreat of financial services, you would think, would cause a great deal of vacancy in New York. By the timing of it, you just didn’t see that,” Lim said. “And I think that put off some of the pain from the Great Recession that is coming to a head nowadays with COVID and questions around return to office.”

Technology tenants, however, were leasing space in those higher-quality buildings, kicking off the flight to quality — one of the biggest catchphrases in the office market today. The market was already divided then, said Marisha Clinton, senior director of Northeast regional research for Savills.  

“The flight to quality actually took hold pre-pandemic,” Clinton said. “Before the pandemic, a lot of companies were less price-sensitive. They had deep pockets to pay the $100-plus per square foot pricing for rent. Now with a global pandemic and an uncertain economic environment, while there is leasing going on in this high-end trophy space [and] we’re still seeing a flight to the quality, the number of trophy deals has lessened.” 

As technology and financial tenants scored better space, coworking firms took up the rest, keeping all ends of the market strong, Michael Slattery, CBRE’s director of research, said.

“We had the candles burning at both ends,” Slattery said. “The top end of the market was very strong, and the bottom end was also seeing a lot of leasing being done by the coworking firms. It was a boost to both segments of the market.”   

That dual activity kept landlords from having to confront the flight to quality and kept availability low, Lim said. And, at the time, landlords weren’t as interested in how coworking could amenitize and improve a space, something office owners have focused on amid remote work and companies shedding space, said Jamie Hodari, the CEO and co-founder of the coworking company Industrious

“So for many years, we said to landlords, ‘We can make what we do an amenity to the whole building, not just to the flex users of the building,’” Hodari said. “And very few landlords took us up on that. … During the pandemic, and certainly the last year or two, that has shifted.”

The coworking boom could have also kept availability rates low as companies flirted with the idea of taking communal space, with a few deals here and there, but ultimately kept their legacy office space as well, Hodari added. 

Put simply, without coworking, 2018 would have been a much different world for New York City’s office market. In fact, it might have looked a lot like today’s market. Landlords might have been scouring their portfolios for new ways to stay competitive, availability rates might have been a lot higher, and newer Class A  buildings might have been running the show —similar to how they are now. 

Still, it’s unlikely Gotham’s office crop would have been decimated without coworking, Slattery cautioned. 

“Yes, the market would have been impacted. But to keep things in perspective, I don’t think it would have cratered the market,” he said. “The prospects were not just coworking or nothing. Coworking was being so aggressive in their growth that they were really bumping a lot of demand elsewhere. Those tenants did land at other commodity buildings.”

Celia Young can be reached at cyoung@commercialobserver.com.