Co-Working Spaces: Emergence, Benefits and Future; Our Perspective

Co-working is the current blue-eyed boy of Commercial Real Estate (CRE) segment across the world. It has emerged as a top disruptor in CRE sphere and is it's the answer to techies who frowned upon the notion as for how little Real Estate Industry has done to embrace change and technology.

 

Since early 2017 co-working spaces started positioning themselves as an office space alternative to start-ups who wanted to work out of state of the art premises in Grade – A buildings, however, weren't able to do so as it would have entailed huge amount of Capital Expenditure, thereby allowing this new CRE Model to fill-up a huge vacuum and become an integral part of the start-up Ecosystem.

 

Before Co-working had emerged, this space was occupied by Business Centres which happened to be a costlier alternative. So, for the uninitiated, if we were to draw parallels with the aviation industry, Business Centre may be compared to a ‘full-service flight operator’ where-in Co-working is offering services equivalent to what you would expect in a ‘budget carrier’, both segments providing delightful services to patrons in their own way. Not to leave own leased offices out of this comparison, they are CREs answer to Chartered Flights, the experience depends on how deep your pockets are.

 

With this article we will try to understand what led this trend to emerge, it's benefits to space owners, operators and end users, trends and what to expect in the future.

 

Emergence:

 

In the year 2017, market share of Co-working spaces in terms of office leasing commanded a mere 6% of the overall Indian CRE space, in 2018 it reached close to 15% and is expected to touch 21-25% market share by the end of 2019, no mean feat by any standards. In fact, this trend globally has acquired such momentum that an international Co-working space operator was reported by ‘The New York Times’ on the 13th of November 2018 in a brief that they ‘Might Be Too Big to Fail’ and it did make an interesting read.

 

Here-under we have tried to create a graph which reflects the rise of Indian Co-working Operators in terms of office leasing over the past two years and its projection in 2019 

Now the question arises, how Co-working was conceptualised? Why is it such a great hit amongst industry stakeholders? What are the benefits of this concept which led to this meteoric rise? We will try to address this in the next segment.

 

Benefits:

 

Co-working is a product of necessity on both demand and supply sides.

 

Post the global economic slowdown, suddenly there was a huge supply of quality office space across CRE markets, thanks to large occupiers either going out of business or consolidating their operations in smaller spaces and suddenly there were no takers for these ‘hot cakes’ anymore.

 

Then came the tech – innovation boom where-in young entrepreneurs started up enterprising businesses with dreams backed by vision, knowledge and technical know-how. However, there was one missing link, where to operate from? A firm can grow only so much from Garages, Cafés, Dining Rooms! At the end of the day, a business needs an address. Setting up an office requires a substantial cap-ex which is either blocked for a considerable period of time (Security Deposit) or non-salvageable (Fit-outs/interior Decoration) either way there are huge entry barriers in acquiring your own office.

Ideally, this money could be better utilised by investing in Hardware upgrades, Software Licenses, Marketing, and Branding, Acquiring Talent rather block it in creating a swanky office.

 

For Occupiers:

 

Co-workings have brought immense value in terms of cost savings, ease of operations, ambience and flexibility to occupiers. To demonstrate the same in details, here-under we have tried to create a visual representation of costs involved of setting up and running a 1000 square feet office for 10-member team in Sector – V area Kolkata for a year and share of each expenditure in it.

 

It is interesting to note that the following:

1.    Security Deposit

2.    Fit-out Cost

3.    Common Area Maintenance

4.    Electricity

5.    Internet

6.    Support Staff

7.    Consumables

Comprises 65% of the overall cost to be incurred for the first year of operations along with valuable man-hours lost to set it up. Thus, if a business moved to Co-working and paid a 15% premium on rental per person, it would be able to run its operations for 2 years with the same kind of money without any compromise, this indeed is the best-case scenario for any start-up or an established business looking for expansion.

 

For Space Owners:

 

Alternately for space owners who in the current market scenario weren't finding any takers, found their knight in shining armour in Co-working operators. However, the question remains;

 

How the space owners can actually monetise their partnership/relationship and perhaps add greater value aimed at reaping greater returns by participating in this trend?

 

Hence to explain this we have tried to list the various avenues on which the deal is structured which may be pointed out as following;

 

·     Lease rental of a bare shell (unfurnished)

·     Lease rental on built to suit models; wherein the landlord furnished the premises as per the plan of an operator

·     Lease rental of fully furnished premises (as and where available)

·     There are instances wherein the landlord agrees to revenue sharing, which is a high-risk high – return model

o  The upside of this model is in the long term when the property is an established Co-working address and high occupancy is maintained

o  The low-side is in initial stages when the address is not an established Co-working property leading to lower occupancy, hence returns are lower

 

Future:

 

As in any business, going ahead it will have its opportunities and threats, which may be summarised as follows

 

Opportunities:

1.    Availability of real estate at easier terms

2.    Government supports to start-ups

3.    Established organisations taking note of this facility and warming up

It is an interesting trend, wherein top organisations, especially in tech space, are leasing Co-working spaces as it is allowing them the ease of scaling-up at short notice and avoid hassles while scaling down. Low entry and exit barriers flexible lease terms, zero cap-ex, and up-fronts are deal sweeteners 

4.    Introduction of new technologies such as IOT will make working in such environments an amazing experience for professionals and enhance productivity

 

Threats:

 

1.    The lower lifecycle of occupiers

This is the single largest threat to any Co-working operator, especially when the occupier is a large one, it may become a time-consuming exercise to find a replacement and lead to low returns during the interim vacant period

2.    Lower real estate availability

With Co-working guzzling up space, as has been discussed above, and traditional office market holding its fort, finding viable lease rentals may become challenging and put pressure on margins making it less lucrative for operators

3.    Competition

Sudden spotlight on this business has brought in a lot of operators who are well equipped and funded. This allows potential businesses to negotiate harder resulting in pushing the margins and occupancy lower

 

Conclusion:

 

No matter what the future holds for this business segment, it has brought a lot of excitement, hope, cheer, and opportunity to the stakeholders of the CRE market. Like any business model, this segment will also face daunting challenges and face existential threats, however with great minds and application will finally evolve and hopefully become an integral part and large contributor the Commercial Real Estate Market ecosystem.