COVID-19 has had an unprecedented impact on the economies across the world. While some of the industries have been brought to a complete standstill, the impact of coronavirus on coworking industry cannot be overlooked as it stares at a battle for survival.
Coworking industry works on a simple principle: taking bigger spaces on a long term contract and selling them at a premium in smaller customized packages based on client requirements on short term contracts. For it to work profitably, two things need to comply:
1) Clients’ need for workspaces (the basic one)
2) Clients’ need for flexibility of increasing/decreasing seats and time commitment
And it is the first instance that the industry is facing a gap in the need for workspaces. There have been enough instances where people have questioned the need for flexibility in such adverse conditions. Totally unprecedented, this is by far the toughest challenge that the industry will ever face.
Categorizing the impact into phases, the battle at ground zero would be some unforeseen turn of events most likely. An analytic assumption is needed, while we should stay hopeful of a bright sunny day after all this is over.
Battle Phase 1
The nationwide lockdown, an unprecedented attack on coworking
February end, most of our space owners were bullish and actively pursuing expansion. 30% of our space partners saw big enterprises signing up, bringing with it, guaranteed revenues and sight of clear profits. In fact, more than 20% of our space partners were already running at 85%+ occupancy.
However, the tables completely turned sides post to 15th of March. State governments immediately started taking actions by announcing lockdowns, followed by the central government’s declaration of stringent social restrictive measures, exhibit A – the national lockdown. Inevitably, these lockdowns brought the entire contact-driven businesses to a complete stand-still, coworking not being an exception.
Within the first 2 weeks, the following changes surfaced:
- Office usage fell down to 0% due to lockdowns
- New sales dried up; new contract signings were put on hold.
- 20%+ clients gave notices (Travel industry, which is the most impacted by the lockdown, itself contributes ~10% of the overall coworking demand)
- 90% of clients asked for discounts/waivers for the month of April
With a lot of pressure on the coworking players, the need for a solution just got graver than ever. They came up with a survival strategy and the most critical steps have been taken already:
- Successful implementation of force majeure with the real estate owner
- Cut down of rental costs, pausing various vendor payments to avoid over the top costs during the lockdown
While quite a few were able to get this done, about ~30% of the spaces have struggled to reach the threshold revenue required. The direct impact of coronavirus for coworking: Unable to give waivers to clients and hence staring at notice for more than 50% occupancy.
We are already looking at some of the coworking spaces losing their entire profits of the previous quarters due to losses incurred in April or potentially expected losses in May.
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Battle Phase 2
Social distancing: The battle toughens, casualties increase
This is what the coming 2 months would look like.
While the government will look to jump-start the economy, COVID-19 threat would not be afar and we would be looking at stricter social distancing norms put into play.
The new normal will see people avoiding crowded places and as per reports, this practice will exist till 2022 at least.
From where we are at right now, we look at the following changes being inducted:
- Back to complete operational costs for the spaces: Post lockdown, the rental waivers would go away, costs would jump back up.
- Lower space utilization: Government would mandate offices to not work at high occupancy. Public modes of transportation would still be shut and people would be hesitant to use common spaces. Clients might not be willing to pay the entire amount due to cashflow constraints.
- Bigger companies would be on the lookout to reduce costs: With a reduced workforce and reduced budget, a lot of corporates would start evaluating options of moving out of existing space to cheaper options. Economical coworking spaces/managed offices would have a pivotal role to play here.
Considering the dual pressure of increased costs and reduced revenues, coworking players will have to work on:
- Communicate: Communicate and work it out with the vendors and real estate owners to get some leeways. Any discounted figure at this time would help.
- Find a middle ground: Work with the existing clients aggressively and find the grounds of common interest (not letting the client go, while still making some revenue) to ensure that the coworking space is not burning a lot of his money during this time. Over-communicate if needed, just make sure the two of you are on the same page of struggle.
- Ensure safety at the space: This is crucial to retain existing clients/convert any potential client. All necessary steps need to be taken to ensure that hygiene, cleanliness and social distancing is kept at utmost priority in the space.
- Realign focus on corporate clients/managed office requirements: Many companies would have let go of a lot of employees and would be looking at slightly more flexible options (which are safe). Separate areas inside existing coworking spaces would work just perfect for them. Closing them in this time would be crucial in getting even for lost revenues.
All steps taken in this time will define the profitability of coworking spaces for the entire year ahead. Spaces which are able to plan a better recovery and close some corporate clients to hit a 70%+ occupancy will be greatly positioned to expand and win the market. Spaces (5-20%) which will struggle with revenues and costs, will shut shop.
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Battle Phase 3
Recession and remote working – Coworking is the answer
Post the initial 2-4 months, we are looking at a completely new way of working. A way which should bode well for the coworking/managed office business.
- People would be accustomed to remote working: Setting up smaller hyperlocal coworking spaces in every area would make a lot of sense. People would avoid travelling for work and would be comfortable working out of any close by location; Companies would have adapted to it and would be able to manage such a culture much better
- Bigger companies would join in to save costs: Companies who are looking at cost control measures would have planned shifting to economical coworking/managed offices; They would start moving to such options now, having finalized some options during the social distancing phase.
- More real estate owners would look at coworking: With a lot of bigger floor plates getting vacant, reduced commercial real estate rentals; real estate owners would actively evaluate getting into managed office/coworking.
Both, from a potential supply and demand standpoint, we are expecting a U shape recovery over the 2 quarters. More distressed supply will be available for coworking and more people would be open to working out of economical, flexible and hygienic workspaces.
While it may seem negative right now, it is crucial that space owners work with patience and keep a 6 months horizon for planning.
Plan for the following revenue, cost structure and plan cash flows accordingly.
|Month 1 post-Lockdown||40%||85%|
|Month 2 post-Lockdown||60%||100%|
|Month 3 post-Lockdown||80%||100%|
|Month 4 post-Lockdown||100% (or more)||100%|
|Month 5 post-Lockdown||100% (or more)||100%|
%tages here refer to the %tages of what you were bearing in the month of February/March 2020.
We shall go on to the end. We shall fight and defend our island, whatever the cost may be. We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; but we shall never surrender – Winston Churchill, WWII
Plan for survival, winning the battle equates to survival here!
Save Our Offices: Sign The Petition
The survival of the coworking industry is imperative for the growth of many others. It gives a ray of hope to the people at large, the courage to take the entrepreneurial route and the will to spread their wings and fly. In a small way and to a great extent, it will define the future of entrepreneurship in our country and will shape, re-form our economy to be better in the times to come.
Since we work with more than 200 coworking partners, we feel it’s our duty to voice these concerns and move to sensitize each one of you to the wake of this situation. Let’s extend our support to those who make working fun and productive.
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