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Monday, Aug 15, 2022

Space As a Service

PepsiCo Inc.’s decision to quietly move a good portion of its western U.S. operations to Irvine’s 2-year-old The Boardwalk office campus along Jamboree Road is a testament to the growing, and changing, role that shared space operators play in Orange County’s business community.

The Purchase, N.Y.-based beverage giant earlier this year relocated much of its regional beverage operations—said to be previously in Los Angeles—to OC, as part of a companywide restructuring effort to become “more capable, leaner, more agile and less bureaucratic,” according to Chief Executive Ramon Laguarta.

That drive toward efficiency apparently also involves PepsiCo’s use of real estate.

Rather than strike a deal with The Boardwalk’s developer, Trammell Crow Co., PepsiCo (Nasdaq: PEP) instead inked a deal with WeWork, which opened a nearly 64,000-square-foot spot at the complex this year, multiple real estate sources tell the Business Journal.

It is PepsiCo’s first reported corporate location in OC since the mid-1990s.

The Boardwalk location is one of eight that WeWork has opened in OC since 2016 or will open in the next year (see coworking list and directory, page 28 and 32).

Sources tell the Business Journal that they expect upward of 100 or so PepsiCo employees at a portion of the WeWork location eventually—it has been looking to hire a few dozen positions there over the past few months, according to job boards—although the company’s current worker base at the Irvine office is unknown. PepsiCo didn’t respond to requests for comment.

What’s clear from the lease: coworking isn’t just a home for startups or one-person operations anymore.

“Large enterprises are increasingly recognizing the value proposition of our global platform,” WeWork said last week, as part of its registration statement pertaining to a proposed initial public offering.

It and other shared space providers “can meet an enterprise’s distinct needs on a flexible and cost-effective basis with availability around the world.”

In layman’s terms, those companies rent long-term space, renovate it, then divide the offices and sublease them short-term to other tenants.

The likes of WeWork, Spaces, Industrious, and Premier Workspaces don’t see themselves as traditional landlords.

Instead, they are providers of what WeWork calls “space as a service.”

Lucrative Leases

Pepsi’s strategy is a growing one for larger businesses looking for a flexible lease to test out a new market, and “see if it’s somewhere they want to plant the flag,” according to Allison Schneider Kelly, vice president for the Newport Beach office of CBRE Group Inc., the largest commercial brokerage in OC.

Going after larger, more established businesses is a focus for CBRE’s new shared space company, Hana, which selected Orange County for its first West Coast location, at Park Place in Irvine. It’ll be taking about 60,000 square feet at the LBA Realty-run offices, which are just down the street from The Boardwalk.

Hana aims to partner with office landlords looking to introduce flexible coworking space—at monthly rents above the norm for the area.

“Going after this enterprise business, or corporate clients looking for flexible space solutions, is the direction [coworking companies and landlords] want to go,” said Kelly, noting the increased stability and profitability for these types of deals.

Hana is one of several shared space businesses that have commercial real estate brokerages as backers. It’s also one of nearly 10 new shared space operators that have opened, or announced plans to open, a location in OC in the past year—taking up more than a quarter million square feet of space.

Expect more going forward.

“None of the coworking operators feel like they have achieved market saturation,” said Scott Wetzel, a senior vice president at JLL. “Growth will be spearheaded by WeWork and its more mature competitors, like Regus,” with boutique companies filling in the gaps.

WeWork’s SoCal portfolio, including locations in L.A., Irvine and Costa Mesa, represent one of the company’s seven largest markets, according to its new IPO paperwork. It said it has about a 0.5% market penetration in the region, and thinks it can greatly expand its presence in its top markets, the registration statement said.

New Normal or New Subprime?

Nearly 500,000 square feet of new coworking deals have been made so far this year in Orange County; it’s the largest source of new leases in the local market since the heyday of the subprime mortgage industry a decade ago.

Area commercial real estate execs aren’t stating—publicly, at least—that they expect the trend to go belly up like the subprime sector, despite questions over the financial health of some operators.

That’s due to a change in target audience for many of the providers, from small businesses to larger enterprises. Nearly 40% of WeWork’s members are Fortune 500 members, the company said.

A shift from providing executive suites to a shared space model introduced in the past decade by dozens of new companies has proven there’s “a need for both owners and occupiers,” according to Kelly.

Industrious’ move earlier this year to acquire Aliso Viejo-based TechSpace—one of OC’s largest and longest-running coworking operators—also speaks to OC’s value as a coworking market.

“It’s a very established business market with a great blend of successful entrepreneurs, high-growth companies and big corporate names,” said Kelly.

“Why do any of us choose Orange County? It’s a great place to work and live.”

Boon to Developers

There was nearly 1.5 million square feet of coworking space in the county at the start of this month, up 16% from the year prior, according to Business Journal data.

Including leases that have been signed, but not yet commenced, that figure jumps closer to 2 million square feet—a figure that’s roughly twice the size as Irvine’s four-building FivePoint Gateway, the largest office project to be built locally in over a decade.

The newly struck leases will bring the coworking sector’s share to nearly 2% of OC’s total office market, which runs around 110 million square feet.

Among more expensive, Class A buildings in the Irvine Spectrum area and the market around John Wayne Airport, coworking space should take up close to 6% once some recently struck deals become effective by early next year.

Every large new speculative office development in the area that’s opened in the past five years has a shared space provider as a large tenant; WeWork recently struck a deal to take up an entire building at Irvine Co.’s Spectrum Terrace complex, the largest-ever deal of its type in OC.

JLL’s Wetzel expects OC’s coworking share to cap out at 5%, though he thinks a lower figure may be healthier for the market.

“Coworking definitely meets a need, but … I don’t think the market should get oversaturated,” said Wetzel.

Any concerns over how the sector would fare during a downturn seem to be put aside for the opportunity that shared space presents for landlords and tenants.

“The demand is there, and we will see fairly steady growth in the next two years,” Wetzel said.

Way of the Future

The bulk of coworking space, 68%, is concentrated in the airport area, according to research from the local office of JLL.

Landlords in the area increasingly see coworking firms as a necessary addition to a property’s tenant base.

“Tenants and occupiers are gravitating toward coworking—it’s the way office space usage is going,” Parke Miller, executive vice president at Lincoln Property Co., told the Business Journal last month.

Lincoln Property has partnered with three different shared space operators for a trio of its area projects in Tustin, Costa Mesa and Newport Beach: FLDWRK, Work Well Win, and WeWork.

“I respect it, and the strategic benefits it brings for both tenants and landlords,” Miller said.

Eyes on a Downturn

Sustainability of the sector remains a concern.

A 2018 Cushman & Wakefield report said during a prolonged economic downturn, “coworking occupancy could potentially decline by up to 6%,” adding that it expects larger players to “withstand declines of this magnitude as they are bolstered by significant revenue and a more diverse service offering.”

“The largest operators will continue to expand their service offerings to become landlords, reducing cycle risk across their portfolios and attempting to create additional value for the property,” the report said.

It also suggests that investors are comfortable with a 15% to 30% allocation to coworking tenants in a building.

This was echoed by Miller, who said the industry is about balance.

“It’s important to diversify your rent roll, and understand where your rent roll carries risks.”

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