The end of WeWork’s growth streak will deal a significant blow to Hong Kong’s office market, where the company’s expansion has provided one of the few bright spots this year.
As part of its voracious expansion strategy, WeWork has made big bets on the Hong Kong’s market, one of the world’s most expensive.
The company’s footprint has expanded more than sevenfold in the past three years, from 112,000 square feet in 2016 to 821,300 square feet this year, according to commercial property company Cushman & Wakefield.
Co-working operators, with WeWork in the vanguard, have provided “one of the key pillars of demand in the past one to two years” and were regarded as “the saviours” of the market, said Keith Hemshall, Cushman’s head of office services in Hong Kong.
But with WeWork facing an uncertain future following a botched attempt to go public, the prospects for further growth in Hong Kong and mainland China have dimmed.
A drop off in the take-up of new leases would be painful for an office market that property company Savills described as already being “in a state of suspended animation”.
WeWork’s share of new co-working space leased in Hong Kong this year
WeWork’s rapid expansion in the city has seen co-working stock double as a proportion of the overall market and has provided a fillip for a market dogged in recent months by street protests. “Everyone was really depending on WeWork,” said Mr Hemshall.
The company accounts for just less than half of the total co-working space in Hong Kong, and almost two-thirds of so-called grade-A stock, the most expensive and best-equipped offices.
Co-working operators represent less than 3 per cent of the overall grade A market, but have been responsible for more than a third of the uptake of new space this year, according to Cushman & Wakefield. Of that, WeWork accounted for 86 per cent of that uptake.
The company, which operates in Greater China through a joint venture called ChinaCo, will open the eight locations it has already secured in the region. A WeWork spokesperson did not comment on whether there were plans for expansion beyond that.
The spread of co-working space in China had already tailed off significantly: less than 3 per cent of new leases in Beijing and Shanghai have been taken up by co-working companies this year, compared to 12 per cent in 2018.
In Hong Kong, “landlords are looking at the market and seeing there isn’t much demand, with the trade war and with social unrest”, said Mr Hemshall.
Across Hong Kong, office rents have fallen 2.2 per cent in the year. The decline will probably accelerate, with Cushman & Wakefield forecasting drops of up to 7 per cent over the full year, and a further 7-9 per cent drop in 2020.
For WeWork, any collapse in rents would pose a problem. “They took long leases at the top of the market, then the market turned,” said Henry Chin, head of research for Asia Pacific at CBRE, the commercial property group.
“There’s a bit of a price war going on with desk rates. They’ll have to compete to win clients and to keep existing ones,” said Mr Hemshall.
Continuing civil unrest, however, in Hong Kong might boost demand for co-working space.
“Given the current situation in Hong Kong, no one knows what is going to happen next. But they still need to operate, so more and more corporates will go for shorter leases with co-working operators. There could be an upside for co-working,” said Mr Chin.