Coworking: Still a Demand Driver in Singapore Office Market

The Singapore office market to date

Office rents performed very strongly over the last two years, rising 25 per cent from the trough in the first quarter of 2019. This brought Grade A CBD rents to $10.61 psf per month, even higher than the recent peak in 2015.

The rental gap is also narrowing between the Marina Bay submarket and the rest of the submarkets, indicating that rental growth has been propped up by the secondary CBD locations such as City Hall and Tanjong Pagar. Marina Bay rents as of the 2Q 2019 are still about 4.5 per cent below the recent peak.

Singapore’s office supply situation is in the landlord’s favour because pipeline supply is consistently below the historical average of 1.4 million. In fact, they are way below the 1 million mark, about 700k on average for the next 2 years. Landlords should be more relieved that the competition from new buildings is unlikely to pose much threat, although the other spaces that are available in the market, i.e., the coworking spaces, could probably pose some competition.

Demand should be steady because hiring has been gradually ramped up, even in the first quarter of this year. In fact, according to Manpower Group, 77 per cent of the companies surveyed in Singapore says headcount remains flat this year. About 15 per cent says they want to increase headcount, another 3 per cent says they want to let go of staff. Sentiment on the economy and labour market seems to be cautious. The market is watching to see if the quarterly numbers will show a moderation in the coming months.

Coworking still a demand driver but for how long?

One of the main drivers of demand is coworking. Healthy take up by coworking operators has kept office vacancy rates down. Office absorption has been strong for the last two years, mainly because coworking operators make up 20 per cent of the total demand; the proportion is even higher if we talk about net demand. We saw WeWork has expanded their service lines. Instead of just providing office solutions, they are now into many other areas – education, residential, and even brokerage business and real estate investment.

In fact, if you analyse demand trends further, you will notice that the proportion of revenue from private offices seems to be hugely boosted in the last 2 years, from 17 per cent in 2016 to 27 per cent in 2018, based on data from Deskmag. What we’re observing is that a coworking space with a larger share of private offices is more likely to be profitable. According to Deskmag, coworking spaces with at least 60 per cent of space allocated to private offices worldwide has the highest success rate with 57 per cent of them being profitable. This seems to suggest that the concepts of coworking and traditional serviced office are converging.

Can coworking operators survive the next downturn? That seems to be a million-dollar question that every landlord and occupier like to ask. The barriers of entry for such business models is low and there’s little room for product differentiation. The business model is akin to how short-term residential rental works. For example, you rent an apartment for a year for a fixed amount, and then try to market the space on Airbnb and lease out the rooms by the day. In this way, you can charge higher on a per day basis.

Coworking is likely to be here to stay. Occupiers are used to the flexibility they are enjoying and is unlikely to give up the flexibility option moving forward. But it is quite certain that the market will see further consolidation amongst the coworking operators. Whether all the operators can survive depends very much on their risk exposure and their profitability.

The risk is exacerbated in a downturn when coworking operators have to continue paying rent they’ve locked in with the landlord for the long term whilst trying very hard to retain their clients in the coworking space at competitive rents. Nevertheless, the flexibility it offers might also attract occupiers who look to right-size or downsize in a downturn. If the coworking operators are in the best locations and best buildings, there is a chance they can emerge from the downturn gaining a bigger pie of the market. Financial feasibility is key for this to happen.