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February 11, 2019 Comments (0) Views: 721 California News, Top California

LA vs. San Francisco: Who Wins Co-Working Battle?

By Dennis Kaiser

JLL’s latest research on flexible space or co-working models, shows a compelling comparison between SoCal and the Bay Area. The report looks at how the two regions stack up, where opportunities are and the challenges landlords face.

Connect Media asked JLL’s San Francisco leader Alex Lassar, as well as a colleague in Los Angeles, Josh Wrobel, to break down the two co-working space segments in a battle between the markets in our latest 3 CRE Q&A.

Q: How would you describe the state of flexible office space in your market?
Wrobel:Flexible office space in the Los Angeles market is in both a state of flux as well as a state of significant growth. First, relative to the growth, the Los Angeles’ content corridor (Burbank/Hollywood down to Culver City/Playa Vista) is statistically the most saturated flexible space market in the nation. The driving force behind this saturation is the combination of both (1) the exponential growth of Media & Entertainment industry’s physical footprint and (2) the insatiable demand for additional content around the World. Since Los Angeles’ development pipeline is not keeping up with the Media & Entertainment industry’s demand, single digit vacancies in the content corridor have pushed most of the West Los Angeles submarkets to peak pricing (creating rate spikes in flexible space as well). More importantly, the unprecedented demand for content has expanded the demand by some of the best supporters of LA’s flexible space market.

Flexible space works perfectly with Los Angeles’ entertainment production based tenant base, because not only does LA’s production morph into the growth of technology start-ups in Silicon Beach, but it also fits the mold for the short-term nature of contracts in the media and entertainment industry (i.e., production companies can be backed by great credit industry titans, but they are often only given short-term contracts which are tied to the specific productions of TV shows, movies and gaming).

Second, as it relates to the state of flux in the flexible office space in the market, we are seeing more and more owners expanding their offerings to provide management-style arrangements with flex space operators to provide flexibility and services that building owners are not typically  great at providing for the modern workforce. Flexible space is taking multiple different shapes and forms, and each of those forms is a natural fit for the Los Angeles market because it (1) allows owners to activate outside areas that Los Angeles employees can take advantage 365 days per year, (2) it tracks the entertainment industry’s model of shorter and more flexible contracts, and (3) some of flex offerings double as social clubs that thrive in Los Angeles’ business/entertainment community.

Lassar:The San Francisco Bay Area is a home to technology innovation, so it is not surprising that flex office space is a popular part of most corporate tenants’ real estate strategy in the region. Downtown San Francisco has more than 2.7 million square feet of flex space making it the sixth largest market in the country, currently. In Silicon Valley, we’ve seen good demand for flex space options, especially among venture-funded start-ups seeking short term options to limit their long-term lease liabilities. We are also beginning to see major tech firms embracing large flex space options in the Valley, and we anticipate that large block corporate demand for flex space will become more prevalent throughout the Bay Area market over time.

Q: Where do you see the most opportunity for flexible office space growth in your market?
Wrobel: Flexible office space is perfectly tied to Second Golden Age of Hollywood, and as such the sky-rocketing growth in Hollywood of both (1) flexible space operators and (2) Netflix has pushed Hollywood’s true vacancy into the very low single digits. Thus, with Hollywood’s flexible space hitting near full occupancy, it will be natural for flexible space operators to spill over into other Los Angeles submarkets that have historically had less co-working (for example, we expect the Hollywood adjacent submarkets, Miracle Mile and Burbank, to take advantage of the next wave of “new” flexible space operations).

Lassar: San Francisco’s very tight office market and growing tech economy are both factors that suggest there is the potential for future growth of flex offerings. In fact, the city’s reputation for innovation has extended into the flex sector where co-working, incubator and flex space ventures focused on specific industry verticals continue to grow. There are also strong flex office growth trends in Silicon Valley and Oakland. Outside the Bay Area, Sacramento is also fast embracing the flex trend as more and more companies push into the market in search of Millennial talent.

Q: What challenges are landlords facing with the recent growth of flexible office space in your market?
Wrobel:The significant growth in flexible office space in Los Angeles has drastically reduced the number of  large blocks of available space in the market (the number of 100,000 square foot blocks East of the 101 Freeway that are ready for tenants to start construction have been cut in half with only a handful of such spaces remaining (with even more coming off the market in the coming weeks/months) and as such, landlords in West Los Angeles have been challenged as to see how high they can realistically push the rates in their projects. In truth, the biggest challenges and concerns that I see landlords facing in Los Angeles relates to what would be the impact of a downturn in the market, and what happens if the flexible space offerings (upwards of 5% of the West L.A. marketplace and growing) are thrust back on the market.

Lassar:Flex space in its various forms – co-working, shared space, and flexible terms workspaces, such as spec suites or subleases space – is clearly here to stay, so the real challenge for landlords is whether they embrace it or not. Right now, JLL research suggests that as much as 30% of all office space will be some form of flex space by 2030. We’re seeing some landlords respond to this phenomenon by assessing the mix of space in their buildings, and making sure that tenants have access to several different flex options, whether it be landlord-branded co-working space, bringing in a co-working specialist venture, providing plug-and-play spec suites or month-to-month lease or sublease situations. Co-working is not a real estate strategy for corporate tenants, but it is an increasingly important part of an overall real estate strategy, and landlords need to acknowledge this fact.

* Pictured Bespoke San Francisco

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For comments, questions or concerns, please contact Dennis Kaiser

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