Concrete Analysis

Co-working spaces are driving change in the office market

Multinational companies are beginning to discover the appeal of co-working spaces as a flexible office solution

PUBLISHED : Tuesday, 28 November, 2017, 9:00am
UPDATED : Tuesday, 28 November, 2017, 7:37pm

The future of work is evolving. Companies aspire to have smarter workplace design which can provide the flexibility to attract and retain talent and help increase productivity. Are co-working spaces the solution businesses have been looking for, or an expanding bubble that is going to burst?

The co-working footprint in Hong Kong will continue to grow in 2018 as businesses consider new ways to manage their real estate. This opens the door for co-working providers to attract multinational companies into flexible and creative spaces. Real estate is typically the second largest operating expense to a company, excluding staff wages. Co-working providers can offer a tailor-made office solution with no upfront capital expenditure costs which address a platform of work based challenges.

Owing to the initial investment needed to set up permanent office space, self-employed entrepreneurs and small start-ups were the initial users of co-working space in Hong Kong. Recognising the unique offering of community, collaboration and higher transactional flexibility, a growing multinational client base has emerged. Co-working now boasts a range of users across different industries, a trend we expect to accelerate moving forward.

For many businesses it is critical to be in an environment that has access to start-ups and technology innovators, elements that can be found in the “community” within the co-working ecosystem. Likewise, traditional teams that are mobile on a daily basis and do not need a permanent desk can work in different locations. These businesses are attracted to a network that allows mobility throughout the city.

Relatively new in Hong Kong, the co-working trend has taken off with 560,000 square feet of providers already in operation.

Year to date space leased, but not yet in operation, is equivalent to 560,000 sq ft, while an additional 550,000 sq ft is currently under negotiation. Significant institutional investment is helping to drive aggressive global expansion and new market players. But there are challenges ahead.

Several landlords have entered the market, while a handful of others are considering doing so. Established operators include Sino Ocean Land which set up OK Space, and Soho which operates 3Q. Swire Properties was the first major landlord in Hong Kong to set up their own hybrid called Blueprint, which opened in December 2014. The landlord recently launched a new version, a co-working and multi-functional event space, located in their Taikoo Place portfolio. The big question is whether other landlords will follow suit in Hong Kong, both creating direct competition with co-working operators and locking them out of real estate options.

Office vacancy rates in Hong Kong are tight, particularly on Hong Kong Island. As a result, co-working operators face strong competition for large space from traditional occupiers and each other. We expect this trend to continue due to steady demand in the core districts.

But when there is demand, a way around the problem will be found. For example, naked Hub leased 55,000 square feet in Bonham Circus, a pencil building in Sheung Wan. Buildings that are perceived as being less attractive to traditional occupiers could be ideal for co-working, as they can offer affordable rents, proximity to transport networks, and an opportunity to partner with an investor landlord to upgrade a building. The attraction from a landlord perspective is the ability to secure an anchor tenant on a long lease and increase the capital value of the asset through revitalisation. By incorporating smart design and partnering with local businesses such as Hong Kong Walls, a non-profit organisation that creates opportunities for artists, naked Hub has created a unique destination for innovators in the heart of Sheung Wan.

Co-working in Hong Kong was for a time seen as filling gaps in buildings, however it is increasingly becoming an indicator of where forward-thinking businesses take up roots.

WeWork recently leased two floors at Mapletree Bay Point in Kwun Tong and there are a number of other providers negotiating in Kowloon East. The floor plates of existing co-working space in Hong Kong ranges from 2,000 sq ft to 24,000 sq ft. In future, we are likely to see co-working operators occupying large floor plates that offer greater flexibility in office design and an array of amenities. This is the volume of space the broader business community needs to satisfy growing demand.

Corporate real estate and portfolio strategies are increasingly looking at ways to activate and maximise space and avoid a major impact to their books. The expansion of co-working can play a significant role as companies aim to implement new working strategies and connect closer to an innovative community.

Michael Glancy is a local director of HK Markets at JLL