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The Real Deal Los Angeles

LA’s niche co-working company craze:
Can it last?

“It’s starting to become the flavor of the month,” one broker said of the rush of small firms taking leases
By Natalie Hoberman | April 05, 2018 02:00PM

(Credit: Pixabay)

In Los Angeles, where the entertainment and technology industries have bred an array of startups, co-working companies have also found their niche.

Their selfie-covered walls, free-flowing Kombucha and dog-friendly workspaces have been a hit among the plug-and-play crowd, in addition to the short-term lease options for those with commitment issues financial or otherwise.

But so far, 2018 has been different. Just in the last few months, a flood of smaller co-working firms like Paragon and Work Well Win have rushed into L.A. They have gobbled up space with a speed that leaves some brokers to wonder whether supply will soon outpace demand.

“It’s become the flavor of the month,” NAI Capital’s managing director Joseph Faulkner said. “There’s almost more than anyone can keep up with.”

No fewer than eight co-working companies have announced a new location in the city so far this year, helped sometimes by landlords who are willing to provide incentives or reduced rent. Across Greater L.A., co-working firms occupy about 3 million square feet of office space collectively, according to Cushman & Wakefield’s Vincent Chang. This year alone, Cushman expects co-working companies to fill 364,000 square feet, with most leases lasting 10 to 12 years.

The bulk of that is concentrated in Downtown Los Angeles, where co-working companies are occupying 500,000 square feet of space. Hollywood is also popular, with those companies taking 289,000 square feet, Chang noted.

And while some, like Faulkner, believe the market is becoming oversaturated, other brokers say that may not be the only issue they face.

“A lot of these companies that are new haven’t been recession-tested,” John Zanetos of CBRE said. But he noted that a down market could provide a double-edged sword for co-working firms.

“At the same time, when there’s a correction in the economy, that’s when people break off from larger companies and start more entrepreneurial ventures, which is the exact clientele that a co-working company would cater to,” Zanetos added.

Ronen Olshansky, CEO of co-working firm Cross Campus, said it’s too early to claim saturation, but concedes that not all the newcomers will be able to remain competitive.

“Co-working penetration in L.A. is still less than one and a half percent of the office stock,” Olshansky said in an emailed statement.

Still, he expects the “next phase in co-working will see significant consolidation as thousands of operators are narrowed down to dozens. “Operators that haven’t built scale or platform differentiation very soon will have a hard time surviving,” he added.

Custom Co-working

The latest providers popping up also seem to each have their own sub specialty, offering amenities the big kahunas of co-working, such as WeWork and Spaces just don’t.

Paragon, for example, announced last month it will be using blockchain to create a space that is solely for small companies and freelancers working in the legal cannabis industry. Paragon Space, as it is named, will only allow business from those who own Paragon’s cryptocurrency, PRG Coin. That office, located in Hollywood near Sunset Boulevard, will open in July.

On the Westside, a company founded by a WeWork former executive is hoping to make waves with the health-oriented folks. Dubbed Work Well Win — although the company prefers it spelled lowercase — is taking over 20,000 square feet on the Third Street Promenade in Santa Monica. In classic L.A. fashion, it’s offering purified areas and rooms for yoga and mediation.

And for the entertainment-minded, Creative Talent Network recently launched “CTN Creator Space,” a co-working office that will cater to students, professionals and entrepreneurs in the animation industry. Its space is appropriately located in Burbank, and offers access to professional animation software like Wacom Mobile Studios Pros and large format plasma screens.

Tina Price, CTN founder, said she expects Creator Space, as well as other co-working spaces, to become a “feeder ground” for a “hotbed of talent.”

“It lends itself to being a very valuable option for a large group of people, ranging from recent college graduates to freelance workers,” Price said. “It’ll be places where employers can go and find people for their projects.”

Other co-working firms that recently announced new L.A. locations include hospitality-centric and Panama-based Selina, Premier Business Center, Serendipity Labs Coworking and Vector90. Meanwhile, more established firms like Regus’ Spaces, Cross Campus and WeWork continue to expand.

“A few years ago, I definitely thought it was kind of a fad and it would eventually go away,” Chris Penrose of CBRE said. “That obviously isn’t the case. We’re seeing co-working companies that already have a presence in Downtown Los Angeles expanding by two to three locations, and they’re filling up.”

Cross Campus recently opened a fourth location in El Segundo. The firm already had outposts in Pasadena, Downtown and Santa Monica.

“It’s the largest and most operationally complex project in our portfolio,” Olshansky said. “Our occupancy is nearly three times ahead of where we expected to be at this point.”

Landlords take notice

Much of the co-working model’s success can be attributed to its flexibility, Penrose said. The location allow companies to staff up temporarily without having to go through the cost and hassle of leasing big spaces at once. That’s attractive to a company of any size, he added.

And as the co-working craze continues, landlords are increasingly warming up to the idea of having leasing their space to a co-working company.

“Landlords once hesitant to embrace the co-working concept have been signing deals with these companies for several floors and adapting to the new trend,” said Cushman’s Vincent Chang. Case in point: Brookfield Property Partners recently partnered with meeting-space provider Convene on several of its Downtown L.A. properties.

Besides improving occupancy, a co-working company can serve as an incubator for future tenants, brokers said. Landlords are hopeful that when a startup grows out of a co-working company, it will relocate to its private office suite in the building.

In the fourth quarter of 2017, co-working companies dominated the list of major lease transactions, according to a Cushman & Wakefield’s latest report. Regus’ Spaces took two of the top 11 spots with its 50,000-square-foot lease at Downtown’s Paul Hastings Tower, and a 60,000-square-foot lease in Hollywood, a good chunk of space in both properties.

But the benefits are likely only possible when a co-working company pays full asking rents and signs a standard lease. In some cases, especially with new co-working firms, landlords will act as an investor in the company, Penrose said. That means that a landlord might invest capital to help a co-working company build out its space, in exchange for later profits.

But even given the higher risk, L.A.’s co-working companies have provided a gateway for potential tenants, brokers say.

“The level of new co-working occupancy in 2018 is already among its highest annual totals we have tracked on record,” Chang said.