Is Covid Really the End of Coworking? No.
Updated: May 11, 2020
(I hate clickbait titles too, as much as you do. So I decided to put the answer in the title itself. Sorry for the spoiler!) We've been hearing obituaries for the coworking industry left, right and center since the Covid-19 crisis began, and mostly in the context of WeWork. WeWork's in for some tough times, absolutely, but that slide began way before the pandemic did, and will probably result in a Netflix documentary or two. Of course the virus has made it much worse - but one thing we absolutely need to do is separate the coworking industry as a whole from WeWork alone. Coworking is a solid real-estate-meets-hospitality business with stable income and decent gross margins above the 70-75% occupancy mark. WeWork was a real estate company in a difficult-to-scale industry, gunning for SaaS valuations. That's unsustainable. Having said that, even for the industry as a whole, the very factors that made coworking cool and convenient - microkitchens, shared coffee machines, foosball tables - now seem like virus magnets. Also, those amazingly comfy sofas...you don't know who's been sitting on them last. So it does seem like the coworking industry is going to have a tough time convincing people that their spaces are safe. We should dig deeper, though. For very many companies, coworking just simply makes sense - and those companies are going to come back, sooner rather than later. To understand that, let's first discuss the case for coworking from the perspective of a client. The Case for Coworking, pre-Covid-19 Let's say we've been running a startup of ten people out of someone's house, and now we've gotten funded, and need to hire, and fast. So obviously we need to move out and find a bigger space, very quickly. To find our own office space, here's what we need to do: 1. Figure out how big a space we need. This is easier said than done. Firstly, how many people are we going to plan for? Let's say the plan that we'd presented to the VC said that we'll add ten people a month for six months, and then expand the tech team, ending the year with a total of 100 people. So...should we get a space for 100 people right now? But we're only ten right now! That's a lot of wasted space, and hence a lot of wasted money. Money, of course, is scarce right now and all the funding needs to go into hiring and selling.
How about the middle ground, fifty people? Well, that's still wasting a lot of space. Plus we're going to hit fifty in four months. What after that? Moving is expensive. And time-consuming. And just....confusing. So yeah, we need to rack our heads and figure out the team size that we need to plan for. And then calculate the square footage we need, which is, again, not a simple calculation, but that's for another post. 2. Figure the part of town we want to be in. Find brokers. Look at a bunch of places from the perspective of connectivity, customer perception, rental, does the landlord give a good vibe, etc. Shortlist. Finalize. Negotiate. Freeze, and start the rent-free period.
3. Find a contractor. Or an architect? Or design-and-build? Will we have to issue a tender? Remember, this is a young startup of ten people. Most likely, none of these ten people has done this kind of work before.
4. Negotiate with architect. Find contractor who fits the right balance of affordable-enough-but-he-totally-GETS-us-man! Get interiors done. Mediate between the architect and contractor in case of any issues. Visit every two-three days, stay on top of things to make sure there are no delays. The team is growing simultaneously, so a delay could prove to be very costly.
5. Move in.
Now, a larger company with an admin team could chalk this down to the cost of doing business, and depute a couple of people to these tasks and carry on. But small startups don't have the time, money, wherewithal, knowledge, and inclination to go about this process. So what's the alternative? Follow these steps: 1. Call a few coworking spaces. Get a clear, transparent pricing, for the ten seats we need right now. Finalise on the basis of connectivity, customer perception, facilities, vibe, cost. Negotiate later that week.
2. Move in and start working. Take up more seats as we grow.
It's actually that simple. Coworking takes the murky, complex world of real estate and adds a thick layer of hospitality on top, by managing all the pain points for you. So why doesn't everyone do it? As companies grow, other priorities take over. Now that your company's larger, you want to develop your own unique company culture, which is hard to do in a shared space. You can afford office managers and admin teams, so you're happy to deal with the extra effort that goes into managing your own space if it saves you some money. But let's actually dig into the numbers, through a real-world example. Let's say a startup in Bangalore wants to set up an office, and doesn't need to be in the center of town, so it can get reasonable rentals. Here's a very rough estimate of costs, in a very ugly chart that's copied straight from Excel:
That's an average cost per employee of roughly 9000 rupees a month - for which you can get a good coworking space in most parts of Bangalore. Now these are very, very rough numbers which could vary a whole lot - but you get the broad idea. for a very small company, coworking should on average cost roughly the same, or be cheaper - and we haven't even discussed factors such as the entertainment options, the foosball tables/Xboxes, the weekly HR events, the proximity to metro stations and the flexibility of no lock-in periods. Add those in and you get the point that for some companies, coworking just makes sense.
As companies get larger, they're able to negotiate better deals on rentals, and start building their own economies of scale, so the costs per employee start reducing - however, it's still not as clear cut. We'll discuss later why even large companies might want to use coworking in a limited manner. Office Spaces in the times of Covid-19 In my last post, we'd discussed what the workspace might look like in coming years because of social distancing norms. A few things have happened simultaneously: - Most companies are massively squeezed for profitability and cash flow, so they want to reduce costs. - Most companies have developed an appreciation for work-from-home in the last two months. - Social distancing is the new normal, for the next year or so. Combine these three factors, and you're staring at a reality where a lot of companies will try to either negotiate better rentals, or just move to a smaller office space where employees come in on rotation, and the rest of the team works from home. So for example, a company that earlier had an office space for its 100 employees could now look for a smaller space where 50 people come in to work on any given day. The rest are at home. Combine this with our observation above - that coworking spaces make sense for smaller numbers - and you could see companies that currently operate their own offices move into coworking spaces. Also, as remote working increases, the remote workers are going to look for places outside of home to work from. Everyone isn't cut out to work from home, and some simply can't, which is what drove so many people to coworking spaces (and Starbucks) in the first place. If remote working increases, so will this trend. However, this will all depend on one major assumption of mine: that coworking spaces will be the first to adapt to the new world. The Key Question: Who're you Gonna Trust? If you're a big MNC with the budgets to have your own office buildings, this section doesn't apply to you. You can afford to get your office redesigned, bring in the best maintenance teams, ensure perfect hygiene. However, most companies and startups don't have their luxury. They're working out of offices in large commercial complexes - imagine shared central air conditioning, shared washrooms, shared smoking areas, shared cafeterias. So basically, the same as a coworking space. You can spend 7 hours a day in your own office, but the remaining one hour or so, you're all over the common areas. And as we'd discussed above, coworking is essentially real-estate-meets-hospitality. A lot of real estate in India is sorely lacking on the hospitality part, though, especially smaller developers that are themselves likely to be squeezed for cash. The typical small commercial developer has sold off units to individual landlords. He's charging a maintenance fee, keeping a good chunk of that, and outsourcing maintenance to a third party. (We've worked with some very professional small developers, but this is the norm, in our experience.)
So the question is, who's more likely to take care of the necessities - constant sanitization, proper air filtration, perfect cleanliness in a professional manner - the average small developer, or the large coworking player whose business model now lives and dies by its hygiene standards?
Unfortunately, the smaller coworking players - the single hub operators, the individual landlords splitting up their 4,000 square foot office into smaller blocks and calling it coworking - are going to have a much tougher time. But if the larger players are professional and get their sanitatisation systems thoroughly audited and certified, they're probably going to be okay. So here's what coworking spaces will offer to smaller firms and startups: - Better sanitisation norms than the rest of the industry, especially in the common areas, to keep the space Covid-19 safe - More flexible cancellation policies - something that's always important to a startup, but even more so these days. - Office management services to help manage the remote-plus-office work culture that's going to confuse the life out of most people in the coming months. So the industry will survive - but the demographics might change. The New Demography The MNCs are likely to leave and set up their own offices. Currently a lot of cash-rich large companies use coworking in a limited way - while setting up an office in a new city, for example, and to have the flexibility to add seats as and when they need them. These MNCs will likely move away, at least in the short-term, since coworking is getting a bad rap these days. Startups and smaller offices thus are likely to form an even larger percentage of the user base. The demand is there, but there's one final thing (I promise) left to consider - the industry itself is going through a rather tough time. The Industry Players' Perspective Despite the hype, coworking is based on a rather simple principle - economies of scale in real estate. Lease full buildings, rent them out on a per-seat basis, and make your margins off the volume discount. To expand this gap between what they pay to the building owner and what they charge from the startups, the coworking companies sign very long-term leases - think 9 or 10 years - and offer the space on extremely short-term leases, mostly down to a month's membership fees. This is great in a thriving economy, but is very problematic in a recession, because the coworking operator still has to pay the same rent, but the customers have left and gone home. Costs stay the same; revenues dry up. Combine this with the WeWork debacle a few months ago, where the company that was about to IPO at $47 billion ended up seemingly worth only a few billion dollars a couple of months later. The result is that new investors aren't exactly lining up to fund the sector, at the precise moment it's going through a massive liquidity crisis. So if and when demand revives soon, the coworking players will have to manage the liquidity to service this demand, and maybe renegotiate with landlords so that they can survive the next six or eight months till people start filling these spaces again. (Disclaimer: I briefly used to work with 91springboard. I have no financial incentive to promote coworking spaces; in fact, if a potential startup client of ours decides to opt for coworking, we might just lose some work. But yes, this is pretty much my honest opinion throughout. Having said that, if you're interested in signing up for a coworking space after reading this, give the guys at 91 a call. They're good people. And if you're setting up or redesigning your own office, drop me a line. )