Diamonds are forged in the crucible of high temperatures and pressures. Industries, when faced with trying times, innovate at accelerated paces, compressing years of slow and steady experimentation into the timeframe of a couple of months.
We witnessed the same phenomenon with coworking spaces in 2020.
The COVID-19 pandemic eviscerated coworking demand in the second quarter of the year. Social distancing affected the profitability of coworking operations, which are traditionally organized around high density workspaces and community interactions. We saw coworking spaces get shuttered. Plans for growth were shelved; operations were put on hold.
As India’s largest coworking marketplace, we at Qdesq were curious to understand how the numbers reflected our anecdotal understanding of the pandemic’s impact on the industry, and how demand for coworking shaped up over the year. So we ran the numbers recently and note below a couple of highlights, all focused on the Indian market for coworking:
- Lead flow for the annual year 2020 versus 2019 was down 15% due to the impact of COVID-19.
- The year started out strong with 40% growth in Q1 2020 vis-a-vis Q1 2019.
- The impact of COVID-19 was strongest in Q2, when leads and inquiries fell 54%, and started recovering thereafter.
- Q3 2020 vs. 2019 was down by 33%, and Q4 2020 vs. 2019 was down just 8%. We expect Q1 2021 to show an even stronger firming up of demand compared to the very strong Q1 2020 numbers.
- The impact of the pandemic was felt the strongest in Hyderabad (down 78% Q2 YoY) and in Mumbai (down 63% Q2 YoY).
- The recovery was led by Bangalore and Hyderabad, which ended the year in the black. Bangalore lead flows were up 26% in the last quarter of the year vis a vis 2019 Q4, and 9% for Hyderabad.
- Bangalore was both the most resistant to the impact of the pandemic and the quickest to recover.
- Delhi suffered a 50% reduction in demand in Q2, but ended the year in the black at a 3% improvement in Q4.
- Mumbai was amongst the worst hit cities and also amongst the slowest to recover. Demand in Mumbai fell 63% in Q2, recovered marginally in Q3 (60% reduction in demand), and ended the year at a 43% contraction for Q4 YoY.
But, along the way, as the temperature and pressure rose, bright spots started to emerge.
- Coworking space operators with a long-term view on the sector doubled down, and took this opportunity to pick up spaces at distressed prices and under favorable terms.
- Operators continued to set up new workspaces, albeit at a slower rate. The rate of new supply picked up decidedly in Q4 2020.
- We realized that coworking is a countercyclical product whose fundamental value proposition strengthens during periods when shocks to the economy drive seekers to value flexibility in their cost structures and adopt risk minimization.
- A first of its kind, canary in the coal mine deal for managing more than 900 seats from one enterprise, pan India, with monthly renewals, no security deposits, no lock ins, highlighted the potential of this demand segment.
- The future of this industry lies in the direction of offering ever increasing flexibility for the transaction of office space. The transformational value of such flexibility is captured by the MoM growth rate for the above referenced deal. At inception, 15 seats were under management, 950 six months down the line, resulting in a 99% MoM growth rate for the size of the deal.
- Operators realized that the fundamental drivers of profitability were high customer retention rates. Interest in digitizing the workspace and occupant interactions picked up, demand for occupant experience management plus retention software witnessed an uptick.
The resilience of the product was tested severely by the COVID-19 pandemic, but the fundamental value proposition for coworking remains unchanged. Office space used to be a discrete binary variable, but is now rendered a continuous variable due to the innovations coworking operators bring to the market.
These innovations often result in unparalleled efficiencies in costs for enterprises, improvements to productivity levels for freelancers and individuals, and improvements to the mortality rate for startups.
We started the year on a high. Along the way, COVID-19 hit and derailed the industry, forcing us to learn how to work from home along with all its attendant trials and tribulations. But, just as crucially, we ended 2020 on a high. We survived this trial by fire. We are still in the ring. We are still standing. And we emerged from this boxing match stronger, faster, fitter, and wiser.
The coworking sector is the counter-cyclical, antifragile, sunshine sub sector of the commercial office real estate sector. It is also the future of the commercial office real estate industry, and it is the future of how we, as a species and a society, will work.