After taking commercial real estate markets by storm, investors are growing wary that the coworking segment may be nearing its saturation point. If commercial building owners plan to thrive in an increasingly competitive coworking landscape, they will need to ramp up their digital network infrastructure.
While coworking accounted for nearly half of US office absorption last year, 87% percent of investors viewed coworking as high to moderate risk to investment values, with 37% noting that the segment could already be saturated, according to the June 2019 Office Investor Sentiment Report by Real Capital Markets (RCM).
The rapid expansion of the coworking segment and potential exposure to market downturns are two key reasons investors are staying cautious.
Investors and large building owners are questioning what mix of coworking and traditional leasing is appropriate- mainly because the sector has yet to reveal how it weathers a downturn.
While in some cases more than 30% of a building may be leased to coworking operators, industry experts say a maximum of 20% is a more reasonable range.
“If it gets above that 15% to 20% range, you could be in competition against your own vacancy, and as an owner, you don’t want to have that,” stated Steve Pumper, Executive Managing Partner of Transwestern’s Capital Markets and Asset Strategies Group in the report.
Despite concerns regarding saturation, the majority of investors indicated that they remain confident the coworking business model is here for the long run. Coworking space continues to lead other office user types in absorption snatching up more than 5.4 million square feet between January and June of this year, according to JLL.
Coworking has remained a significant driver for pushing vacancies down, and the segment has consistently added value for landlords by helping to stabilize buildings and boosting rents in areas throughout the US.
The coworking leasing process is favorable to landlords because it is often less expensive and labor-intensive compared to traditional leasing prospects.
However, industry experts like Tom D’Arcy, Senior Managing Director at Hines cautioned in the report that the coworking industry will reach a saturation point due to the number of companies vying for market share. In his estimation, there are three or four dominant market leaders, followed by many “wannabe providers.”
Coworking operators and building owners will need to offer higher-quality amenities and services to differentiate themselves from the pack if they want to attract and retain long-term customers.
As more competition enters the marketplace, those who will survive must focus on providing an exceptional tenant experience and exceedingly high levels of customer service.
Further, as large property owners and REITs embrace an “incubator mindset” – the ability to derive long-term value from smaller tenants by keeping them within their rental portfolios as their companies grow- tenant experience will become even more critical in years to come.
With more than 80% of all data traffic originating or terminating indoors, ABI Research, forecasts that the rapidly increasing adoption of 4G and Wi-Fi will drive monthly in-building traffic to 53 exabytes per month by 2020 – growing a whopping 600% in the past four years.
More than 90% of workers stated that access to reliable internet was critical and that their companies should prioritize access to reliable internet connectivity when selecting office space, according to a recent survey of Atlanta-based office employees by digital connectivity rating firm WiredScore. More than 75% of office workers surveyed said they would encourage their company to find a location with better, more reliable internet connectivity during leasing decisions
Video calls, access control and space planning tools to hold meetings were also among the amenities most demanded by commercial tenants. Some analysts predict that internet video will account for 80% of global traffic by 2021.
Digital connectivity and reliable cellular service are requirements for deploying everything from fast internet and video conferencing to smart building apps used to place orders for meals, scheduling pick-ups and providing frictionless access control via smartphones in today’s commercial office buildings. A robust cellular and digital connectivity backbone has become critical to tenant satisfaction and will only gain more significance as users consume more bandwidth in the future.
Interested in learning more about the role of digital connectivity in enhancing coworking and tenant experience? Please join us for our webinar It’s A Coworking World – How Can Property Managers Compete? Thursday, July 25th at 2 PM EDT/ 1 PM CDT/ 11AM PDT.