Co-working in perspective
Article3 mins29 October 2019
The co-working sector has sparked a great deal of interest recently with its impact on office markets featuring in media reports around the world. It's certainly a sector that captures the imagination. With beer on tap, trendy offices and the escalating problems facing high profile co-working operator WeWork, it's more fascinating than the serviced offices model of the past.
Co-working is a driver of demand for office space
It's a sector that's definitely had a positive effect on office markets, meeting the demand from small business, global organisations seeking a landing pad in new regions and larger companies wanting flexible or short-term space. WeWork and a growing band of co-working operators have also drawn micro businesses and individual entrepreneurs who once worked from cafes or from home into key CBD locations.
Overall, this has prompted an increase in the demand for CBD and fringe-city office space. It's an attractive proposition for the customers of co-working space, with the promise of a collegiate working environment and the added benefit of new business opportunities while being close to the big end of town that may well buy their product, services or even their business.
"Companies large and small are prepared to pay a premium for this type of flexibility on offer."
Australia vs global markets
In Australia, flexible space providers account for only 2 to 3 per cent of CBD office space, and by all accounts, most operators are substantially full. But the Australian experience has not matched the growth in co-working overseas with the sector representing 6.3 per cent of London’s central office market, and circa 4 per cent in the Asia Pacific, excluding Australia. Our very tight CBDs where the low vacancy rates have hampered the growth of flexible space providers, particularly in Sydney where only 4.6% of CBD offices are empty and in Melbourne where the CBD vacancy rate stands at 3.7%.
It’s become clear that companies large and small are prepared to pay a premium for this type of flexibility on offer. And to offset the additional costs, their working environments will become denser with smaller workspace ratios but compensated by inviting break-out areas.
Given that the demand – major corporations and larger groups took up around 20 per cent of co-working space last year – the future is likely to see more landlords and managers create additional flexible spaces for their customers in each of their assets.
Who wears the risk?
Still, a question hangs over the sector: who carries the risk? Is it the landlord/manager, the tenant, or the co-working operator taking this on?
The challenge for co-working operators that effectively buy long and sell short, is managing their risk and cash flow in a downturn, with many of the new breed of operators never experiencing a fully-fledged economic slowdown. Some say that the demand for flexible space will rise as an economy falters. That may well happen, but previous cycles have exposed flexible space providers to be as vulnerable as landlords when tenant demand evaporates.
The co-working sector is still something of a microcosm featuring a band of what has been to date rapidly expanding players but representing a very small proportion of landlord/managers’ office portfolios. For example, WeWork only accounts for 0.6 per cent of Dexus’s portfolio income. And even if WeWork were to pull back, those users will need somewhere to work, and the tight leasing market would see that the space would not go unoccupied for long.
The office market cycle
The office cycle continues to enjoy demand momentum, albeit at a slower growth rate than the frenzied levels of 2017–2018, and a fresh range of factors have come into play to underpin demand for space.
The Banking Royal Commission and financial services inquiries have prompted the increased focus on risk and compliance functions and the expansion in the financial services sector, while the health and education sectors have been on a growth path globally as have the big technology companies like Amazon and Google. Meanwhile the next round of development will be relatively tame with office vacancies in the Sydney CBD forecast to reach circa 7 per cent, less than the long-term average of around 8 per cent – even as more supply comes into the market in 2023-24.I am a big believer in the growth of flexible workspace, but the issues and teething problems of rapidly growing co-working companies should not be viewed as a proxy for the overall health of what is a strong and stable Australian office market and the returns that it generates.