Is co-working on the right path to profitability?

Co-working spaces have already conquered the hearts of many, particularly those of young generations. Working in open and well-designed environments, enjoying free-flow coffee and beer in the pantry, attending engaging social events, and even playing VR games with co-workers from other companies: all this has revolutionized the very idea of office life.

Co-working spaces in China have boomed in recent years, driven by the rapid growth of start-ups and the arrival of a new, younger crop of workers into the job market. According to the latest estimates, the co-working space market has reached 50 billion yuan in 2018 – growing by an average of 85% each year since 2015 – and is expected to grow by 28% per year in the next 5 years.

Rapid growth has driven more and more players to enter the market. Due to the fierce competition, many players priced aggressively to capture market share, while spending heavily on premium locations, resulting in dual pressure on both revenue and cost side. 

According to our study, most co-working spaces were not profitable in 2018, even though many have also extensively explored various value-added services to increase their income stream (e.g., start-ups incubation, business services, consumer services).

We identified three main areas in which leading players are investing to build their competitive advantage and improve profitability:

  • Data-driven location selection. Just as in traditional retail, the right location is key for co-working spaces. A leading Chinese player, for instance, has developed its own algorithm to scientifically compare and select locations
  • Optimal design. Making the most of each square meter is a challenge. By using machine learning to design and arrange furniture and equipment, a domestic player is able to significantly improve the space utilization and reduce the cost of a single seat by up to 20% compared to traditional layouts
  • Replicable operational system. A standardized model helps to ensure service quality and facilitates rapid expansion. For instance, a rapidly growing domestic player developed a standardized operational system with 80 main processes, allowing them to quickly get new locations up and running

As the industry becomes more concentrated, prices to customers will rise, income from value-added service will increase and property costs will likely fall back to more normal levels. We expect well-operated spaces to start being profitable in 2020.

Following the first-moving asset-light operators, numerous real estate companies have also entered or are considering entering this market. This trend is not surprising considering the potential synergies with the real estate business.

To enter the co-working market, real estate companies have two strategic options to choose from: fighting alone or establishing a partnership. Some, including some major real estate companies, decided to develop their own business model and operate independently. Others chose the partnership option – with the real estate company providing the property and financial support, and the established operator providing brand, data and global network resources while also holding responsibility for operations.

Which way to choose depends on a company’s ambition and capabilities.

If the ambition is to build a nation-wide business and a recognizable brand, staying independent is the best choice. In a first phase companies can leverage the existing assets to experiment, accumulate experience and fine-tune the business model. Afterwards, they should try moving towards a more asset-light model, by cooperating with other asset owners and keeping a managing role (similarly to hotel management groups).

On the other hand, if the goal is mainly to improve the lease rate of existing assets, it will be preferable to establish a partnership with experienced operators instead.

In our study, we conducted an in-depth analysis of the current market status and its key trends, studied the leading players and identified key success factors. We also modeled the unit economics for a single co-working space.

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