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Co-working - The office of the future?

Co-working - The office of the future?

Changing perception of the workplace

Coworking, Top coworking companies, Coworking trends

The office space format has come a long way since it was regarded solely as a place of work, comprising plain desks, chairs and cabins. Over the past few decades, the workplace has evolved significantly in terms of space utilisation, equipment placement and automation. Over the past decade alone, the role of the work environment in enhancing employee productivity has been acknowledged as office design, amenities and even colour have been observed to significantly impact operational efficiency of employees.

Recent research has also shown that the introduction of natural elements such as fresh air, sunlight, greenery and even natural smells and sounds in a workplace play an important role in reducing work stress and enhancing creativity. With newer business avenues opening up, office space design continues to evolve at an incessant pace, covering not only its structural facet but also involving aspects such as amenities and the digitalisation of the office.

It comes as no surprise that with improvements in office space design and development and the varied priorities of the new age employer, a workplace today has ceased to be a single, fixed address in a commercial district. Like most commodities in present times, workplaces, too, have come to be redefined as spaces that can be accessed anytime and from anywhere, providing Just-In-Time services enabled by technology.

While this forms one aspect of coworking, the concept of coworking spaces essentially involves groups of individual professionals and small and increasingly large-scale businesses, who share workspaces and breakthrough ideas, enhance their business horizons and gain a fresh standpoint on their own businesses by the virtue of sharing workspaces. In an age when business cycles have dramatically reduced and companies need to constantly innovate to survive and remain competitive over the long term, a coworking workplace may provide the environment that fosters fresh thinking and innovation.

Co-working in India
India, today, is witnessing a proliferation of startups and SMEs, buoyed by the government’s concerted efforts to create a sustainable ecosystem for entrepreneurs in the country. On their part, entrepreneurs believe in harbouring global aspirations with a staggeringly ambitious mindset that was not evident a few years ago. This provides a perfect platform for dynamic coworking business centres to cater to the office needs of these aggressive growth-seeking startups. Besides companies, people such as business nomads, expats or those travelling for a limited period are amongst those preferring to work out of plug-and-play coworking spaces. Another constituent is the growing volume of freelance workers (gig economy) who support corporate entities with specialised outsourced services in the advisory, consulting and designing domain such as recruiting and advertising. It is apparent that corporate supply chains are broadening and lengthening in India today. Until a few years ago, these businesses would have opted to work from coffee shops or so called third spaces. Thus, with the increasing number of new and growing businesses, there is a palpable demand for coworking spaces in metros that had been lying untapped.

There are several benefits of working from a coworking environment. Startups are characteristically capital poor and need to keep cost structure at the bare minimum. Real estate expenses make up approximately 9-12% of overall operating costs. (can differ from market to market) for an established corporate and could account for more in a startup. Coworking spaces also enable the typical startup to bypass fixed rental cost with additional capex requirements of fitouts and operational hassles of a traditional office space and opt for the flexibility of a coworking office. This not only allows the new business to occupy a contemporary workplace on a per seat basis but also the flexibility to increase, reduce or to exit the workplace. This is a critical feature in early stage businesses particularly. More importantly, it allows them to focus on their core business rather than non-core operational areas such as real estate. This is also why additional services such as print-room and repo offered within coworking facilities are an attractive proposition.

The co-working phenomenon is just taking root in India as operators endeavour to wean large-scale occupiers from conventional office spaces and give them a taste of modern flexible office space, more in keeping with a more disruptive, uncertain, collaborative and innovation heavy operating environment. To this end, coworking players are adopting aggressive pricing strategies in order to poach the large occupier and showcase their service focused real estate offering as a turnkey business solution for all their real estate requirements. As evidenced by the rates for dedicated desks offered by a prominent coworking operator in BKC and Andheri in Mumbai, the occupier actually gets a deal that is 5-15% lower in the serviced workspace than if he leased in a similar property in the vicinity. Thus, the coworking option is viable for the small startup and corporate occupier alike because it comes bundled with the promise of a plug and play facility. Single occupancy cost (No CAM, OPEX, etc) and the benefits of adding further capacity as required and perks such as being able to access other office spaces of the operator across different locations, only sweeten the deal further. Thus, ease of working in such pocket-friendly and hassle-free setups is quickly increasing the popularity of coworking space across occupier groups.

Corporates have increasingly been taking up coworking space and currently account for approximately half of the occupier base of this operator. We believe that the operator is currently investing heavily to acquire and retain customers and hence pricing his bouquet of coworking services extremely competitively. The market also seems to have responded well with the operator maintaining 80-85% occupancy consistently, while more established players in the vicinity have not fared as well. This depicts the strong underlying demand that this flexible office workplace format commands. Due to the changing perceptions of the office, the workplace is now being looked at as an environment that needs to be managed and optimised. It is being viewed as an instrument that could drive a dynamic and vibrant culture of corporate productivity impacting the financial, cultural and environmental ethos of the organisation. This far reaching agenda warrants an element of specialisation. The coworking operator is filling this niche and is fast being regarded as a specialist in workplace design and management who can cultivate an environment of collaborative enterprise that yields tangible benefits to the occupier. People costs make up a much more significant 50-60% of operating expenses of a company and real estate can have a key role in retaining staff within a business. Good working environments can support worker contentment and this is a great cost mitigation as it is much more expensive for a business to lose an employee than it is to accommodate them. Thus, while the Occupancy cost of a coworking space in today’s competitive context works out cheaper than a similar conventional office. the enormous value that a coworking space generates for the occupier can, in fact, warrant a premium over its conventional counterpart. An increase in real estate occupancy cost can be easily absorbed if it results in a corresponding increase in employee productivity.

Coworking spaces are geared to offer an organised and synergised working environment along with business networking opportunities with the other members. Moreover, the coworking business model also provides access to a number of shared amenities and services such as conference rooms, Wi-Fi connection, refreshments and recreational space, as well as the flexibility to scale up or decrease the number of seats, based on business needs. Companies can also base their key project teams out of coworking places in order to let them be located close to their clients. While these centres provide a viable model for corporates looking for flexibility in work locations, companies are slowly realising the fact that a collaborative work environment is in stark contrast to the standard corporate workplace and at one with the needs of the employee that corporate employers need and must retain. They are also becoming aware of the wider corporate benefits of fostering a corporate environment of creativity and innovation that directly impacts employee productivity. As coworking spaces have a wide range of occupiers, they are spaces that expose corporates to external ideas and inputs that are critical to being truly innovative and which are totally necessary in the context of a collaborative economy.

Much like Uber, new-age coworking operators are using big-data generated from their existing facilities to better understand how to optimise their services, maximise utilisation of facilities and establish what is working and what is not. The result is a virtuous feedback loop which ensures that service is maintained at levels relevant to the occupier and also that future investment decisions are smart and based on hard evidence. Data is thus being efficiently used to optimise occupancy and investment decisions.

Indian co-working market players
While coworking as a concept is a fledgling phenomenon in India, it is part of mainstream office parlance in the much more evolved markets of the West such as New York and London. The global acceptance of this category is no mean feat considering that the concept that was conceived as a grassroots movement of freelancers, startups and solo entrepreneurs seeking to establish collaborative coworking communities, opened its first modern day coworking space in 2005. The number of coworking spaces across the globe has grown by 3,050% since 2010 while the number of people working in these facilities has exploded by close to 8,000% in the same period by growing from 21,000 seats to 1.7 million seats, according to Statista Dossier.


Coworking companies such as WeWork who occupy 2.6 million square feet in Central London and has recently become the largest single occupier in that market, feature prominently on the tenant roster of prestigious office markets globally. Coworking is thus creating a structural change in commercial office markets with a growing need for the supply side to provide flexibility, services, turnkey solutions, scalability and well-designed, optimal space. While Regus is arguably the most established shared workspace operator in the country today with approximately two million square feet and 20,000 seats under operation, WeWork and CoWrks are among the newest and most aggressive players in the space. These companies started their India operations in 2016 and already operate approximately 1.5 million square feet and one million square feet respectively, with plans to more than double their footprint by the end of 2019. Both companies have acquired 0.7 million square feet each of coworking space in Mumbai, Bengaluru and Delhi-NCR since October 2017. While both, WeWork and CoWrks, are expanding aggressively, there is a stark difference in their market entry strategy. The US-based WeWork adopted a franchising model and partnered with the Embassy Group in 2016 to operate a facility in Bengaluru at an estimated investment of $100 million. The Embassy Group will provide the capital and handle the real estate and construction aspects while operations will be handled by the American company. CoWrks on the other hand is an Indian startup promoted by RMZ Group.
Private equity players have also been looking to invest in coworking startups. An example is Sequoia Capital that invested $20 million in mid-2017 in coworking startup Awfis. It is the first of many companies to have introduced a mobile app that enables users to find and book office and meeting spaces on a real time basis in its centres across the country. Besides its own managed spaces, Awfis also offers a large repository of listed third-party meeting rooms in hotels in various cities.

Despite the demand for such spaces, there are several challenges that have to be tackled. For instance — changing the conventional mindset of a client who would want to book a meeting room based on the touch and feel factor rather than an app. Data security and privacy are also impediments in the way a corporate occupies coworking space, especially as the value of data becomes an ever greater source of competitive advantage. Corporate occupiers thus tend to lean toward coworking space with contained floors or spaces within the facility to overcome this risk and will move to managed solutions for significant scale operations.

The coworking model is based on the operator’s ability to buy space long and selling it short. It enables the flexibility of tenure and scale. However, this is also a double edged sword that makes it difficult to predict cash flows of such an enterprise. The average tenure of coworking space occupiers can vary from under six months to close to two years depending on the operator and the occupier profile. This makes maintaining a deal pipeline one of the most important parts of this business.

Owing to the inherent risks involved in the sector, a few coworking operators strive to mitigate these by preferring to let out the major part of their area to companies that can act somewhat as ‘anchor tenants’., thereby helping them get a fixed income stream. This tendency could compromise the collaborative environment essential to the coworking experience if one corporate entity dominates the occupier pool of the coworking space.

Co-working going mainstream?
Coworking spaces used to be the domain of the quintessential startup that required the flexibility of tenure as well as cost that a standard leased office space cannot offer. This office format naturally evolved as a collaborative community space that allowed and encouraged the dynamic and creative startup community to interact and thrive. This shared workspace format also adopted the dynamism of its occupiers and was always the first to adapt, evolve and often pioneer changes in the workplace. The revenue model of such operators also demands that it earns more on a per square feet basis for its property than what it was leased for. This constant strife to outperform market rents and stay on the cutting edge of workplace design to attract and retain the demanding occupier also brought it to the attention of the more established and mainstream occupier.

The general flexibility around work, and the ability to reduce or increase real estate costs and capacity as the business requires have been persuasive factors for corporates to consider the coworking model. However, a coworking environment being seen as a major factor in improving work-life balance, employee productivity and talent retention that are critical and tangible business benefits, are major motivators for corporates to increase their coworking footprint. The growth of specialist project teams, often multidisciplined, sensitive and short lived, are intended as game changers for the organisation, often with the mandate to initiate change. The coworking environment is a natural foil for these teams as it fosters a creative and dynamic environment ideal for their purpose. Approximately 50% of the client roster of an Indian coworking operator is made up of big corporates. This can go as high as 80% in the more premium priced offerings. WeWork which is arguably the largest coworking company globally is valued at approximately $20 billion and has grown from 1,000 members in two locations in New York in 2010 to over 1,30,000 members across 163 locations today. This, along with the fact that its current client roster includes names such as Microsoft, GE, Dell, Sales Force, Deutsche Bank and HSBC is a testament to the fact that mainstream occupiers are definitely looking at coworking spaces as a longer-term option.

The changing appetites of mainstream occupiers have not escaped the attention of landlords as coworking players increasingly poach those occupiers that have been the exclusive domain of the quintessential Grade A office space. The fact that, a coworking operators’ need to outperform market rents tends to improve the prospects of the entire property they occupy, has also led the landlord to consider the operator as collaborator rather than a competitor. Parallels can be drawn with e-tailers who were seen first as disruptors by established retailers but now coexist as both online and offline retail formats are essential for the omnichannel experience that the modern retail customer has come to expect.

A recent Request For Proposal floated by Equity Office, owned by the Blackstone Group and Hines, seeking partners in the coworking space to provide the best possible working environment for the Howard Hughes office complex in Los Angeles, underscores the undeniable leadership status accorded to the coworking operator as a doyen of the modern workplace. Though the Indian coworking environment is a long distance away from its western counterparts, aggressive expansion underway by the likes of CoWrks, WeWork and Smartworks suggests that we might not be so far behind after all.

As the shared workspace format gradually gains acceptance with the mainstream occupier, it is being regarded as positive workplace experience and slowly acquiring an aspirational quotient with the occupier and the employee. With industry leading paymasters such as Google, Microsoft, Oracle and Twitter engaging their top talent in large coworking spaces successfully, coworking spaces are well positioned as a “cool” place to work and is a significant attraction for prospective employees.

Some coworking operators are going above and beyond the conventional amenities offered in the industry by providing free beer, health club facilities and even a Jacuzzi to acquire the coveted “cool” tag. Recent entrants such as WeWork, CoWrks and Smartworks have been pushing the limits and merging the services offered by pure play coworking spaces, serviced offices and business centres, and these elements are fast coalescing into modern shared working environments that are collectively represented as the coworking phenomenon.

Going forward, with the advent of major coworking players in India and an increasing number of such facilities coming up across cities to cater to the demand of startups and SMEs, the sector is expected to thrive and could prove to be a significant disruptor on India’s commercial real estate market. While such operators accounted for just under two million square feet of the 3.8 million square feet annual commercial office space transactions volume, the expansion plans of major players and the increasing appetite for this format from occupiers, property owners and coworking operators should see annual transaction numbers triple from current levels over the next three years.

Currently Bengaluru, Mumbai and NCR house most of the coworking stock in India followed by Hyderabad and Pune. However, it is still early days for the segment and not all operators are likely to be able to hold their own in the long run, owing to their inability to mitigate risks in their business models or have enough stronghold in nonprime markets. Globally, maintaining occupancy levels is the most challenging task of an operator and the Indian market will be no exception. While aggressive pricing used currently will address this to an extent, the financial strain could lead to compromises on service delivery resulting in poor customer experience and could prove to be the biggest risk for the industry today. This would expectedly result in consolidation among coworking operators and the market would be divided amongst a handful of large players. The rapid growth of coworking facilities and more particularly providers, will inevitably lead to casualties and also drive consolidation in the sector as recently witnessed with the merger between Naked Hub and
WeWork.


KEY FINDINGS
Due to the changing perceptions of the office, the workplace is now being looked at as an environment that needs to be managed and optimised. It is being viewed as an instrument that could drive a dynamic and vibrant culture of corporate productivity impacting the financial, cultural and environmental ethos of the organisation. This far reaching agenda warrants an element of specialisation. The coworking operator is filling this niche and is fast being regarded as a specialist in workplace management as one that can cultivate an environment of collaborative enterprise that yields tangible benefits to the occupier.

• A coworking operators’ need to outperform market rents also tends to improve the prospects of the entire property they occupy. This has also led the landlord to consider the operator as collaborator rather than a competitor.
• The number of coworking spaces across the globe has grown by 3,050% since 2010 while the number of people working in these facilities has exploded by close to 8,000% in the same period by growing from 21,000 seats to 1.7 million seats, according to Statista Dossier.
• India is at the cusp of a coworking revolution with several large players. There are close to 200 coworking operators running an estimated 400 shared workspaces across the country today.
• While coworking companies took up a modest 1.8 million square feet in 2017, the first quarter of 2018 itself has exceeded the annual tally of 2017 at two million square feet.
• The coworking phenomenon is gaining wider acceptance with the mainstream Indian occupier as big corporates today constitute approximately 50% of the overall client roster. This share can go as high as 80% in the more premium priced offerings.
• The expansion plans of major players and the increasing appetite for this format from occupiers, property owners and coworking operators should see annual transaction numbers triple from current levels over the next three years.

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