One of the hottest commodities in commercial office space is set to get even hotter. Coworking spaces have made a real impact in the market in 2018.
The latest reports from Cushman & Wakefield on US coworking spaces have shown that despite the economic downturn, occupancy rates have remained unaffected. In addition, it revealed that demand for flexible offices is expected to triple in the US.
The fact that the sector is becoming less dependent on the tech industry goes someway to explaining this. Chris Browne, Head of Global Occupier Services, Asia Pacific, Cushman & Wakefield noted, “There are signs that coworking is weaning off its dependence on tech and start-ups and positioning itself as a pillar in corporate real estate strategy. For most corporate occupiers, coworking has become a business solution, not just a real estate alternative. With rent growth in the region expected to accelerate in the next 2 years, cost containment strategies will necessitate incorporating flexible working arrangements to manage real estate footprint.”
Coworking operators have become a significant occupier of office space across the world. It can be seen from countries such as the US that landlords and coworking operators have entered into more strategic partnerships across portfolios.
Coworking in Vietnam has steadily becoming more dominant within the market. Between 2017 and 2018 the office area leased by coworking in Vietnam increased from 14,435m2 to 50,000m2 (233%). At the same time, there has been an increase of 54% in the number of operators, from 24 to 37 centres nationally despite three centres closing in the same period. This can be accounted for by the fact that multinational players are entering the market and taking over smaller operators.
Alex Crane, Managing Director, Cushman & Wakefield Vietnam reports: “Now in Vietnam we are about to witness a coworking/serviced office giant take 15,000m2 in downtown HCMC. (This would be in line with trends reported in the US, as that is almost exactly 30% of the building they are said to be moving into). With that one move, they will become the second largest operator present in Vietnam in terms of area leased. We are also witnessing the entry of WeWork, now valued at circa US$20bn after the last round of funding by Softbank. So it is evident that the game is heating up in Vietnam.”
Asked for his expectations on what was in store for the coworking sector, Crane replied: “We will see consolidation of the sector. On a multinational level, WeWork are swallowing other regional players and this will also happen at the local level. While we have seen investment into local groups, it will be interesting to see what happens when they want to exit the investment as the market becomes more competitive. For example, our report shows that a workstation in key US cities at coworking is maxing out at $1,000/month, we have just seen that price quoted in downtown HCMC. Personally, I do not think comparing our market to Manhattan for cost per desk is a smart bet to make. There will be realignment.”
Coworking is driven by independent small & medium enterprises (SME’s). To date in 2018, 49,000 new enterprises have been registered in Ho Chi Minh City and Hanoi, with 60% of those in the southern hub. This goes some way to possibly explaining why coworking space in Ho Chi Minh City is growing aggressively. Many of the large coworking operators also offer memberships to multinational companies, who generally establish their headquarters in Ho Chi Minh City, so the trend of more space being offered by coworking operators in the south is unsurprising.
A continued trend of consolidation in the number of operators will stabilise this area of the market to some extent. For the short term, operators will continue to fight for the already limited space in the market, resulting in decreased profits and a slowing of the “boom”. This will in turn open the door for smaller operators, however that door will shut firmly in 2020 when more office space comes to market in Ho Chi Minh City.
This being said there are drawbacks among the rewards, Alex Crane added: “Occupiers need to be mindful of privacy in coworking spaces. Large landlords and investors that plan to include coworking spaces within their buildings need to be mindful of a few factors; the first being the privacy of the spaces, particularly in relation to multinational companies’ intellectual property. The second being the casual attitude to attire, it’s comfortable of course, but not always the image multinational companies wish to reflect.”
In addition, there are the less obvious considerations: “Large coworking groups may also ask for capital contributions and often look for revenue share/management partnership agreements, these have never been well received in Vietnam and while the office market is favourable for landlords, I don’t think they will change and become more flexible making these contributions. If, say, the office market hit 15% vacancy instead of the 2% it stands at today, investors and landlords would need to invest more themselves if they want coworking operators in their buildings,” Crane warns.
Starting out in business isn’t easy or straightforward, any help is greatly appreciated and sought after, and many coworking operators have recognized this. Some operators that believe an enterprise using their space displays potential for viable business growth will help with ‘angel’ financing. Others provide direct business advice and/or a digital ‘community’ platform where members can access business advice, bounce ideas off one another, or simply book a meeting room.
In spaces across the world the true potential of working with innovative and product-ready start-ups in a shared working environment is evident. Nurturing new ideas and experimenting with multiple start-up communities and entrepreneurs has become critical for companies that are willing to break down silos and are ready to target innovation-led longevity and sustainability. Vietnam will have to adapt and take note if it is to compete.