The Outlook for the Coworking Industry

Coworking was a big trend in 2017, with both large operators and smaller boutiques aggressively expanding into almost all markets around the region. The coworking/ flex space model is here to stay, but there are some concerns around the long-term viability of some operators. The service is great for corporate occupiers in that they can expand and contract quickly without taking on long-term liabilities. For many corporates, they are not seeing this flexibility, costing them a significant premium – which pulls into question the operating margin for some of these coworking spaces. The business model of course has some parallels to the serviced office product, which has at times been shown to be quite volatile with regard to its operational viability. It will be interesting to see how coworking operators handle a cyclical downturn, as corporate clients cut short-term liabilities and centralise remaining personnel back to their HQ. Generally, cyclical downturns are also associated with a reduction in R& D expenditure and therefore the short-term contracts for personnel and project space requirement are reduced. This would also flow through to the private individual clients of coworking operators, as freelance, IT and tech workers would experience a fall in demand for their services. Landlords will most likely start to look closer at the business model proposed by an individual coworking operator as the sector becomes increasingly competitive. On an occupancy basis, coworking tenants may have a higher downside beta than many other sectors, so landlords will want to consider the impact of Net Operating Income (NOI) volatility associated with various coworking occupiers. Perhaps landlords will look closer at what level of bank guarantees might be required to shield themselves from tenancy risk concentrated in the coworking sector, or whether or not there is a case to apply a rental premium. Furthermore, major landlords with large portfolios may also look to build up their own capability in the coworking sector in order to capture any upside benefit from coworking operations – as well as to reduce their tenants from eroding their business model of renting space.