Tertiary markets CCIM Feature

Small Cities, Big Demand

Tertiary markets lead the growth frontier for flexible workspace offerings.

The buzz in the commercial real estate industry for the past 18 months has centered around the coworking space occupancy model. Coworking companies are leasing space at a fast pace, and coworking services are providing tenants with alternatives to offer space to employees. While coworking occupancy only represents a small portion of the combined office inventory across leading markets (1 to 2 percent), according to a recent report by Colliers International, flexible workspace accounted for 52.9 percent of inventory growth in Manhattan and 28.3 percent in other major U.S. markets from 2016 through 2Q2018.

Still, nearly all coworking activity revolves around urban centers. Outside large urban markets - which notably have a high concentration of technology companies - will coworking be a factor? While coworking spaces in secondary and tertiary markets haven't exploded, several factors point to these markets offering an additional growth frontier.

Flexibility in Remote Workers

Over the past 10 years, the largest companies in the U.S. have shifted from former industrial giants - Exxon, Proctor & Gamble, and General Electric - to tech giants - Apple, Amazon, Microsoft, Google, and Facebook. Today's workers are not tied to a physical manufacturing plant; rather, they could be in Sacramento, Calif.; Norfolk, Va.; or Milwaukee. With the high cost of housing and labor in coastal markets like Silicon Valley, companies may look to coders, customer support, and contract workers in lower-cost areas. These workers are likely to work from home, but they may be interested in coworking spaces. Companies like Adobe have added jobs in Utah, Amazon announced its expansion into Nashville, and Salesforce continues to grow its marketing cloud business in Indianapolis.

Tech Job Growth in Secondary Markets

Markets with the fastest high-tech job growth in 2016 and 2017 include usual suspects Seattle, San Francisco, and Austin, Texas, but also Indianapolis and St. Louis, according to Visual Capitalist. CBRE projects the 10 new markets to lead tech job growth through 2020 will include Sacramento, Calif.; Kansas City, Kan.; Colorado Springs, Colo.; and Norfolk, Va. The best investment markets, according to CBRE's Tech-30 report, offer low rents and growing high-tech labor pools, such as Nashville, Tenn.; Portland, Ore.; and Raleigh, N.C. If tech jobs boosted the expansion of the flexible workplace in urban, technology-centric core markets, why wouldn't the same be true in secondary markets?

Replicating the Coworking Model

Large operators or new franchisors can easily replicate the coworking workplace model in smaller markets. With low barriers to entry and office inventories not likely to grow as fast, flexible workspace can meet the demand in tertiary markets. If large coworking firms don't want to expend capital to invest in smaller markets, local operators or franchisors likely will pick up the slack. Ohio-based coworking company COhatch, for example, has plans to expand beyond the firm's base of operations through the Midwest, focusing on smaller towns, according to the Dayton Business Journal. Traditional owners and landlords are also launching their own flexible workspace concepts.  Additional flexible workplace firms, such as Novel Coworking and Serendipity Labs, are expanding access to coworking inventory in smaller markets.

While the expansion of the coworking model in small markets offers new workplace options, these smaller markets are not growing at the pace of larger metropolitan areas in the U.S. Distance learning may alter the availability of technology industry-ready workers in the future, but the current pool of qualified remote workers remains limited.

Innovation and Higher Education

While venture capital funds are typically focused on investing in the coastal markets with high concentrations of innovative startups, some new ventures emerge as spinoff ideas generated by large research universities - many of which are in tertiary markets. For instance, the University of Illinois, Purdue University, Virginia Tech, and other land-grant universities generate a healthy supply of STEM graduates in smaller communities. Startups in these markets will benefit from an inventory of urban-like flexible workspaces. Though it's not likely that the innovative spinoffs from research universities will create a concentration of technology companies like in New York or San Francisco, the availability of urban-style flexible workplaces may encourage these startup firms to remain in the university towns longer. Furthermore, one of the benefits of the coworking model is the opportunity to create an ecosystem of similarly positioned firms to generate new opportunities for one another.

Retaining Top Talent

Companies recognize the need to not only attract new talent to knowledge-based technology industry sectors but ensure talent retainment. With technology and knowledge-based jobs, workers may jump at the opportunity to relocate to meet personal and family needs while retaining their positions. Eighty percent of respondents in a recent employer survey by IWG/Regus, the largest flexible workplace provider, stated that enabling employees to work from anywhere helped them recruit and retain top talent. With some of these retained workers relocating from high-cost urban coastal markets to secondary and tertiary markets, a strong supply of flexible workplaces in these markets will meet the needs for these employees.

While the supply of flexible office space is growing quickly in urban core markets, the next frontier is in secondary and tertiary markets. A confluence of factors - mostly centered around the needs of a flexible and mobile workforce - may drive demand to markets that previously were not perceived to be growth opportunities for flexible space providers.

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