Globally, economies have started focussing on developing the next Apple, or Google or Facebook on their own soil. The allure of incubating the next unicorn company with the potential to turn into a world beating brand has in itself promoted the emergence of entrepreneurial ventures that have created industry verticals of their own. A classic case is Co-Working.
Initially conceived as an experiment in the provision of a cost-effective alternative to expensive commercial real estate, co-working has emerged as a major driver of the digital economy. Now they form an important part of the start-up eco-system by having become the germinating grounds for ideation and collaboration.
The co-working environment is designed to encourage enhanced interaction, socialising and learning from peers. From ?parent?s garage?, the incubation space has come a long way into a more organised set up, so much so that even established companies, in their continuous endeavour to find the next big idea, have started experimenting by seating their employees in co-working and accelerator spaces. Many, such as Google, as is widely known, have converted their own offices or parts of it in the layout of a co-working arena; spaces without boundaries and stuffy officialdom.
Other than the explicitly stated benefits of collaboration and interaction, one benefit that has emerged as a by- product of co-working is the ability of companies to attract and retain top talent. As the suits give way to hoodies and jeans and as the boardroom gives way to couches, young, tech savvy people have welcomed with open arms, wide uninterrupted spaces that are in tune with their sensibilities and allow them to think freely.
Any country that aspires to tap into the fertile combination of youth and digital energy and turn it into an engine of growth, simply cannot afford to ignore the irresistible force that co-working has turned into. A casual web search reveals that compared to 2016, in the current year, the number of co-working spaces across the major economies is expected to double to nearly 26,000. The number of members occupying these spaces is expected to touch almost 4 million by 2020.
Despite the multiple benefits of co-working, the operations side of it presents a plethora of challenges. The root of all complexity lies in the fact that this sector inherently seeks to serve a section of society that is grappling with limited financial resources and trying to compete with peers, all vying for eyeballs of the same financiers.
Some key challenges that have been observed in this sector are described in the following narrative, more as a point of thought and debate than as an authoritative judgement:
- Real Estate Planning and Costs:
- Fact is that building space is all about brick and mortar. Therefore, although start-ups are grappling with ideas that are supposed to make us break away from tradition or the conventional ways of doing business, they are part of a universal set that is still guided by the invisible hands of demand and supply. In order to grab attention, many co-working sites start by occupying buildings in prime locations that are costly. If they choose to occupy real estate in non-prime locations then either they run the risk of low occupier interest or, ironically, if they are successful, they attract other players that gradually leads to
price increase, thereby affecting their expansionary desires.
Resultingly, though co-working spaces by concept are supposed to be cost effective in order to support the working requirements of a large community of entrepreneurs, the dynamism in real estate pricing can play havoc with operating expenses. This constitutes a large percentage of their operating pie. Real estate prices across major centres also have a bearing on the decision of co-working operators to expand either by leasing spaces or load their balance sheets with outright acquisition.
Within the Indian context, most co-working operators, whether international or domestic, have chosen the leasing route. This has allowed them to follow the expansive strategy of low investment and rapid coverage across the country. However, as rents across major Indian metros rise, even in secondary and tertiary micro markets, profit margins have been under pressure. This has compelled them to change client strategy; instead of simply offering cookie cutter layouts to one and all, they have moved to providing plug and play solutions to occupiers both big and small, along with customised infrastructure to cater to specific needs.
- Building synergies and enhancing operational efficiency: Co-working operators have moved to a strategy of making their real estate ?sweat?. Before one conjures misleading images of odour inducing, slime covered buildings, let me explain the analogy. The ever-increasing foot print of the co-working brands, supported by cross geographical leasing teams and technological prowess, is likely to translate into uniform experiences across locations for occupiers, thereby enhancing the negotiating leverage for operators.
It is my opinion that like in retail, building a client base across locations and by offering flexible leasing solutions that allow clients to operate with low capex and quick exit options, co-working could maintain an edge over traditional leasing in the immediate future. However, this model is likely to be tested during economic slowdowns and can cut both ways: whilst the option of a quick exit will attract business in the immediate future, exits at the time of a challenging business environment are detrimental to operators.
- Technology and Disruption: Ironically, the very elements that make the foundation of this industry can emerge as a potential challenge. Whilst undoubtedly, technology is aiding in connecting the community, managing large spaces, reducing fitout costs et al., sooner than later such innovations will invariably be adopted by industry at large and profitability will diminish over time.
Further, with co-working presenting itself as a disruptor to the traditional office set up, valuation levels have been high. Therefore, in order to maintain the core quality of disruption, innovation is the name of the game for it to always be a step over other models. This again begets the question of funding and profitability.
- Government Support: Governments and private equity funds, especially, in the developed world have played a significant role in the development and growth of this sector.
France, a country that had insignificant presence on the co-working map till recently, has motored past to emerge as a vibrant co-working micro market in Europe. Besides holding the European Co-Working Conference and the Co-Working Weekend, the government has provided financial incentives for the development of co-working spaces. Far away in the southern hemisphere, the Australian Government too has acknowledged the importance of flexible work practises at low cost. Local government agencies in Sydney, for instance, have converted sixteen (16) unutilized government properties info affordable co-working spaces. A similar initiative had also been undertaken by the government in Queensland.
Such examples of putting non-productive and redundant assets to use would go a long way in promoting entrepreneurship and also act as a source of revenue in the long run. Conversion of abandoned buildings, warehouses and barren land into co-working sheds or spaces that are further rented out to operators at discounted rates (compared to prime locations) can help bring a spirit of entrepreneurship to neglected communities, lead to job creation and enhance the ambit of the digital revolution.
- Digital Infrastructure: As has been repeated all too often in this post, the digital economy is the bed rock of co-working. In many developing countries reliable internet connection at quick speeds is still a dream. Moreover, to keep costs low, many co-working operators choose to start operations in sub-urban locations which many a times is at the cost of poor digital infrastructure. Here the example of India is perhaps pertinent, which, inspite of being a developing economy, has managed to partner with private players to provide a robust digital infrastructure with cloud-based services. India has indeed taken an enviable leap in this sphere, compared to many of its peers.
Overall, though I am of the opinion that co-working is here to stay, there are certain checkpoints that the concept would need to cross before establishing itself as a permanent force. There is no doubt that it has disrupted the conventional leasing model by targeting a neglected yet growing community of occupiers. A cursory look at the top companies of the world suggests that entrepreneurial ventures will define our future and co-working aims at building a community of such entrepreneurs. As I like to say- ?it is in the business of building the business?. However, it has to yet to pass the litmus test of surviving an economic slowdown. The balancing act that operators have to manage between long term lease commitments with landlords versus flexible leases with occupiers, will define whether the industry consolidates in term of scale and model or withers away as an ?also ran?. Even among operators, the chaff from the grain will be separated by who can generate profitability, which as already mentioned, will be challenged by many factors. It is up to enablers such as funds, governments and the real estate community at large to find ways to support this sector and aid sustainability.
Thank Anurabha Bhattacharya for contributing to this blog!