GROWTH & SATURATION

Is the white-hot flexible office space format headed for a cooldown? Nationwide, co-working — flexible office space in which renters take single offices, suites or even just a desk in conjunction with common areas — has emerged as the top office format in absorption so far this year, snatching up more than 5.4 million square feet between January and June, according to brokerage JLL. And market leader WeWork doesn’t seem to be slowing down anytime soon. The New York-based company plans to open locations in North Hollywood and Woodland Hills by late 2019, in addition to its established operation at 3900 W. Alameda Ave. in Burbank. But an office survey released in June from Real Capital Markets gives cause for some worry. According to the Office Investor Sentiment Report data, about half of all respondents said the co-working industry was at moderate risk, and 37 percent said it was a great potential risk and showed early signs of oversaturation. Only 4 percent of respondents said the co-working niche showed no risk at all. “Given the significant expansion of co-working, some investors are questioning whether this market segment is nearing a saturation point,” RCM, Chief Operating Officer Tina Lichens told Globe Street. “They are asking ‘How much is too much?’ and ‘Is there a bubble that is likely to burst and have an impact on the market?’” However, in the San Fernando Valley market, brokers and other real estate professionals think co-working is no fad. “It has continued to grow,” Colliers International Associate Vice President Jacob Mumper said of both WeWork and the co-working format. “There is more and more in the headlines and everyone is anxiously waiting for a WeWork IPO.” Representatives of WeWork LA declined to speak to the Business Journal for this article. ‘Nimble’ tenants Early fears in the industry that co-working would siphon leases from the direct market have not materialized, as co-working companies have become an amenity at large office buildings. For now, large co-working franchises and independent boutique flexible office designators appear to be thriving in the San Fernando and Santa Clarita valleys. According to Yelp, the top-rated shared office space venues in the San Fernando Valley include Circle Hub in Winnetka, Toolbox LA in Chatsworth, Muse Rooms in North Hollywood, Barrister Executive Suites in Sherman Oaks, Premier Workspaces in Sherman Oaks, My Other Office in Burbank, Valley Executive Suites in Van Nuys and Premier Workspaces in Panorama City. The top shared office space venues in Santa Clarita include Valencia Executive Offices, Valencia Executive Plaza, Regus California Gateway Plaza, Barrister Executive Suites and Valencia Office Suites. And just two weeks ago, co-working operator CommonGrounds Workplace opened a 24,475-square-foot site at 40 E. Verdugo Ave. in Burbank, which will serve 318 clients. NAI Capital Executive Vice President Brian Luft told the Business Journal that many companies are drawn to co-working for various reasons: non-committal short-term leases instead of five- or 10-year commitments; a versatility of space that can contract and grow with a workforce; cap rate is zero down; and, of course, those attractive amenities. “They can be more nimble with shorter leases,” Luft said. As with any trend, co-working has its downside. For tenants, it’s a convenient way to work that is increasingly becoming more expensive. From the landlord’s purview, Luft has heard some grousing from building owners regarding the number of people causing wear and tear to the common areas and “overuse on parking, although that depends on the building.” Many of the younger workforce prefers ride-share, mass transit and electric scooters over cars. If anything has changed since the co-working concept began to ignite seven years ago, it’s how it’s becoming embraced as a mainstream format. When co-working was in its infancy, it skewed younger to tech, entertainment and other creative companies. “Now it’s morphing,” Luft said. “It’s become a consideration for bigger companies.” Regus and Barrister already offer a hybrid of more conventional office space with the co-sharing, short-term feature. Recently, WeWork introduced HQ by WeWork, a co-mingling of co-working and traditional formats. “You get our design, you have your own private suite,” Luft explained. WeWork expansion WeWork’s most formidable local expansion will unfold in the San Fernando Valley by the end of 2019. This fall, WeWork NoHo will set up 40,000 square feet of co-working space at 5161 Lankershim Blvd. (at Magnolia Boulevard), while another 50,000 square feet at 21255 Burbank Blvd. in Woodland Hills is slated for November 2019. Cushman & Wakefield agent Michael Seidman is among the office brokers wondering what took WeWork so long to reach Warner Center. Woodland Hills is currently in the midst of substantial redevelopment in line with the Warner Center 2035 Specific Plan, designed to transform the neighborhood into the downtown of the San Fernando Valley and lure younger companies and workforces there. “They’re going to try to make it creative,” Seidman said of WeWork in Woodland Hills. “It’s not known to be a creative campus. Great building, a lot of high profile tenants.” “It’s a smart move for them,” Seidman continued. “The office market is growing over there. They’ve identified a good new market to tap into.” In NoHo, WeWork will join just a handful of tenants, among them Bento Box and Endemol Shine North America, and take up 40,371 square feet of office space across the building’s first two floors. WeWork, which technically started in NoHo in June, is leased up through mid-2034. “North Hollywood is the market you expect to find them,” said Mumper with Colliers. “As soon as space opened up, they took action. The timing was perfect for them. It’s near the Burbank Media District and (mass transit).” Luft had a hand in leading WeWork to its North Hollywood lease. When informed by the Business Journal that WeWork had signed a lease at Warner Center, Luft was not surprised. He remembers telling WeWork representatives early on, “The San Fernando Valley has a tremendous population base. You guys have not addressed at all. There are people in the Valley who don’t want to drive to Hollywood or downtown L.A.” Luft believes more co-working could crop up in Sherman Oaks and Encino while there’s less likelihood to see much demand in the West San Fernando Valley. As the dominant property owner of office inventory in Woodland Hills, Douglas Emmett is still very much entrenched in the traditional office world, Luft said. “(They’ve) really shied away from co-working,” he said, noting that they don’t want to invest in the tenant improvements required and would rather have longer leases. “Their bread and butter is a lot of smaller tenants,” Luft said. “They feel they don’t need (co-working) – their buildings are all leased up.” Macro and micro According to Cushman & Wakefield, co-working in the second quarter accounted for 5.7 million square feet in the greater Los Angeles office market, and has grown about 500,000 square feet per quarter. Technology, financial and consulting firms statistically lead as adopters of this type of flex space. While the Downtown Los Angeles submarket has the highest co-working concentration (888,761 square feet), the Tri-Cities, which includes Burbank and Glendale, has the second largest amount at 508,951 square feet. The entire greater L.A. market has nearly 202 million square feet of offices. Lichens said that industry experts vary on just how much is the right amount of co-working per building. Some feel that owners should allocate no more than 20 percent of their structure to co-working space, while others feel 10 or 15 percent would be the ideal range. “If co-working gets much above the 15 to 20 percent range, building owners could find themselves in competition against their own vacancy,” Lichens said. “It’s going to be different with every ownership,” Cushman & Wakefield Research Director Eric Kenas said. “Some firms, they are very inviting to include co-working in their portfolio.”’ According to Kenas, the greatest concentration of co-working north of the 101 freeway is in Pasadena with close to 200,000 square feet, followed by Burbank (180,000), Glendale (180,000) and Woodland Hills (160,000). Calabasas/Westlake Village (80,000), Chatsworth (80,000) and Valencia (50,000) follow. Over the past few years, CBRE Group Inc. office specialist Matthew Heyn has cut some 20 co-working deals for Regus and its WeWork-esque sub-brand Spaces from West Covina to Calabasas and Valencia. With Spaces at 4500 Park Granada in Calabasas, Heyn said, that property “has repositioned as a contemporary office campus I know that demand there has done well from an occupancy standpoint.” “You’re going to see continued demand in the Conejo and San Fernando valleys,” Heyn said, as companies come in looking for more flexible terms and space. “There has been executive suite providers all throughout the San Fernando and Conejo valleys, but the true co-working type offerings hasn’t been available until more recently.” Santa Clarita story In Santa Clarita, co-working follows a different narrative — one that is more corporate. And even though it’s a small proportion of the L.A. office market, Santa Clarita may have already reached the saturation point for co-working space. According to Cushman & Wakefield’s Kenas, Valencia has 50,000 square feet of flexible office, much of it of the Barrister and Regus variety. A Santa Clarita Valley native, Colliers agent Kevin Fenenbock knows the office market and he thinks the capacity for co-working is somewhat tapped at the moment. “The market, at this point, is fairly saturated with the three majors – Barrister, Regus and Premier, which just opened a new location on 25101 The Old Road. … Those three providers are fairly occupied.” CBRE’s Heyn does not see WeWork or Spaces thriving in Valencia. “I haven’t seen a lot of demand for anything other than the traditional executive suite,” Heyn said. “Co-working gives good office space for smaller companies, but if you have a larger requirement you’re forced to go into more traditional office space.” Heyn explained that Santa Clarita has a smaller tenant size on average than other parts of the Valley market and “the traditional suite model has done well.” The professional fundamentals around Valencia and Newhall are just different, Fenenbock added. “The Santa Clarita market serves more professional services — CPAs, attorneys — there’s not a lot of creative or entertainment,” he said. Despite the plethora of movie ranches in the area and some post-production facilities, Fenenbock explained that “you can’t compare it to the occupancy of North Hollywood or Burbank or Woodland Hills. You’re not seeing Facebook or production companies come to town yet. I don’t see it changing in the near future.” Beyond the San Fernando and Santa Clarita valleys in the larger picture, industry experts such as NAI’s Luft believe that co-working is here to stay. Initially, people in the industry thought it was a trend. However, the rise of the smartphone, wi-fi and various apps have facilitated workplace collaboration and paved the way for such an office setting. That said, as co-working came into popularity in the aftermath of the 2008-spawned Great Recession and the economy has held steady, its longevity through turbulent times essentially remains untested. “What happens (to co-working) in a downturn? That remains to be seen,” Luft said.