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Co-working, in its various forms, has taken the market by storm in China. While
co-working has become something of a global sensation, in China – where boundless entrepreneurial spirit feeds into demand for co-working space – it has taken on a distinct form with local characteristics. So, what are the special characteristics of co-working operators in China? And what is the opportunity for landlords?
As it exists outside of China, co-working aims to achieve the following:
From these original objectives, global players have emerged with dozens of locations around the world. These operators are offering a premium product, with comfortable interiors, extensive value-added services, and the ability to use any of their global locations.
But in order to keep up with China's mass entrepreneurship drive that encourages creativity and innovation to promote self-sufficiency and economic growth, co-working operators in China are competing in a highly competitive environment, growing as fast as they can, at all costs. In other words, they are following a very familiar mantra in China: go big, go fast, and worry about the details later.
Until now, this has been fine for the target customer whose expectations on office space are low. Young entrepreneurs looking to be the next Jack Ma are often living what amounts to the extension of a college lifestyle – cold pizza and all. The target customer doesn't travel often and tends to stay in one location. Also, in cities where large homes are a rarity, co-working spaces offer a welcome relief from cramped homes where a home office is impractical. For now, this makes sense. These are early-stage companies with individuals who are personally invested in seeing their businesses succeed.
In feeding this demand, the popularity of cost-effective
office space has soared, as small companies prioritise price above all else. Services and equipment are no-frills and interiors are designed to be practical. The emphasis is on getting a functional workspace with shared services and Internet connectivity that meets business registration requirements. These locations allow plug-and-play setups at minimal cost. Fixed desks are rented out on a monthly basis and do not have free seating seen with the international operators. This makes the business model a variant of "sub-landlording" commonly seen in China where a large space is simply subdivided and rented on short leases, and is also like the no-frills cousin of a traditional serviced office.
In this environment, the future consolidation of co-working operators in the market is inevitable. The real survivors of mass entrepreneurship in China will be able to care about the frills – and this will lead to more co-working formats that increasingly resemble that of the global operators.
With co-working operators commanding only a few percent of office space in Beijing according to our own analysis, the leasing activity of the operators themselves is not a major market mover. It's still the large tenants that move the market. The opportunity is in nurturing small tenants to become large-scale occupiers as they grow and this is the chance for landlords to reel them in from the start. Setting up a permanent office starts to make financial sense as a company grows into dozens of employees.
Contrary to expectations, Zhongguancun – or China's Silicon Valley – does not hold the highest concentration of co-working space in Beijing, because Zhongguancun is more about incubators, who take a financial stake in new companies. Rather, co-working space is spread out in pockets throughout the city.
The fast growth of co-working in China is leading more landlords to evaluate the benefits that co-working can bring to their properties to keep occupancy levels up. As more start-ups reach success, the benefits of having a co-working operator within an
office building will continue to rise.
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