Co-working spaces: Space jam

The merger of co-working space providers UrWork and New Space in April was billed as a meeting of minds. The former was an industry leader in China, with over 80 centers across 22 cities. The latter was a fraction of this size, but had a successful incubator program. “We have our respective niches and we thought it was time for us to merge and provide young entrepreneurs with more services, and maximize our value,” Josh Zhang, chief strategy officer at UrWork, told AVCJ at the time.

Zhang also spoke of the combined UrWork-New Space entity making its mark on an industry entering a new phase. If the idea was to create a template that strikes a balance between real estate might and start-up alchemy, it doesn’t appear to have lasted long. UrWork recently raised $178 million from a collection of domestic conglomerates that share a passion for property development. Make no mistake, this is the co-working space version of an arms race: prevail through scale.

UrWork’s principal antagonist is WeWork, which has over 155 locations in 50 cities across 15 countries. The company has taken a different approach to capital-raising in recent weeks, but with the same end-goal of maximizing scale. WeWork has siloed its China, Japan and Southeast Asia operations into individual units, with a separate pool of capital for each one. Should they get large enough, it isn’t hard to envisage one or more listing in the style of a real estate investment trust (REIT).

This approach to co-working spaces is fine provided people are prepared to untangle the hype from the reality and recognize the industry for what it is – and factor that into sensible valuations for these companies.

Finding and furnishing a location is the easy part for a co-working space operator; they must then attract members and keep attracting them, because co-working tends to generate very fluid revenue streams as people sign up for a few months and then move on; on top of that, they must replicate the model in each new location. At the heart of these retention efforts is creating and sustaining a community to which the target users want to belong.

The likes of WeWork and UrWork could invest heavily in their locations and provide facilities unmatched in quality, thereby creating a standardized user experience that becomes synonymous with their brands. But at what point does the sense of community become subsumed by a corporate identity, and would this be a turn-off for members? Furthermore, does standardization fit with cross-border expansion, given the nuances of different countries’ workplace cultures?

The answers to these questions will vary by user type, and it’s misguided to suggest that WeWork is or ever can be a haven for the entrepreneurs with whom it is so readily associated. A scale operator typically requires large anchor tenants such as multinationals that want to provide flexible workspace solutions for staff and simultaneously expose them to innovative environments. Small but established companies that value the convenience of co-working spaces represent another stable source of clients.

However, as soon as these facilities become populated by groups that want private office space, the community dynamic changes. Networking events can make a difference, but only if they are carefully curated, identifying the right themes, settings and speakers for the target group. Once again, the magic might be hard to replicate across multiple locations.

The WeWork model, now copied by so many others, has successfully tapped into trends around urbanization, sharing of space and services, and the rise of entrepreneurial millennials. Savvy marketing – much of it based on technology-enabled mobility – has also contributed, but at the same time subsidies are dangled in front of clients considering a new approach to office space.

Given how co-working spaces are proliferating in Asia, many of them provided by opportunistic players with a rent-seeking mindset and not a thought for value-add, an industry shakeout is widely expected. Even then, large-scale brand name operators would likely have the heft to withstand the initial shockwaves, but the extent of the impact would go some way to establishing whether what is essentially a property play has really become a technology play.

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• Topics
• Greater China
• Support services
• Technology
• Asia
• Real estate