Office N Illinois

Chicago may be in a fix when it comes to flex office

Chicago may be in a fix when it comes to flex office,ph1

Despite the recent struggles of a certain juggernaut provider, all expectations are that the coworking and flexible office segment will only flourish in the U.S. over the next decade. Some cities will see larger growth than others, however, and Chicago might not match the rate of expansion in other markets.

According to research by JLL, flexible office occupancy has grown an average of 23 percent each year since 2010. Last year alone, the sector accounted for nearly two-thirds of the country’s office market occupancy gains.

Despite this progress, flex space inventory currently accounts for less than 5 percent of U.S. office stock. JLL projects this segment of the office sector will advance from skyrocketing to meteoric, as it consumes up to a 30 percent share of the market by 2030.

The flexible office phenomenon

Employees, startups and independent contractors obviously gravitate to coworking spaces, but they also make sense at the enterprise level. The main driver here is that these spaces offer lease flexibility.

“If a building has some flexibility options, it’s really enticing for occupiers,” said Emily Watkins, managing director, flexible space solutions, JLL Americas. “It allows them to perhaps take a little bit less space and feel comfortable that they can sign a more traditional lease for a longer period of time because they know that they will have the ability to flex up or down if needed.”

There’s so much promise of expansion that some ownership groups have opted to cut out the middleman, crafting their own coworking spaces. Tishman Speyer, for example, launched Studio last year. The landlord operates one Chicago Studio coworking space at the Franklin Center in the Loop, where rates start at $350 per month for a flex desk. And they’re not alone.

“A lot of the thought leadership is seeing this as the next frontier in shared spaces,” said Watkins. “We do see a lot of people doing it themselves because they feel that it creates flexibility within an asset.”

These owner-provided coworking options dovetail with how office building amenity suites have evolved in recent years. On-site gyms and cafeterias are great, but when properties started offering rentable conference spaces, that impacted the tenants’ bottom line as they didn’t have to make room in their lease for, what is for some, a seldom-used asset. The inclusion of coworking space is just an extension of that.

“A lot of asset owners are looking at their entire building and how they can provide more flexible solutions, more amenity spaces that can drive a better experience and help that occupier with solutions related to flexibility,” Watkins said.

Toward 2030

According to the JLL research, there’s not a single U.S. market where flexible office space is currently oversaturated. That said, some are better positioned to see rapid growth. JLL identified 15 markets the greatest potential for growth within the sector. New York, San Francisco, Silicon Valley, Austin and Boston rounded out the top five; Chicago didn’t make the cut for the top 15.

According to Scott Homa, senior vice president and director of office research at JLL, there are several reasons why Chicago didn’t crack the top 15 markets. For one, Chicago already has a high share of existing flexible inventory. WeWork is currently the largest non-governmental office occupier in the Chicago CBD (though this may change depending on the mercurial company’s future prospects).

Homa also points to a declining regional population. From 2010 to the present, Chicago’s population has flatlined, growing a meager 0.8 percent, while Illinois as a whole lost residents. Compare that to the population growth in markets like Austin (23.3 percent), Raleigh-Durham (18.1 percent) and Orlando (17.6 percent).

The main drivers for that population loss—the city and state’s high taxes and budget deficits—are further reasons that some providers are slightly bearish on Chicago. Pricing is another factor. Chicago can be a money-losing market for coworking due to comparatively low-priced direct space, as well as a high cost of construction.

“In Chicago, construction costs are still relatively high, so the ability to commit to something long term is a little bit more palatable if you’re building out your own space,” Watkins said.

So what does the future of coworking look like, in Chicago and nationally? First is excising the notion of “coworking” only, as these spaces truly are flexible.

“When a lot of people think of flexible space, they immediately think of coworking, but that is just one piece of the solution for companies who are looking to implement flexible space—both for occupiers as well as investors,” Watkins said. “As these different models have started to become more prevalent, there has been more education and perspective about how flexibility can be applied to portfolios.”

There may also be more collaborations between flexible office providers and non-office assets. Convene recently partnered with For Five Coffee Roasters to introduce a flagship café at their 311 W. Monroe Street location. “I think there’s a lot of interest in that because of the experience that you’re driving for the consumer,” said Watkins.

While Chicago may not be as competitive as other markets when it comes to growth in the flexible office segment, the sector will still see progression here. Flex space currently makes up 2.1 percent of Chicago’s office inventory; if the market only expands at half the rate that JLL predicts over the next ten years, that’s still a significant step forward.