Flexible workspace has undergone exponential growth. But the impact of social unrest and COVID-19 are re-shaping its position and overall demand. Over the last five years, WeWork – fueled by Soft Bank’s Vision Fund – thrived, taking up market share across multiple regions. WeWork now finds itself handing back space in some markets, creating something of a power vacuum that will lead to a fragmentation of operator market share.
2019 Overview
Last year was turbulent for the flexible workspace sector in Hong Kong. In the first half of the year, WeWork doubled its footprint by adding approximately 500,000 sq. ft. of space before its failed IPO. The Chinese operator KR Space took four locations and then quickly retreated, handing three of these spaces back immediately, with new entrants, CEO Suite and Victory Offices, taking up two of these three. The local operator, Campfire, which in the previous year added three new locations began to retrench, handing back its campus in Hung Hom and its flagship facility in Causeway Bay.
Meanwhile, The Executive Centre reshuffled its portfolio, exiting Three Pacific Place and 28 Hennessy, at their natural lease expiries, while adding Two Pacific Place and PCCW Tower, continuing its longstanding relationship with Swire Properties. Elsewhere, Garage Society moved from Des Voeux Road Central to Queen’s Road Central, increasing its footprint. Activity in the second half of 2019 was largely subdued due to social unrest.
2020 Outlook: COVID-19 & BEYOND
This year started in a similar way to which 2019 ended with social unrest creating hesitation and uncertainty. The first half of 2020 was challenging and is likely to remain that way as the year closes out. The flexible workspace sector is under strain given that much of the space currently occupied by operators is on leases with passing rents above-market.
To date, WeWork has handed back circa 30% of its Hong Kong portfolio, having terminated its leases at Harbourside HQ, 8 Queen’s Road East, Hysan Place, The Gateway and Hopewell Centre. With additional locations under review, WeWork could end 2020 as it started 2019; with around 500,000 sq. ft. of leased space. As many of these premises were fully built out, WeWork will have to absorb significant write-downs on its capital expenditure. This situation could portray both the company’s global business and specifically its operations across Greater China in a negative light.
It seems likely that WorkTech will hand back all of its Hong Kong locations in 2020, while IWG is handing back its China Resources and Harbour City premises, though it has added WeWork’s Hysan Place location to its portfolio and remains active in the market. The challenging business environment in Hong Kong means other operators may also return space and as a result we are likely to see negative operator take-up of circa 150,000 sq. ft. by yearend. However, we do expect some enterprise demand to buoy the sector in the second half of the year.
To discover more about flexible workspace and the latest trends, read our Outlook Report.