The smaller co-working space operators are expected to find it very difficult to weather the COVID-19 storm and at least half of this stock amounting to 3.2 million quarter feet (msf) will be vacated by their operators within 2020 as these small operators fade away, according to a Knight Frank report.
Approximately 25 percent, that is 6.4 million square feet (msf) of the total 25.45 msf co-working stock in the top eight cities is operated by small players.
Low occupancy and increasing cost are expected to make co-working operations unviable for fringe players and would therefore, force smaller players to vacate their low performing offices, according to a report titled: ‘Co-working: Surviving COVID-19’ by Knight Frank India.
“The Indian co-working business, much like other sectors will feel the impact of the COVID-19 pandemic with the fringe players likely to make an exit. This will be a period of shake-out for this segment where we expect larger players with a greater weightage of enterprise tenants to endure,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
Knight Frank believes that while the industry is expected to see a significant exit of start-up tenants and smaller occupiers as they cut on costs in this crisis scenario, the demand from large enterprises is expected to grow over the medium to long-term.
Demand from MSMEs and start-up tenants to reduce to a great extent. On average, they make up approximately 25-40 percent of the tenant rosters of prominent co-working operators, but there are some players who have up to 60 percent of their portfolio constituted of these tenants, the report said.
Demand from large enterprises expected to sustain and grow over the medium to long term:
Most operators that have built large capacities of over 15,000 seats across Indian cities have a 60-75 percent weightage of large enterprise clients and demand from this segment is expected to sustain and grow over the medium to long term.
Co-working operators with a higher weightage of enterprise tenants will remain reasonably insulated from immediate tenant exits. However, it will still not protect them from having to re-negotiate per-seat costs and renewal terms.
Renegotiation with landlords to take place:
As in the case of malls and office space occupiers, co-working operators are also renegotiating rents downward or asking for a temporary moratorium in rents. Additionally, co-working players will increasingly look to acquire office space on revenue or profit-sharing terms to reduce their own fixed costs and improve their financial resilience in the event of a downturn.
The business focus may shift toward customised and managed co-working offices in the long term. Co-working industry will need to steer toward a customised Managed Office model that will allow occupiers to pick and choose the amenities they pay for and nothing more.
The uncertain economic environment will compel more companies to look for flexible options that can adapt to and fulfil their changing requirements, without capital expenses and shorter lease terms.
The increasing need for flexibility and the competitive advantage of being a workspace expert will sustain the industry over the long term.
While there are over 250 co-working players operational in India today, an estimated 75 – 80 percent of the market in the top eight cities is dominated by the top 10 players. The annual space taken up by co-working players has nearly quadrupled since 2017 to a little over 8 msf (0.75 mnsq m) in 2019.
Gross revenues of the co-working business in India have more than doubled since 2017 to an estimated Rs 34 bn in 2019. The top eight cities of India contained an estimated 25.45 msf (2.4 mnsq m) of co-working stock at the end of 2019, which is about 3.4 percent of the total office stock.
Bengaluru and NCR have been major markets for flexible office space due to the proliferation of start-ups and a greater acceptance of the flexible workspace format by resident companies in the technology sector.
The co-working engine was fuelled by private equity investors looking to cash in on a high growth opportunity. This growth capital spurred an expansion spree that saw co-working operators claiming nearly 13 percent of the total office space transacted during 2019. Close to $110 million of private equity investments were made in co-working businesses in 2019.