WeWork’s mid-April acquisition of China’s Naked Hub for $400 million raised concern among media and investors that China’s coworking sector might be slowing down. In our opinion, however, the coworking sector is still on the rise in China. China’s key cities have strong pent-up demand for flexible office space (see “Coworking: Fad or fixture?”, 2016), and the central government’s strong support for new industries and innovative businesses will also fuel the future growth of coworking space.
The coworking sector has changed considerably over the past three years, emerging from near non-existence to becoming a booming industry. Three key trends having guided its evolution into a new phase.
Figure 1: The Two Phases of China’s Coworking Boom
Source: JLL
Geographic Reach is Expanding
In terms of location selection, while the main focus is still the four Tier 1 cities’ CBD areas, we have observed increasing interest from major operators in expanding into Tier 1 cities’ decentralized areas (see Figure 2) due to their lower costs and space availability. In addition, big name operators are also seriously exploring opportunities in some Tier 1.5 cities, including Chengdu, Hangzhou and Wuhan.
Figure 2: Heat map of major coworking operators’ presence in Shanghai (2015 vs 2018)
Note: Based on 13 major coworking operators
Source: JLL
Rising demand from large corporates
While startups and freelancers were the first movers in leasing coworking space, we are now witnessing a surge of large corporates seeking such space to set up satellite offices. These large firms want to utilize co working space to foster innovation, and more importantly, -to accommodate fluctuations in headcount. As one of our clients describes, “We like the hub-and-spoke model, taking traditional space and supporting it with flex satellite offices”.
More landlords/developers are entering the market
As more landlords and developers become aware of corporate tenants’ new preference for coworking spaces, they are increasingly interested in setting aside some flexible space in their upcoming vacant contiguous floors or new developments. It is likely that coworking space will become a standard “amenity” in new office buildings, similar to food and beverage offerings today. Some large domestic developers also are exploring opportunities to create their own coworking brands, such as China Overseas and Agile.
While the fundamentals for coworking space remain strong, China’s coworking industry is getting more crowded. We have observed operators starting bidding wars to secure good locations, a trend which will increase risks in their profit models. M&As among the industry’s key players are another indicator that China’s coworking sector is entering a new phase. M&A activity will be a positive trend in the long run as it weeds out weak players and puts stronger ones on a firmer footing to take advantage of new opportunities as demand continues to evolve.
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