Why are multinational firms falling in love with the flexibility offered by co-working spaces?
More than 40 per cent of co-working spaces are now occupied by MNC’s, doubling in the last two years. Read on to understand the factors that are driving this trend.
Co-working operators may have initially imagined their clientele to consist of start-ups and small businesses. No one foresaw this would revolutionise real estate, and awaken a vast occupier base – multinational corporations.
More than 40 per cent of co-working spaces are now occupied by MNC’s, doubling in the last two years. No surprise they are now the number one target for flexible workspace providers. The evolution of this sector is happening at such a rate that the design of committed space is changing before new sites come to market to cater for the change in clientele. A very traditional asset class, real estate has had to adjust rapidly to keep pace with changes in its customers’ preferences.
Uncertainty stemming from the US-China trade war, Brexit and China’s slowing economy along with revolutionary technology, disruption and new ways of working have all made it more difficult for MNC’s to accurately forecast their business in six to nine years.
Hong Kong is experiencing high rents and vacancy remains tight. It’s perhaps unsurprising that tenants reaching the end of their current leases are loathe to renew at current market prices for more than three years.
Based on our forecasts, this may be a solid strategy: the market is expected to be more favourable to tenants by 2022 and new supply in Central, Hong Kong East, Wong Chuk Hang and Kowloon East will have come online by then, giving end-users more office options, while further citywide infrastructure improvements will make decentralised districts even more accessible.
The catch for MNCs will come if they need to expand or adjust the size or scale of their businesses over the next few years, and this is where flexible space offers solutions. Flex-space often comes with short-term contracts and costs and enables firms to reduce capital expenditure, leaving more money to invest in other areas of a firm’s business.
An MNC may decide, for example, to lease fewer square feet in a traditional office space and make up the difference by offering employees opportunities to work in co-working facilities, perhaps closer to home. This strategy also allows MNC’s to potentially utilise a flexible space operator’s citywide or global network to increase the mobility of talent without the need to invest in additional branch offices.
Flex space providers have been expanding dramatically over the last three years, investing heavily in setting up multiple new sites.
These providers are now adapting their growth plans across Asia-Pacific, leading to more joint ventures, revenue sharing and contributions from landlords to get larger deals over the line. The aim of this strategy is to accelerate their return on investment, make their operations more profitable and attractive to investors. For operators, this means they can invest less in fixed real estate costs, more on technology and improving end-user experiences in an increasingly competitive market.
Leasing deals concluded in 2019 will take flexible workspaces across Hong Kong to around 2.8 per cent or 2.7 million square feet of the grade A office market. There is still room for further expansion with the flex-space market expected to reach around 3.5 per cent of the market or 4 million sq ft in 2020. This, however, still lags London’s 6.3 per cent dedicated to co-working spaces.
Whether flex space is operated by a major brand or directly by landlords, it is attractive to larger MNCs seeking flexible workspaces close to their own operations to accommodate short-term expansion requirements or up/down flexibility across a long-term lease.
Flexibility is a staple requirement for occupiers in markets such as London and New York, and it is making its way to Hong Kong. Landlords are increasingly exploring the creation of flex space amenities, including event facilities, which will take pressure off tenants leasing such premises for infrequent use.
Not all flex space providers will survive; some will shut down or be acquired to catapult growth of larger providers. The common misconception is that a downturn in the global economy will spell the end of many of the major players in this sector.
JLL research shows that during the 2008 global financial crisis a number of the well-established providers performed well. Entrepreneurs emerged as a major driver who needed a cost effective office for their new businesses, along with mid-sized businesses looking for flexibility in an uncertain market.
It is clear there will not be one single path occupiers follow in taking up future workspace. Some MNCs will choose to lease flexible space on a long-term, enterprise, or project basis; others will prefer to take advantage of landlord-led solutions; and others will look to transform their own offices, adopting flexible workspace concepts into their own headquarters. After all, while co-working has been a big disrupter in getting people to think about flex space and the future of work, it’s just one piece of a much bigger puzzle.
This article was originally published in the South China Morning Post on July 02, 2019