Cover Story: More corporations and MNCs moving into coworking spaces

This article first appeared in City & Country, The Edge Malaysia Weekly, on December 2, 2019 - December 08, 2019.

Common Ground, a coworking operator in Malaysia, has established itself in 15 locations across the country. Photo by Kenny Yap/The Edge

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Coworking spaces have become a part of the working environment around the world and the number of shared spaces and coworkers is forecast to grow. According to online statistics portal Statista, there were 18,700 coworking spaces globally last year and it estimates that this number will increase to 26,300 next year.

Meanwhile, coworking community, the Global Coworking Unconference Conference, estimates that the number of coworkers will grow from 1.74 million in 2017 to 5.1 million by 2022.

Today’s coworking spaces can be traced back to hackerspaces such as C-base in Berlin, Germany, that was founded in 1995. In 2005, software engineer Brad Neuberg was said to have started the first coworking space in San Francisco, the US. Neuberg wanted a space that allowed the independence and the freedom of working solo while having the feel and structure of working in a community.

Large coworking companies with franchises and multiple branches can now be found in major cities around the world. Some of these big names are Impact Hub, WeWork, Knotel, District Cowork, Spaces, Regus, Talent Garden and Ucommune. Apart from the traditional users of coworking spaces — freelancers, start-ups and those who work remotely — larger companies and multinational corporations (MNCs) are also moving into such spaces.

With Asia-Pacific now embracing this trend, the region is expected to see the fastest growth in the number of coworking spaces and its users.

City & Country speaks to three real estate consultancies to gain an insight into the coworking market in Malaysia, and a dispute resolution lawyer on the legal implications of such spaces.

 

Growing appetite

CBRE | WTW managing director Foo Gee Jen says the coworking market in the country is in an expansionary mode. The number of such operators are estimated to have grown from less than 10 five years ago to more than 70 in the first half of the year. However, the market is still fragmented with many small coworking establishments and operators, he points out.

“The concept of coworking is in tandem with the modernisation of work arrangements in which companies are more open to flexible working hours. This is coupled with the increasing population of freelancers and nomad workers,” says Foo.

According to Savills Research, the coworking market here has grown about tenfold since 2016, with most new spaces having opened in 2017. An average of 200,000 sq ft of such space is injected into the market annually (see Table 1).

Savills’ records show that there are 63 coworking spaces of about 700,000 sq ft in Greater Kuala Lumpur, with nearly 70% of them located in KL — mostly in suburban areas such as Bangsar and KL Sentral.

It adds that most coworking spaces in KL are operated within quality purpose-built office buildings, while in Selangor, they are mostly operated on a smaller scale, such as in shopoffices or office lots, within commercial complexes. Some operators, however, have bucked this trend — Co-labs and Colony are located in Uptown 7 in Damansara Utama and KYM Tower in Mutiara Damansara respectively.

Outside of KL and Selangor, coworking operators such as Regus and Common Ground have set up shop in Penang, Johor and Kota Kinabalu in the last couple of years, notes Knight Frank executive director of corporate services Teh Young Khean.

He says there are currently over 40 coworking operators in the Klang Valley that offer more than 1.6 million sq ft of commercial space in about 130 locations.

A quick online search reveals that such operators in Malaysia include Colony, Co-labs, Worq, WS Space, The Co., Komune, Impact Hub and Wotso.

“As coworking spaces are commonly found in strategic areas, start-ups or new market entries can opt to have a prime business address — even in a Grade A office building — without the high upfront cost,” says Teh.

In line with the trend seen globally, companies and MNCs in Malaysia are jumping on the coworking bandwagon. They include snack company Mamee-Double Decker (M) Sdn Bhd and regional start-up Carsome Malaysia, which are moving their KL office and headquarters respectively to luxury coworking space, [email protected] Damansara, in Selangor.

Many conventional office owners and developers have also created coworking spaces in their developments, either by venturing into the business or collaborating with established operators.

CBRE’s Foo observes that some corporations and MNCs have started to change their office layout to a more coworking environment and that these users may constitute a more significant demand source compared to startups and entrepreneurs. “Coworking spaces are becoming increasingly available in purpose-built offices, usually taking up a few floors. Some older office buildings could also do the same by readapting their spaces to stay relevant in the market.”

About 55% of existing coworking spaces are found in purpose-built offices while the rest are in non-purpose-built offices such as shopoffices and retail centres, says Foo.

Knight Frank’s Teh says, “Due to the speed of change and volatility in the business environment, businesses are looking into agility and scalability of office spaces. Businesses that used to prefer long leases of 5 to 10 years have started to opt for shorter and more flexible tenancies.

“Furthermore, we anticipate that certain MNCs will consider exploring the adoption of the coworking or flexible workspace model for certain divisions or departments to suit their business needs or strategy.”

Additionally, shared offices will continue to appeal to millennials, who will account for 75% of the world’s total workforce by 2025, according to Teh.

“They appreciate the flexibility provided by coworking spaces in terms of tenure or even day-to-day or passport flexibility. The opportunities to socialise and think creatively are appreciated by this age group, much more than the previous generations,” he notes.

 

Challenges and coexistence

Like other market segments, the coworking market does not come without its share of challenges, one of which is occupier retention.

As there is a certain prestige to having your own office space, once a company has expanded, it is likely to move into a conventional office, says Foo. “Hence, coworking spaces could be limited by their reputation as a spawning ground.”

Additionally, coworking spaces may not be economical for larger occupiers as charges are usually on a membership and per-use basis, he highlights. “In fact, it has been observed that coworking spaces in KL city centre are experiencing slower take-ups compared with those on the fringes of KL city centre such as Bandar Utama, Damansara and Sunway, which could be due to the fact that the target users, comprising start-ups and entrepreneurs, tend to be cost-sensitive and are partly deterred by the traffic congestion in the city centre.”

While Foo believes that the coworking markets in major cities will continue to see bright prospects due to the entry of major local and international operators, he foresees that the markets will not grow as exponentially as before. “The expansion is likely to taper off slightly once the market matures and reaches a saturation point,” he remarks.

The experts agree that the number of shared spaces is unlikely to overtake conventional offices.

Foo says coworking spaces constitute less than 1% of the Klang Valley’s office supply of 110 million sq ft. “The coworking concept is only feasible for certain types of service industries, such as professional service providers and consultancy firms, and creative industries to enable more [collaboration]. Coworking is also not compelling enough to be the natural choice for office occupiers compared with a conventional setup.”

Savills Malaysia senior director of capital markets Nabeel Hussain concurs, saying, “Over time, coworking may become increasingly popular, but at this stage, it is difficult to see it overtaking the traditional leasing model. Most companies will still need a ‘core’ office, which can then be supported by a coworking space that allows the flexibility to increase or decrease their requirements on short notice and in response to business demand.”

Nonetheless, Nabeel acknowledges that as a concept, coworking offers some clear benefits over the traditional model of office leasing. “It increases the utilisation of space by pooling sources of demand. It also allows occupiers to avoid large upfront capital expenses and committing to much longer leases that typically accompany the leasing of space directly from a landlord. As a result, we expect the concept to persist, although certain elements of the model may evolve over time.”

Knight Frank’s Teh believes coworking spaces will still need physical spaces — such as commercial offices, shopping malls, warehouses and shoplots — to exist. “Both can coexist and we don’t foresee coworking spaces overtaking conventional offices for the time being.”

In terms of sustainability, he advises coworking operators to adopt a business model that ensures that they are able to service their commitments through all cycles of the economy, adding that they should not focus purely on growth.

It is understandable for operators to want to expand as quickly as possible and to think that having the most centres would help them win the race. “However, it is important to prioritise an organic sustainable business model and growth,” he says.

 

Regulatory implications

It is pertinent to know the potential legal implications of such a concept, as coworking spaces are largely untested in a court of law. Issues that could arise during the leasing of such spaces include property rights, allocation of responsibility for unexpected costs and liability issues, says Jeyakuhan Jeyasingam, partner in the dispute resolution practice of Zaid Ibrahim & Co.

“Without clear regulations and provisions, it could be problematic for the service providers as well as their members and users. As coworking is a new and emerging industry, it is suggested that [there be] clear provisions [that] define the type of licence or permit that the coworking industry needs. This is to provide protection to those in the said industry and to avoid crossing into the real estate industry.”

With reference to Section 22 of the Valuers, Appraisers, Estate Agents and Property Managers Act 1981 (VAEAPMA), which restricts the business of estate agency practice to only registered estate agents and states that failure to abide by the VAEAPMA is an offence, Jeyakuhan notes that the way a coworking business is commonly run, for example the collection of membership fees, could fall within the ambit of an estate agency practice under the VAEAPMA, specifically Section 22B.

Additionally, while the terms of agreement provided by service providers to end-users may appear to be the granting of a licence rather than a rental agreement, he points out that the courts will look at the relationship of the parties to determine the law and not the label the parties choose to put on it, as seen in Facchini v Bryson [1952].

Other existing laws that have a bearing on this industry are the Personal Data Protection Act 2010, the Employment Act 1955 and the Occupational Safety and Health Act 1995.

Jeyakuhan says coworking spaces such as WorQ, Common Ground and Co-labs state how they regulate the collection, processing and use of personal information on their employees, suppliers and customers in their terms and conditions.

“Just like how e-hailing rides have made their way to Malaysia and much of Asean despite transport laws on commercial and private vehicles … necessity will pave the way for the establishment of shared working spaces to be a mainstay in not just Malaysia, but possibly the whole of Asia-Pacific,” he adds.