Co-working trend likely to accelerate

This article first appeared in City & Country, The Edge Malaysia Weekly, on September 21, 2020 - September 27, 2020.

Co-working space numbers are projected to reach almost 20,000 this year and over 40,000 by 2024, says coworkingresources.org (Photo by Shridhar Gupta/Unsplash)

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Although co-working spaces were in expansionary mode globally — with the number of co-working spaces projected to reach almost 20,000 this year and over 40,000 by 2024, according to coworking-resources.org — many operators were striving to retain members even before the coronavirus crisis.

The virus outbreak early this year resulted in a surge in vacancy as shutdown orders closed international borders and led to most employees working from home.

In order to overcome this difficult period, Knight Frank Malaysia’s Teh Young Khean observes that many co-working operators are facing the unenviable task of trying to manage their cash flow, which can mean retrenching staff, appealing to their landlords for relief and shutting down centres. “Additionally, many have offered promotional rates to attract new members and to discourage existing members from cancelling their memberships,” says Teh, who is executive director of corporate services.

“I think it is no surprise that co-working spaces, like any commercial office space, have been going through a difficult time. Almost the entire world unknowingly entered into a social experiment to test the potential of working from home. As a result, companies are questioning their need for offices and the impact on workforce and business productivity,” he says.

The latest trend among co-working operators is the push for business continuity plans (BCPs). “Operators for serviced offices and co-working spaces have always been promoting their centres as a disaster recovery option, but now, they are trying to educate the market on how their spaces can be used in today’s uncertain environment. Companies can take up ready-to-move-in offices almost immediately with minimal deposits and on flexible tenures,” he notes.

CBRE|WTW group managing director Foo Gee Jen observes that some co-working operators have also rolled out non-core services such as virtual office plans, offering a registered address and mail-handling services, as seen at The Great Room and Work Central abroad. “Some co-working operators have also shelved their initial plans to expand and focus on sustaining cash flow during the period.”

The smaller operators were affected more than the stronger ones, says Foo. “However, even prior to Covid-19, co-working spaces in less established locations had been closing down.”

Savills Malaysia managing director Datuk Paul Khong observes that operators in city centre locations are still seeing drops in occupancy rates. “There is higher demand [at] suburban ones, better demand for BCP [options] and a spike in enquiries on enterprise solutions from companies looking for downsizing options due to the current recessionary times.

“We further note that new packages are being offered at discounts ranging from

20% to 40% in various forms of rent frees and additional incentives. The marketing content highly emphasises [physical] distancing, cleaning and sanitisation SOPs,” notes Khong.

He anticipates that the general office

market in the Klang Valley will stay relatively soft, with current vacancy levels at about 25%. “Coupled with political and economic uncertainties, along with the coronavirus pandemic, we are moving into recessionary times where the office market is expected to be more challenging in the remaining 2H2020.”

A flexible alternative for corporates

Despite the current crisis, property consultants are optimistic about the co-working market’s prospects in the days ahead and are of the view that the pandemic is set to accelerate the earlier trend of bigger companies jumping on the co-working bandwagon.

“In the current market condition, all companies are extremely sensitive to their occupancy and operational costs, which requires them to review their current and new occupancy strategies quickly and accurately. The pandemic has accelerated all cost-sensitive decisions for corporates,” says Khong.

“We anticipate increased inquiries on flexible space from corporates that are potentially looking from the BCP angle and at the cost of restructuring and downsizing,” he adds.

For larger companies with operational offices at several locations, Foo says adopting a flexible space helps them stay agile, which then provides a financial buffer to lower operational costs and capital expenditure. “There should be increasing appreciation of real estate agility. The demand for co-working space [may be subdued] at this time, but the long-term prospect of co-working space as a supplement to the conventional office market is still intact.”

Foo adds that the market could see more “core plus flex” leasing agreements, whereby occupiers take up a core space with the flexibility to expand should conditions arise.

In addition to BCPs, Foo suggests that the social distancing measures in place could potentially work in favour of co-working in the mid to long term as corporates are likely to consider alternative work arrangements, such as flexible and remote working.

“Flexible workspaces [would remain] feasible options as companies are required to adapt to the new normal, which includes rotational or staggered work hours moving forward. This could potentially reverse the current trend of companies consolidating as firms may begin to consider de-consolidating and de-densifying existing offices to facilitate physical social distancing,” Foo adds.

As social distancing measures would sometimes mean needing more office space rather than less, Teh suggests that larger enterprises have more co-working spaces in their portfolio. “So, to avoid getting locked into a long-term deal for space they may not need once the pandemic subsides, the flexible nature of co-working [could potentially] appeal to them.

“During this unprecedented time, avoiding long-term financial implications is certainly something companies not only want but need, and the appeal of co-working spaces has always been their flexibility — the ability to grow and contract with limited capital expenditure,” he says.

As the flexible office can be easily sized up or down with a lower or nominal initial set-up cost, Khong says any business expansion plan will also work in favour of co-working space in terms of risk management. “However, this is subject to the final pricing, which remains the key deciding factor in uncertain times.”

An emergency response strategy

During the Movement Control Order, enquiries for co-working spaces, especially from MNCs looking for an alternative space to house their staff, were relatively active, notes Teh. “In addition to splitting their essential teams in multi-locations, more companies are starting to [look at] how co-working spaces can be an [emergency response strategy] in case their main offices become inaccessible due to an infected staff member.

“Until a vaccine becomes available, there is a potential risk of keeping all staff under the same roof — even if one employee gets infected, it will cause disruption to the overall business — and this will be at the forefront of decision-making for companies,” Teh observes.

Meanwhile, he does not foresee the death of offices due to the pandemic. “There is still a need to maintain an office for operations, community, social interaction, major decision making and for those who do not find remote working on a full-time basis productive.

“As the economy restarts in this recovery MCO period, we feel that the demand for co-working spaces will be healthy due to the lack, and inadequacy, of facilities and also non-conducive conditions to work from home for certain organisations.

“Depending on the nature of businesses, working from home may not be for everyone and may not be sustainable over the long term, and ultimately, co-working spaces’ flexibility, amenities and services, location and community, which drove their exponential growth, are still in place,” says Teh.

Going forward

In an increasingly saturated market, co-working operators can consider offering a more diverse product range targeting a wider reach, Foo says. For example, IWG plc (formerly Regus) offers a spectrum of co-working options, ranging from the lower-end SPACES to the upmarket and lifestyle-centric No18.

“Co-working operators could also potentially review existing space allocation [to have] a reasonable proportion designated for private office suites to target larger occupiers who seek to add some flexibility to their real estate portfolios to account for headcount volatility,” adds Foo.

Collaborations between co-working operators and landlords is another option to look at, says Foo. “For example, co-working operators could form management agreements with landlords to operate co-working space. By having a revenue-sharing model between the landlord and co-working operator, it incentivises the co-working operator to maximise occupancy and also reduces the initial capital expenditure for landlords,” he explains.

“The ‘core plus flex’ [leasing] model mentioned earlier may see more office buildings dedicating some floors for flexible working space. Also, there could be more mergers and acquisitions taking place between large corporates and smaller scale operators in established locations who have been strained by [the pandemic]. This is a cost-effective method to acquire a readily fitted out co-working space as their flex component,” adds Foo.

Additionally, co-working operators could offer customisable agreements by taking into consideration the business profiles of their members and their respective risk exposure to the current economic fallout, he says. “In the past, operators have been seen to collaborate with external parties to offer exclusive services and benefits to members. This needs to continue as a useful [strategy] to instil brand loyalty and, ultimately, [for] member retention.”

According to Teh, co-working operators will need to adjust their business models and continue their pivot towards attracting larger, more established companies. “Amid the current economic uncertainty and with hiring and growth plans on hold, established companies may opt for co-working spaces to lower real estate costs. For example, a company that is reluctant to commit to 50,000 sq ft may instead take a long-term lease for 35,000 sq ft and rent the remaining 15,000 sq ft of space from flexible and co-working operators.”

And for many operators who have strong financial backing, Teh suggests focusing on “enterprise solutions” — offices which are bespoke to tenants’ requirements. “This removes much of the uncertainty of trying to sell desks in small quantities for short periods of time. [And] because enterprise solutions require greater capital expenditure from the operators, they generally have a minimum two-year contract, which will give operators visibility on their revenue stream,” Teh adds.

Meanwhile, Foo and Khong expects co-working spaces to make adjustments in terms of both space for distancing and SOP regulations.

“Co-working operators may need to reduce existing workplace density and reconfigure shared space and meeting rooms to accommodate a larger workspace per user. There may be a need for adequate space between open workstations, staggered seating in meeting rooms, and a larger buffer zone in shared spaces to facilitate industry events,” Foo says.

“Co-working spaces are expected to address the social distancing aspects, which mean less efficient layouts per floor despite a price-sensitive environment. Some of these measures include new seating arrangements with floor plan adjustments and adhering to extra health and safety regulations, such as daily screening and temperature checks, increased cleaning frequency and installation of additional fitouts,” Khong concludes.