Double whammy: Once attractive to investors, how coworking is fighting WeWork fiasco, Covid for survival

Updated: May 31, 2020 8:18 PM

In terms of immediate short-term strategy, co-working companies may consider entering into a compromise with the occupiers, which may involve, reduction or deferment/staggering of payment of rents and extension of the term of the occupation.

real estate, impact of Coronavirus on housing sales, lockdown, commercial real estate, covid-19It remains to be seen whether (and how) domestic players in the sector alter their business model.
  • By Anuj Bhasme, Avichal Mathur & Apeksha Narula

Coworking spaces, over the past few years, have carved out a niche for themselves in the country, and have been extremely popular especially amongst startups and other small and medium establishments. However, this sector which was witnessing a spurt of growth was hit by the downfall of WeWork – the world’s largest co-working company, last year, and this year the outbreak of Covid-19 portrays a bleak picture for the growth or perhaps even the sustenance, of the sector.

Lesson from WeWork

As has been widely publicised, the collapse of WeWork can be attributed to factors such as eccentric leadership, rapid expansion and financial losses. Amongst all these, what stands out is their business model, where long-term lease contracts for the premises were coupled with short-term contracts with the occupiers, irrespective of occupancy levels and revenue generation. This created a huge financial gap and made the business model almost unsustainable. In this background, it remains to be seen whether (and how) domestic players in the sector alter their business model to avoid going down the same road as WeWork before it’s too late.

Impact of Covid-19

While the industry was just about dealing with the downfall of WeWork, the outbreak of COVID-19 seems to have landed another sucker punch, from which domestic coworking spaces may find it hard, if not impossible, to recover. In light of the lockdown imposed by the Government of India, the coworking companies would face challenges primarily on two fronts. Firstly, on account of the huge fixed cash outflow incurred by these companies owing to their long-term leases. Secondly, given the occupiers are generally businesses which are in their incubation stage, their preference would be to deploy any available capital towards the growth of their core business, as opposed to paying high rentals.

Challenges

A natural phenomenon such as Covid-19, can be expected to have a domino effect on the coworking sector. Even when the government-initiated lock-down is lifted, occupiers may opt to refrain from conducting business through physical venues, until they can ensure the safety of its personnel. Even once business operations return to normalcy, given that coworking spaces have multiple businesses occupying the same space, concerns in relation to social distancing and preventive hygiene would need to be addressed to adhere to the new “normal”.

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This would be through measures such as re-organization of workspaces, engagement of additional personnel and making appropriate provisions to ensure regular sanitization of the premises. This will undoubtedly lead to an increased operational cost. This may be accentuated by the reduced potential business opportunity, as businesses in the incubation stage that may have survived Covid-19, would be looking to scale back any unnecessary expenditures including cutting down on their rentals.

In terms of immediate short-term strategy, coworking companies may consider entering into a compromise with the occupiers, which may involve, reduction or deferment/staggering of payment of rents and extension of the term of the occupation, so as to retain their current occupants and earn market credit which will attract potential business opportunities.

If they were to emerge from the aftermath of Covid-19, the future may not necessarily be all doom and gloom for the sector. It’s a well-known fact that coworking spaces are a cheaper alternative to the conventional offices, with the conditions attached working out of a coworking space being far less onerous as compared to the leasing of exclusive office spaces. These are the fundamental reasons that attracted businesses to them in the first place. With more businesses adopting the “work from home” model and people being generally wary of travelling long distances especially using the overcrowded public transport, there is a bright light at the end of the tunnel, which may not really be the headlight of an oncoming train!

Adapt or Perish?

Given the above, coworking spaces in India, which in their nascent phase of growth showed huge growth potential, making it an attractive sector for financial investors, finds itself, now wedged between the catastrophe caused by Covid-19 and the aftermath of the WeWork fiasco. If the impact of Covid-19 prolongs, there is a grave danger to the survival of the coworking industry in the country, as the uncertainty which looms on their outlook will have a huge impact on the investors’ sentiments and funding for the sector. If they could somehow manage to keep afloat in the short term, re-working their business models and adopting strategies to remain relevant in the post-Covid-19 world, could make them attractive once again.

Anuj Bhasme is Partner, Avichal Mathur is Senior Associate and Apeksha Narula is Associate at Shardul Amarchand Mangaldas & Co. Views expressed are the authors’ own.

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