What is the future of co-working spaces in Hong Kong?

The sector witnessed high levels of growth in Hong Kong between 2016 and 2018, but this has decreased over the past 24 months
There are opportunities for both operators and tenants to take advantage of the current business environment

Dane Moodie

Published: 11:59am, 16 Mar 2021

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The co-working sector, also known as the flexible space sector, has enjoyed tremendous growth in recent years, supported by the start-up boom, demand for greater flexibility among both employees and companies, and its appeal as a cost-effective alternative to traditional offices.

However, with Hong Kong entering its longest recession since 2009, and companies widely adopting work from home policies and social distancing measures, what does the future hold for this sector?

Co-working space is defined as a shared work environment providing a wide range of workspaces to occupiers. Tenants in co-working spaces pay a fixed operating cost. They, however, do not take out long leases or make a large capital outlay for fit-outs. By simply subscribing to a membership, they receive the right to use the co-working space and access shared facilities. Also, co-working operators have increased allocations for customised space exclusive to corporate members, whose subscription could be hundreds of seats in Asia-Pacific.

In Hong Kong, the flexible space sector witnessed high levels of growth between 2016 and 2018, which has now decreased due to the pandemic and other sociopolitical factors in the past 24 months, which led to a 20 per cent reduction of flex space in Hong Kong in 2020. A fall in flex sector operations such as events, conferences and meeting room subscriptions have put great pressure on co-working operators’ income across the region.

Membership subscriptions in multiple flex sites and full directory boards in Hong Kong are still active despite the reduction in office occupancy due to work from home measures. While small and medium enterprises (SMEs) and multinational corporations (MNCs) favour flexible workspaces, many occupiers have deferred any long-term decisions in the last twelve months to understand more about the pandemic. In 2020, there was activity geared towards short-term solutions, in line with previous years.

In future, we anticipate strong demand for flex space, particularly from large MNC occupiers, who view it as an attractive option for entering new markets, reducing capital expenditure and testing out alternative occupancy models.

What is the future for flex operators?

All flex operators were under pressure during the Covid-19 pandemic, which resulted in closures, consolidation and lease restructurings. To mitigate their risks, landlords will look at the covenant strength of each operator before entering into any agreement, and may opt to partner with operators that have corporate real estate expertise.

Established operators are set to continue to grow their market share, while newer and smaller players will take a wait-and-watch approach due to the high availability of traditional spaces for leasing. However, their business models will need to be re-evaluated. To achieve growth, operators will look to improve their facilities, upgrade building quality and improve presence in other market segments.

Generally speaking, Hong Kong is lagging behind other Asia-Pacific locations, such as mainland China and Singapore, and there are limited landlord-owned operators in place at the moment. In cities such as Hong Kong and Beijing, both SMEs and MNCs historically favour grade A buildings. However, grade A offices with flex space fall way below the average in both markets, with grade A flex and all grade offices’ use rate standing at 1.6 per cent and 3.5 per cent, respectively, versus 5.3 per cent for grade A flex space in Singapore. This represents an opportunity for growth for operators in Hong Kong over the medium to long term.

Is flex space for me?

For companies that are considering flexible workspaces, there are several key factors to keep in mind:

1. The key objective of the change, whether it is cost or employee benefits: Generally speaking, tenants may be able to reduce fixed costs for office space and pass the savings to their employees. Companies could potentially better engage with their employees by offering them the work flexibility they need. Staff will be able to access local hubs to avoid working from home and to enjoy the benefits of socialising and collaborating with colleagues in a flex working space.

2. The effectiveness of working from home: Companies need to have a better understanding of the effectiveness and impact of working from home for their employees to execute a seamless transformation to a hybrid workplace.

3. Ratio between traditional and flex space: According to CBRE’s internal data, 20 per cent of flex space proves to be optimal in a real estate portfolio.

4. Technology: Are existing office facilities able to meet the new normal? Flex spaces will be a good option for those who look to have a significant improvement of technology, such as video conferencing and meeting, and to have advanced technologies support their digital transformation, for example, going paperless.

All in all, there are opportunities for both operators and tenants to take advantage of the current business environment. Established operators are expected to continue to grow their market share while occupiers should capitalise on the market downcycle to negotiate good memberships for a sustainable and agile real estate strategy.

Dane Moodie is senior director of advisory and transaction services, office at CBRE Hong Kong

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