Co-working industry: overvalued and at risk?

Co-working - Overvalued and at Risk
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The rise of the co-working industry has been nothing short of meteoric and shared working environments are booming, from Asia to the US. The industry has more than doubled in terms of spaces since 2015, and by 2022 the market is projected to grow another 43%, resulting in 30,000 sites worldwide. Yet, according to some industry experts, this growth has been built on a “business model that works great in up cycles but is still unproven, especially in downturns.” This criticism has fallen primarily at the feet of industry leaders, such as WeWork, due to their apparent overvaluation and continued quarterly losses. With a large player facing staggering financial losses and reduced funding, the question arises – Are these experts right in pointing out a risk of collapse, or has the industry evolved into a more stable place of growth? And more importantly, what are co-working spaces doing differently to get ahead of this?

Learning from the past…or not?

The origins of the co-working movement can be traced back to 2009, just after the last global recession. This means the majority of this nascent industry has yet to face the trials and tribulations of a global economic downturn. IWG, formerly known as Regus, was founded in 1989 and for over a decade was one of the industry’s leading players. Yet, soon after the dot com bubble collapsed, the company was forced to file for bankruptcy as it was unable to meet the demands of expensive long-term rental agreements. At one point, the company’s US business was hemorrhaging around “US$2.5M a month.” Although bankruptcy filings and last-second capital injections kept the group moving forward under new names, it never regained the same position, a case study that leaves modern-day skeptics wondering, “what happens when start-ups and freelancers disappear during a downturn, and co-working spaces are stuck with a lot of expensive space?”

Industry leaders will point to the fact that companies today are more secure than IWG was during the Great Recession. They are reserved with their pro formas, have raised significant venture capital, have entered into revenue-sharing leases, and have diversified their service offerings to ensure they’d have numerous revenue streams in a time of economic plight. These are valid points and would definitely provide some breathing room, but what does a sustainable future for coworking really look like?

Costly Mismatch

The crux of the concern lies in the fact that there is a mismatch between the long-term lease obligations to landlords, and the revenue-generating, short-term, subleases to tenants. During a recession, it’s safe to assume that co-working members – especially freelancers and start-ups who benefit from popular flexible tenancy plans – would quickly regress to working from cafés. This leaves co-working spaces, as the middle-man between landlord and tenants, to cover rent expenses with significantly less revenue. In the case of WeWork, those lease expenses currently sit at a whopping US$18 billion, around US$5 billion of which are due in the next five years. When coupled with the fact that plenty of co-working providers are also running at a loss, due to aggressive expansion policies and poaching strategies, it becomes clear that a better model is needed. The demand from consumers is clearly there, but co-working spaces need to have a clear strategic vision for the marketplace.

The Bright Side

According to JLL, 30% of the office market will be flexible by 2030. What this means is that the shift towards co-working is not just a trend or unique business model, but a fundamental change in the way people want to approach their work, and the spaces that support that work. This is true all the way from single entrepreneurs needing a space to get their idea off the ground, to large multinational corporations in need of more flexible office solutions for their teams.

Growth in the co-working industry doesn’t appear to be slowing down. As mentioned before, the industry has been growing at a remarkable pace, and future projections see the sector tripling in size in the near future – with co-working spaces potentially accounting for up to 10% of real estate portfolios in some markets. Investors are signaling they feel that the co-working model is reliable enough to sustain a downturn and that market demand will not dissipate enough to jeopardize their investments.

Thomas Hui, CEO of theDesk
Thomas Hui, CEO and Co-founder of theDesk

As theDesk CEO and Co-founder Thomas Hui describes on the closure of other co-working spaces in Hong Kong, “It is indeed a good thing for the likes of us, as we will see a fiercely competitive market become more rational. Not everyone in the industry will get funded and, as a result, the number of operators will decreaseBut the trend is that the market will continue to grow. And in a good scenario, the area occupied by co-working operators will increase 10 times.”

The key is that regardless of short-term economic conditions, co-working will continue to grow because it represents a fundamentally different way that people and companies want to work. The spaces that will do well within this can be judged like any other business: They must have a clear vision and purpose, and add value to both their members and the neighborhood they occupy.

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