Local co-working players see expansion opportunities despite the financial struggles of unicorn WeWork.
The co-working giant’s struggles haven’t deterred local players in the segment, writes William Hicks
As financial troubles plague the largest co-working company in the world, an uncertain future awaits WeWork. Local co-working players, meanwhile, see an opportunity not only to expand into the market, but to redefine the business model as well.
In September, WeWork expected to raise US$47 billion from an IPO. But the company fell far short in valuation and cancelled plans. Fearing total collapse, its largest investor, Japan’s SoftBank, had to buy an 80% stake in the company for $8 billion as part of the bailout.
Investors lost confidence in WeWork after taking a look at its business model of expansion first and figuring out profitability later. Large, expensive office spaces were popping up all over the world, along with long-term leases and massive amounts of debt.
The company fired its ambitious, if not quixotic, chief executive, but now it must buy him out for a whopping $1.7 billion — all while losing $1.25 billion on revenue of $934 million in the third quarter, a deficit up 150% from the same period last year.
WeWork plans to lay off 25% of staff, which brings into question the fate of co-working locations in underperforming markets. WeWork operates four co-working spaces around Bangkok and has 20,000 square metres in future development deals in Thailand, according to Colliers Thailand.
A NEW DIRECTION?
The stunning blow to co-working’s largest player has elicited questions about the entire business model of the young industry, as well as the possibility of a domino effect collapsing the whole market. However, smaller local players say that a struggling WeWork could actually lead to a healthier domestic industry.
“We have been expecting WeWork to fail for four years,” said Gavin Vongkusolkit, chief executive of Glowfish Offices, which operates two coworking spaces in Bangkok, one in Asok and the other in Sathon.
“We knew it wasn’t a good business model and didn’t think it was a good idea to buy up a huge corporation in China,” he said. “We didn’t know how they could do so much rapid expansion.”
Mr Gavin said WeWork started off building great communities in New York City and London but lost its way when it expanded into foreign markets it didn’t understand and turned into more of an office-space middleman, renting primarily to large corporations as opposed to innovative SMEs.
Essentially, in its rush to grow, WeWork lost
WeWork’s co-working space at WeWork Thonglor in the T-One Building on Sukhumvit Soi 40.
sight of the main selling point of co-working spaces: their ability to connect like-minded entrepreneurs and talent to start new businesses, Mr Gavin said.
“I don’t know how they could come back from this, it’s never good when a company has to change its purpose,” he said. “Its new purpose is to make money and has nothing to do with co-working. It’s designed for corporations, not small businesses and for employees, not entrepreneurs.”
Amarit Charoenphan, co-founder of Hubba, Bangkok’s first co-working space, said he expects the industry to do some soul-searching after what happened with WeWork.
“WeWork is a reality check for entrepreneurs with lofty dreams,” he said. “We need to realise the people that fund us have their own ideas of what the business model should be and are seeking returns.”
As Mr Amarit sees it, the co-working industry is veering towards a race to the bottom, where more supply is causing prices to soften and many operators that were running on venture capital money are content operating spaces at a loss in an effort to grow and attract more funding.
“I think we have yet to see the full fallout, but the co-working model might change,” he said. “The work that co-working spaces do to create communities is still valuable, but there may be a need for more diversified revenue sources.”
Singapore-based Justco, WeWork’s chief competitor in Southeast Asia, may have the most to gain from WeWork’s troubles. The company is aggressively purchasing property in Bangkok and operates three spaces in the capital, including 12,000 sq m at the new Samyan Mitrtown mixed-use development.
“We are not distracted by the recent news of the industry,” said Wimolnit Lertpitakkit, general manager for Thailand. “JustCo is focused on creating a quality product that better serves the demands of our customers, such as the need for affordable workspace solutions, connections, speed, flexibility in office leases and more. We strongly believe that a good product will speak for itself, and ultimately we aim for customers to be satisfied, happy and to turn them into loyal customers.”
BY THE NUMBERS
“Even though WeWork’s IPO failed, I don’t think it will affect the office market too much,” said Waras Dechgitvigrom, research manager at Colliers International Thailand. She cited the fact that co-working spaces take up less than 1% of total office space in Bangkok.
Co-working spaces in Bangkok are expected to grow by 50% over the next two years, Ms Waras said. The average occupancy rate in Bangkok is at a healthy 70%, and the rent in co-working spaces is as much as twice that of traditional offices. Co-working spaces are best suited to small startups of 5-10 people that need only 20-30 sq m of space.
According to Colliers research, some 50,000 sq m of co-working space is planned for Bangkok by 2021, with 78% coming from WeWork and Singapore-based Justco.
Some 20,000 sq m will stem from upcoming WeWork deals at five locations in Bangkok: Spring Tower, Siripinyo Building, Suthi Building on Phetchaburi Road, The Parq on Rama IV Road and Vanissa Building on Chidlom Road. Despite WeWork’s financial woes, Ms Waras said the deals are finalised and would be difficult to break.
“In the Bangkok market for offices, people still prefer traditional offices,” she said. “However, startups can’t really rent at such a large scale in traditional office buildings, so [co-working spaces are] getting more popular. WeWork is a large player, but there’s room for everyone to expand because overall market penetration is not that high.”
The total supply of co-working space in Bangkok is 120,000 sq m, with 90% located in the central business district, according to the real estate firm JLL. The amount of co-working space has near doubled since 2017, growing by 66,500 sq m from 2017 to the present. In the CBD area, co-working spaces make up 2.7% of the available 4.5 million sq m, with WeWork taking up 0.5% of stock.
“If WeWork decides not to proceed with a deal, then the space in the building will likely be taken up by another co-working operator,” said Thananun Ruengveeravich, director of tenant representation markets at JLL Thailand. “Buildings in a good area with access to the BTS and MRT will still be in high demand.”
He said developers in the past few years have become more knowledgeable about co-working spaces and see them as attractive tenants that lure hip young people and tech startups to their developments.
The growth of flexible workspaces in Southeast Asia is in line with growth in Asia-Pacific, where flexible-space stock had a compound average growth rate of 35.7% during 2014-17, much higher than growth in the US (25.7%) and Europe (21.6%) over the same period.
‘‘ We have been expecting WeWork to fail for four years. We knew it wasn’t a good business model and didn’t think it was a good idea to buy up a huge corporation in China.
GAVIN VONGKUSOLKIT Chief executive, Glowfish Offices