Why Everyone Needs a Reality Check on Coworking
A note from Coworking Insights: We reached out to the FlySpaces team a few weeks ago to get their perspective on what’s happening in Southeast Asia with the coworking and evolving CRE industry. The region has been of particular interest to me since my two-month visit in early February 2017, which was kicked off by CU Asia 2017. I particularly wanted FlySpace’s thoughts because they are one of the largest service providers of their kind and have access to a lot of data and insider information on the happenings in their region. Suvi, the author of this article, did not disappoint. The article is filled with tremendous insight into what’s to come for coworking and corporate real estate.
Corporates Want Innovation
Coworking spaces have mushroomed in Asia as the large millennial population, seeking a retreat from the monotonous 9-5 work environment, has entered the workforce. Conjuring up Instagram images of cool open-plan spaces bustling with headphone-wearing MacBook-using millennials, coworking has traditionally been regarded as a startup phenomenon. Operators of these spaces capitalized on a gap in the traditional Asian office environment by providing flexibility, relative affordability, and networking opportunities integral to startups. In 2016, these coworking spaces experienced an added boost as Venture Capital firms invested over USD 22 billion into more than 1,000 startups.
Yet the hidden truth is that corporates are the ones actually filling up these “cool” spaces.
As with anything, be it the iPhone or a pair of Stan Smiths, coworking has begun to evolve and attract new customers. Expanding across the business spectrum, coworking spaces act as central hubs for innovation. With the constant ins-and-outs of entrepreneurs, freelancers, and startups, corporations expose themselves to fresh opportunities. Whether this satisfies their desire to implement innovation into their own practices, recruit young talent, encourage unique thinking, or even to set up an accelerator program like Google’s Launchpad Accelerator, being present in a coworking space is a relatively fuss-free decision.
Moves in the East
Major companies such as IBM and Philips have already taken advantage of coworking spaces in Amsterdam as a means to promote innovative thinking. More recently, we have seen Microsoft move 70 percent of its New York sales team into WeWork spaces to increase employee flexibility. Designed to encourage knowledge sharing and lightbulb moments, these were strategic moves aimed to increase the productivity of their respective workforces.
MNC’s Moving In
Not only are we seeing corporates move into coworking spaces, but we are also seeing operators begin to cater to these larger clients by acquiring larger spaces. Examples include WeWork’s acquisition of 93,000 sq. ft. for one Hong Kong centre and JustCo occupying 60,000 sq. ft. in Marina One in Singapore, significantly dwarfing traditional spaces.
In turn, this has brought operators larger transaction sizes. In 2017, Colliers International reported 80 percent of deals for 40 desks or more coming from MNCs (multi-national corporations). Notable regional examples include the 400 desks HSBC booked for its digital team at WeWork, Hong Kong and PricewaterhouseCoopers taking 100 desks at Collective Works in Singapore. Also in Singapore, JustCo reports that 50% of its current members are made up of MNCs.
Other than being present in these hotbeds of innovation, corporates take advantage of the one-stop-shop aspect of coworking spaces. With the added inclusion of maintenance staff and amenities, such as free coffee, these spaces provide MNCs an average of 25 percent in cost savings.
With the changes in accounting requirements expected in 2019, it’s safe to presume that the movement of MNCs into flexible office spaces will accelerate. As businesses become required to list properties on their balance sheets, their liabilities increase. However by taking advantage of coworking spaces, corporates avoid owning property and have the added capability of scaling up or down depending on the ebb and flow of their business.
So what impact does the shifting of MNCs into flexible office space have on the operators?
Taking the example of digital nomads, let us first illustrate the difficulty coworking spaces have in attaining profit from smaller clients. Digital nomads are those who combine travel and work by utilizing ubiquitous WiFi availability. On average, these workers make $1,000 a month. However, they offset this low salary by living in cities such as Chiang Mai, where a coworking space costs an average of $106 per month. Yet, this cost doubles as you move into major commercial business districts (CBDs) such as Singapore, where the average monthly cost of a coworking space is $218.
With such little capital to spend, especially taking into account other living expenses, digital nomads don’t provide the same security to operators that MNCs are capable of.
Furthermore it can cost an average of USD $58,000 to set up coworking spaces, with 60 percent currently operating at a loss. So if operators want to achieve break even levels, then MNCs would be their solution; statistics show that the more members a space has, the higher its profit.
Where’s the Money?
Studies report 70 percent of privately operated spaces, catering to 50 or more members, make profit, whereas only 40 percent of those with 10-49 members make profit and 56 percent of spaces with less than 10 members report a loss. Another statistic states 3 in 4 coworking spaces with 200 members or more, are able to surpass their break even levels. Diving in deeper, 61 percent of spaces earn most of their revenue by renting out desks, with private offices as the next biggest revenue contributor at 17 percent.
All of this suggests that in order for operators to stay afloat, they need to diversify their client base to achieve stability; namely those who can rent out more desks for longer. Even though freelancers and startups are exciting to work with, those with both the finances and security to provide this stability are in fact, the larger corporations.
Let’s bring this back to basics. By imagining a back-of-the-envelope calculation, we can showcase the difference between freelancers and corporate teams in flexible office space. For the sake of simplicity, we will make the average monthly cost of a seat $100, with a freelancer occupying 1 seat and a team occupying at least 5. Consequently, a coworking space earns $100 from the freelancer compared to $500 from the team. However, the amount of seats is not the only factor operators must account for. There is also the question of duration. With limited capital, freelancers are only able to commit to a desk on a month by month basis whereas on average, small teams sign up for 6-month contracts. This now means that whilst operators still only earn $100 from the freelancer, they can earn $3,000 from the team.
With the landscape of office acquisition continuously evolving, the more people opting for flexible office space, the less time it will take for operators to break even. As companies such as HSBC and Microsoft are already utilizing these spaces, it’s likely that more will follow suit. The influx of MNCs could in fact, increase the number of startups in flexible office spaces, ultimately increasing the operator’s total revenue. These startups want to take advantage of the knowledge-sharing and networking opportunities provided by these larger organizations, and as corporates want to take advantage of the innovation that stems from startups, we have seen an increase in startup-corporate partnerships.
On a more overarching note, it is quite likely that coworking will cease to be a word in the same sense that it is today. Rather, as more people use and incorporate coworking, it may in fact become the standard practice for doing business. So when people in the future say “I’m going to work,” they will be referring to going to a coworking space.