The naysayers of coworking companies have said that an economic crisis will bring about a reduction in its member base. There is no doubt that many coworking firms are facing them already, along with a push for waivers, deferral, and discounts to existing prices. As members face uncertainty in their underlying business, the impact on coworking spaces is imminent.
Operators will need to tackle quickly, even if it means offering discounts, as other challenges will test their ability to transform and operate their coworking business. We investigate the impact due to the COVID-19 on the coworking operations in greater detail.
The challenges will arise from the following Changes
1. Infrastructural Issues
- Reconfiguring the workspace seating
- Rethinking common spaces
- Health concerns & safety stations
- Innovative designs for future coworking spaces
2. Users behavioral changes
- Work from home goes mainstream
- Virtual Meetings, Events & conferences
3. Business Model
- User Pricing changes
- Return of flexible usage terms
- Preference for private offices
Consider an analogy. When the oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure. [i]
Infrastructural Changes
Coworking spaces have relied heavily on the efficient use of space to drive profitability. They broadly revolve around creating great private working spaces from which members work and an array of shared facilities.
A common pantry on each floor, communal cafeteria, centralized printing, and other amenities help individual users get rid of these costs. A large member base at the coworking space ensures that the expenses are evenly spread.
Likewise, shared meeting and conference rooms provide that users pay for it only when they use it.
In a post COVID19 scenario, these common facilities and concise seating arrangements pose significant challenges to both the operators and the members. These challenges will manifest themselves in the following manner:
1. Reconfiguring the workspace seating:
If there is one drawback of coworking spaces, it is that the seats are tightly packed. Unlike traditional offices, coworking spaces, especially the ones in the mid and lower price segments, fill in more seats. The reason is apparent – members pay per seat and not the area occupied by these work desks. With the increase in the number of seats, the cost per seat decreases, and pricing becomes competitive.
As social distancing becomes the norm, members will have to choose between renting out additional space or require some of their employees to work from home. Members will insist on fewer employees using the facility and pay only for the seats occupied. Lower billable seats will directly impact the revenues and profitability of the operators.
The second option available to operators is to reconfigure the workspace to ensure greater distancing between seats and retain the members.
At coworking spaces designed as per the user requirements, changing the layout within the allocated workspace can be challenging. Typically, members sign up for a designated area. The layout, design, and fit-outs confirm to the member’s requirements. Any changes will result in additional workspace requirements.
At coworking spaces with fixed layouts, reconfiguring will require additional investments in civil work and networking. These changes may also result in lesser billable seats, and revenue and pose financial challenges. Non-adherence to these norms may result in members having valid terms to terminate agreements ahead of time.
Coworking spaces may, therefore, have to discuss with individual members and find suitable solutions, giving paramount importance to the health and safety of its members.
2. Rethinking common spaces:
A prominent feature of coworking spaces is its common spaces – cafeteria, breakout zones, meeting rooms, et al. Typically, all members have access to these facilities with certain usage limits set as per the member subscription. The sharing of infrastructure ensures lower cost allocation to all its members and thus makes it affordable.
Work timings will be staggered, and the use of shared facilities like Gym will need greater care.
Will members agree to use these facilities as freely as before? How will these shared utility spaces be segregated? Without the shared facilities will coworking spaces remain as efficient as now. These and some more issues will need to be tackled by the operators.
Limiting the use and sanitizing the spaces frequently will probably be the go-to solution, but some may need more long term and sustainable solutions too.
3. Health & safety stations:
In the days leading to the lockdown, one would find hand sanitizers at every entry point. For the foreseeable future, this will remain the pattern. Major terror attacks across the world led to changes in the security processes at airports, hotels, and public areas.
Metal detectors, CCTVs, and even facial recognition software to monitor movements no longer baffle us. A similar change may now be occurring with the monitoring of members and visitors at all offices.
Currently, the Government mandate is to establish screening systems at a workplace that can restrict the entry of people with fever. Add to that provision of sanitizers and frequent clean-up of work desks and common areas would mean we have to be extra vigilant about the way we behave and operate in the office.
Additional screening and segregation protocols will follow in due course of time.
How will offices in general and coworking spaces face up to these challenges? What type of investments will be needed to upgrade the infrastructure to meet these requirements? Can smaller coworking spaces afford them and retrofit them?
4. Innovative Designs for future coworking spaces:
All these challenges throw up the question- will coworking space rethink the designs and layout of new spaces. What role will social distancing and greater need for segregated spaces play in designing the new centers? How will it impact the cost-benefit that members have thus far been enjoying, and will it continue?
Many of these are unknown at present, and the impact will be assessed shortly. It is certain is that coworking spaces and members will no longer benefit from efficiencies of shared infrastructure as now.
Health and safety concerns will result in demand for private offices with liberal seating arrangements, at much the same price as now.
Behavioral Changes
In the post covid19 era, shared infrastructure as a theme may not find the same levels of acceptance as in the previous decade. From cab sharing to co-living to holiday homes, the sharing-economy brands have had a great run. Technology helped people discover and book these facilities from their mobile phones, while a conventional, stringent onboarding system ensured reliability and standardization of user experience.
Health and safety concerns will drive user preference resulting in choosing risk-free options. It will, in turn, impact the use of shared economy products, including working from coworking spaces.
Large and lavish offices, once the sign of the company’s strength, are seen as potential contamination zones. Even after the removal of all restrictions, the latest circular issued by the Ministry of Home Affairs will set the benchmark in which workplaces will operate.
The lockdown period has facilitated the use of remote working technologies and processes. Perhaps, for the first time, we have a live scenario in which millions have worked from home and kept businesses running.
All these will not only change the way we work in the short run but will result in long term changes in both staffing norms as well as work culture.
1. Work from Home:
It was a concept that everyone loved to talk about, but never gave serious thought. There were two extremes – one who said their business was different and it couldn’t be implemented and the other which advocated it as the solution to all problems. Both have been proven wrong.
The lockdown has ensured that business processes are changed to suit this new style of working. At the same time, continuous working from home has dampened the spirits of those who used it intermittently.
The result is that working from home is here to stay. Every enterprise will develop a protocol to ensure that employees are just as efficient. They will monitor work and measure outcomes in a phased manner. Employees shall continue to stay home in these challenging times even as the number of confirmed cases reach their peak.
As office spaces get squeezed due to social distancing requirements, it will force many to work from home, at least for a part of the time, or on a rotational basis.
Enterprises are more likely to invest in technology that will enable workers to work efficiently from home, over investing in additional office spaces. While this will result in lesser dependency on office spaces and thereby the demand for coworking spaces, it also opens an opportunity for them to promote as hubs for satellite offices.
2. Virtual Meetings, Events & conferences:
When coworking space became popular with startups, a common theme at these venues was free access to events and conferences. These gave members access to mentors and investors and help connect with other professionals.
Post the current crisis, we will find an increase in the number of such events hosted online. Virtual conferences will also allow larger and broader audience participation. Coworking spaces that attracted members through constant engagement will lose out.
Coworking spaces are also likely to lose out on meeting rooms and event spaces that are booked by non-members for daily and hourly use. While these account for a small portion of the revenues, they contribute very high margins.
Also, users are likely to repeat their booking multiple times, providing a steady stream of income with the potential that some will sign up as members for larger workspaces.
Business Model Challenges
One of the biggest challenges faced by coworking spaces right now is the cancellation of membership by many of its users. The shutdown period has been used by many members to issue termination notices to operators. As a result, many coworking spaces are likely to see vacant seats when the lockdown ends.
In many other cases, members have sought a waiver of service charges for the period of the lockdown or discounts and deferral of payments. Correspondingly, coworking spaces have also sought similar waivers and discounts from their lessors.
Coworking spaces add value to existing commercial spaces through innovative layouts and designs, investment in fixtures, and office equipment. Rent is the single most significant cost of coworking spaces. While many innovative methods have evolved to de-risk this fixed cost (cost-plus model, variable rent), a complete waiver of service charge to existing members seems unlikely unless they get similar waivers from their lessors.
As a result of the current COVID-19 pandemic, workspaces and its members will relook at the way the deals are structured and are likely to see the following changes:
1. Split pricing structures:
Everyone loves a good bargain. At one end, members and users will expect to pay only for services that they avail and will want to avoid paying for any future lockdowns; coworking spaces are likely to change their pricing structures.
Many operators provide an overall cost per desk that includes the rent and cost of other utilities. Currently, members are challenging these charges due to the shutdown. Members suggest that the savings on account lower utility costs during the lockdown should be passed on.
Even as operators work to resolve these matters, they should consider splitting the costs between rent and utilities.
While an all-inclusive cost per desk is easier to understand and account, splitting it up between rent and additional cost for utilities will help resolve such differences in the future.
The lockdown has also highlighted the need for having exhaustive service agreements that spell out the terms of engagement, especially on pricing, usage, and disruptions, including discounts and waivers.
2. Return of flexible exit terms:
In the early days of coworking, most membership deals were flexible – with short lock-in period and deposits. As the member turnover rates increased and created an imbalance in occupancy levels, coworking spaces have been insisting on longer lock-in terms, even extending into multiple years.
Over time, coworking spaces have allowed customization of workspaces and have used this as a strategy to insist on long term agreements. Some coworking spaces also work on a sub-let model and have mitigated any risk of early termination of deals by the tenants.
The ability to exit with short notice periods is hugely beneficial to smaller enterprises, especially during economic downturns.
Members are now likely to insist on extending back such beneficial terms as before. At a time when the business moods are conservative, we are more likely to see shorter-term signup and with much smaller deposits.
It may eventually lead to coworking spaces offering two types of deals for the same workspace – a flexible and more expensive option that allows members to terminate on less onerous terms, and longer more rigid deals that allow for members to optimize their cost.
3. Move towards private offices:
Coworking spaces have long been celebrated as collaborative spaces and have kept openness at the heart of their design strategy. With a higher focus on safety health concerns, members are likely to opt for closed private offices instead of open desks.
As demand shifts, coworking spaces will also concentrate on building only private offices with their own set of amenities like meeting rooms, break out zones, and cafeteria.
Such a change is not just about redesigning the workspace but also a shift from focusing on individual users, who are the primary users of general open seats.
At the same time, the demand for managed and serviced offices is likely to grow. Members may no longer be willing to work out of shared spaces and instead opt for standalone offices built to their specifications.
New Business Opportunities
The world post the lockdown also provides many business opportunities for coworking spaces. However, beyond the apparent need for someplace to work from, change in strategy will drive coworking spaces to deliver new solutions:
1. BCP & Decentralized Offices:
Most large enterprises have a well-defined Disaster Recovery Plan (DRP) and Business Continuity Plan (BCP) that has been effectively implemented during the current crisis.
Smaller and mid-size organizations mostly work from single offices. It exposes them to huge risks, especially during such pandemic. A single instance can result in the entire team being put under quarantine. Business continuity of such enterprises will face serious threats.
To mitigate such risks, companies may have to operate key teams from multiple offices. Coworking spaces are best suited to fill in this additional workspace requirement.
Also, social distancing norms will mean that most businesses will have to operate with limited staff in their corporate offices. The remaining employees will have to either work from home or will have to set up satellite offices throughout the city. Reduction in travel times to these satellite offices is an added advantage.
Such remote working solutions can work not just in the short run, but also in the longer term as an option for work from home employees.
Remote working solutions through satellite offices can be challenging to implement. Primarily, this will include identifying compliant offices in multiple locations and then managing multiple stakeholders. It is both time-consuming and complicated.
RemoteX is a remote workspace management solution by Sneed. It provides a comprehensive solution that includes assessing requirements, identifying workspaces, vendor management, and billing.
2. Coworking spaces as Corporate Offices:
Most businesses are currently looking at conserving cash. It will result in them not deploying capital in non-strategic investments. Companies are likely to move away from making significant Capex investments, especially outside their core areas of business. Scaling back investments in office spaces will seem obvious.
As these enterprises look at expanding their office spaces or look at options at the end of each lease term, coworking spaces will now become a desirable option. The ability to operate out of world-class offices without having to invest in it is a compelling idea for any CFO.
Every economic crisis has made companies look inward and channelize energies into building compelling products and services. Spending will likely increase in strengthening the market presence and developing new solutions and not on discretionary projects.
Companies have always done a buy versus lease comparison to arrive at decisions. The cost of capital is no longer an issue, but the capital itself. Coworking spaces solve the problem of capital deployment. Innovative financial models will help both sides to appreciate the value it generates.
Office spaces will increasingly be looked at as an important, yet not a strategic investment. An enterprise is a cultural amalgamation of ideas and people. Coworking spaces will provide the necessary infrastructure that enterprises need to keep innovating.
3. Add on Services:
Access to high-speed internet and subscription model has ensured that communication tools are available to everyone. A few years back, video conferencing involved expensive equipment and exclusive setup. Today, simple apps on the mobile phone and computers have ensured that it is accessible anywhere, anytime.
Coworking spaces can look at partnerships with many such solution providers so that its members can have access to them without separate sign up. It will provide additional value to the members and, at the same time, provide new streams of revenues to them.
Conclusion
The coworking industry has evolved from being a business that was focused only on startups and young enterprises. As corporates have increasingly become members of coworking spaces, the offerings have also changed. It is no longer a business of real estate arbitrage and shared offices. Quality of services rendered and the ability to engage the users continuously have emerged as crucial differentiators.
In a short time, the industry has faced many challenges – rise and fall of funding and valuation, scrutiny of its business models, the ability to retain members, and more. The Covid19 pandemic is the latest of them.
Membership cancellations and the prospect of dwindling revenues, cashflows and, vacant inventory loom large and immediate solutions. In the short term, people working from these shared office spaces will experience a drop. Beyond this, challenges emanate from infrastructure design, member behavioral changes, and from its business model.
Operators will have to formulate strategies that can overcome these new challenges quickly.
As businesses recover from the coronavirus, it also provides new opportunities for the coworking spaces – as players providing business continuity solutions, decentralized offices, and many more. Coworking spaces will also become the preferred choice for many corporates that opt to conserve cash. Such business opportunities may not be on the horizon immediately, but tackling the current challenges will undoubtedly place them well to take advantage of it in due course.