Companies that flourished by providing inexpensive shared-office space have hit a brick wall as the pandemic hammers commerce in general, and the industry in particular. Luo Weiteng reports from Hong Kong.

Once hailed as a game changer and trailblazer in the world's most expensive office market, Hong Kong's coworking sector, already reeling from the months-long citywide violent protests and protracted Sino-US trade skirmish, is poised to slip further into the doldrums in the wake of the coronavirus crisis.

While usually slow to see innovations that really catch on in town, Asia's financial center this time lost no time in embracing the advantages of coworking spaces, which offered a ray of hope for those trying to cope with the city's skyrocketing office rentals.

By 2018, coworking operators had taken up more than 1.1 million square feet (102,200 square meters) out of 90 million sq ft of available office space, according to global real estate consultancy Jones Lang LaSalle.

WeWork — the one-time runaway success and biggest player in the red-hot coworking industry worldwide — had expanded its business footprint more than sevenfold in Hong Kong over the past three years, from 112,000 sq ft in 2016 to 821,000 sq ft last year, according to commercial property company Cushman & Wakefield.

Challenging environment

Despite all the hype, WeWork — the now-cash-strapped coworking company, battered by a failed initial public offering, a seemingly fruitless rescue package and bouts of job cuts — is said to have indefinitely put off creating at least three coworking spaces in Hong Kong planned for late last year.

The delayed openings reportedly include new shared-office facilities at Hysan Place in Causeway Bay, Sun Life Tower in Tsim Sha Tsui, and Octa Tower in Kowloon Bay.

"To be sure, the coworking business will be tested hard by the novel coronavirus pandemic, given the need for social distancing," said Simon Smith, senior director of Asia-Pacific at international real estate consultancy Savills. "As people avoid crowds and public areas, shared-office-space operators are taking a severe hit from the pandemic."

Australia-based Servcorp founder and CEO Alf Moufarrige said in early March the company's shared offices on the Chinese mainland and in Hong Kong are among the hardest hit.

Servcorp's coworking sales across the United Kingdom, Europe, the United States and Australia had fallen by nearly 30 percent to 40 percent from mid-February to early-March when the coronavirus showed signs of rampaging across the globe.

But its worst story, at least at that time, still came from Asia, where the company owns eight offices on the mainland and three in Hong Kong.

The shakeup of the once-booming office-sharing business offers a glimpse of the broader story as today's Hong Kong office market has, by and large, become a "tenants' market".

The city's overall office rents had declined for three consecutive quarters in the first three months of the year — for the first time since the 2008 global financial crisis.

The core business districts — Wan Chai/Causeway Bay and Central — led the downturn with the largest year-on-year rental drop of 6.2 percent, according to Savills.

As leasing demand shrank, overall availability climbed to 10 percent, the highest level in a decade, with West Kowloon and East Kowloon at the high end, posting vacancy rates of 14.6 percent and 14.2 percent respectively, data from Cushman & Wakefield shows.

There apparently won't be light at the end of the tunnel by the end of this year. Savills and Cushman & Wakefield have joined a growing chorus of pessimism, expecting Hong Kong's overall vacancy rate to remain in double digits for the rest of 2020, which will drag down Grade-A office rents by about 20 percent.

"The dilemma faced by coworking operators could result in another stage of consolidation for the industry," Smith said.

What makes it even tougher for coworking operators in Hong Kong is the fact that industrywide runaway expansion has been far from sustainable.

The harsh reality is that most players vying for a piece of market share are not making a profit. This is a cash-burning game reminiscent of cautious tales of "from boom to bubble".

Well before the escalating Sino-US trade battles, festering violent protests and the coronavirus pandemic left the sector in the lurch, a consolidation was underway to weed out opportunists.

In March 2019, Kr Space — one of the biggest coworking space operators on the mainland — put the brakes on its expansion plans in Hong Kong, backing out of a lease for seven floors, or 83,000 sq ft, in Chinachem Group's One Hennessy in Wan Chai.

Chinachem, in turn, sued Kr Space in the Hong Kong High Court for breach of contract, claiming about HK$500 million ($64.5 million) in damages.

The Beijing-based office-sharing company, which made inroads into Hong Kong in May 2018, eventually withdrew from the overcrowded city in November 2019, shutting down its last facility here — a two-floor, 34,000-sq-ft coworking space in Times Square in Causeway Bay — only about half a year after opening in April. At that time, Causeway Bay had become one of the major battlefields of the city's violent protests.