Research | October 2016

Coworking: Fad or fixture?

2015SOHO China launched its coworking brand, 3Q

Shift towardssharing economy

Technologyboom

Governmentsupport

Rise of themillenial workforce

2006Citizen Space, one of the first official coworking spaces, was founded inSan Francisco, US

THE EVOLUTION OF COWORKING IN CHINA

2016Rapid development of the coworking industry in China

Coworking continues to grow

Executive Summary

1

2 FOUR TRENDS DRIVING THE COWORKINGPHENOMENON

3 BUSINESSES ARE REAPINGMANY BENEFITS

4 DIFFERENT WAYS FOR BUSINESSES TO ADOPT COWORKING

1995A predecessor of coworking space, C-base, was set up in Berlin, Germany

2017 and beyond

Send select teamsto coworking space

Open parts ofoffice to external parties

Replace office withcoworking membership

INTERNAL

INTERNAL/EXTERNAL

EXTERNAL

Build coworkingcorners in office

Create an internalcoworking-style office

Collaboration

Flexibility Talent

Online community

The coworking concept emphasizes creating an office space or working environment that supports collaboration, openness, knowledge sharing, innovation, and user experience. As a result, the design briefs for coworking spaces are, typically, inspired more by creative spaces than typical offices.While the coworking concept is embedded in the specialized spaces such as WeWork, it also has considerable potential as an accommodation option for office occupiers seeking to up their game by deepening the extent of collaboration and innovation within their organisations. This paper explores the state of play for coworking in China, and considers how office occupiers can integrate coworking into their real estate strategies.

Coworking: (n.) The use of an office or other working environment by people who are self-employed or working for different employers, typically so as to share equipment, ideas, and knowledge.Oxford Dictionaries

“The concept emphasizes creating a space that supports collaboration, openness, knowledge sharing, innovation, and user experience.”

Introduction

4 JLL

2006 - One of the first official coworking

spaces, Citizen Space, is founded in San Francisco, US

- Anken House shared creative office space is launched in Shanghai

2010 - 600 coworking spaces

worldwide

2015 - In China, coworking

operators start to set up - SOHO China launches its

coworking business 3Q

2016 - Coworking industry develops rapidly in China - US-based coworking brand WeWork officially

launches its first space in China - Select corporate occupiers begin to explore

coworking solutions in China

1995 - C-base—a predecessor

of coworking space—is set up in Berlin, Germany

2017 and beyondSpecialised operators - Consolidation - Differentiation

Tenants - An increasing number of corporate

occupiers will seek coworking solutions

The coworking journeyCoworking traditionally has been favoured by start-ups and entrepreneurs as a flexible and collaborative workplace solution with minimal cost burden. Lately, however, coworking has also caught on with corporates as an alternative to traditional office space. The number of coworking tenants worldwide has been increasing steadily, and is expected to reach 3.8 million in 20201.

As recently as 2015, there were only a few independent coworking sites in China. In the last 12 months, however, a huge number have opened up in many of the country’s Tier 1 and 1.5 cities, with many of the larger operators committing to tens of thousands of square metres of space.

Coworking is growing exponentially in China—there are now more than 500 coworking sites in Shanghai and Beijing alone. Urwork, a Chinese coworking brand established in April 2015 by a former executive of real estate firm China Vanke, opened 11 spaces and signed more than 30 leases across 15 cities in only one year2. US-based WeWork—one of the best-known firms in the coworking industry—officially entered China in 2016. As of September 2016, WeWork has secured three locations in Shanghai, with plans to expand to other cities later in the year.

1 Smallbizlabs. (2016) Coworking Forecast - 26,000 Spaces and 3.8 Million Members by 2020. [news]. Retreived from http://www.smallbizlabs.com/2016/08/coworking-forecast-44-million-members-in-2020.html 2 South China Morning Post. (2016). From renting out tables in co-working spaces, UR Work aims to become a networking platform. Retrieved from http://www.scmp.com/property/hong-kong-china/ article/1899907/renting-out-tables-co-working-spaces-ur-work-aims-become

China catches coworking fever

“The number of coworking tenants worldwide has been increasing steadily, and is expected to reach 3.8 million in 2020.”

Co-working: Fad or fixture? 5

3 www.ce.cn. (2016). Newly Registered Companies Per Day Reached 12 Thousand in China in 2015. [News]. Retrieved from http://www.ce.cn/xwzx/gnsz/gdxw/201601/13/t20160113_8244055.shtml 4 PWC. (2011). Millennials at work: Reshaping the workplace [White paper]. Retrieved from https://www.pwc.com/m1/en/services/consulting/documents/millennials-at-work.pdf

Four factors driving China’s coworking boomCoworking has a long history in Europe and the United States, but it did not penetrate China until recently. So what is propelling its growth now? Four key factors have stimulated the sector’s growth, according to JLL.

Government supportThe central government has made clear its support for start-ups. At the 2015 World Economic Forum in Davos, Chinese Premier Li Keqiang proposed “mass entrepreneurship and innovation” for China, signalling an official encouragement for small-scale start-ups, which are coworking spaces’ target tenants. The number of newly registered companies in China reached more than 4 million in 2015, up 21 percent from the year before3.

Shift towards sharing economyChina’s sharing economy is booming. Ride-sharing app Didi Chuxing (similar to Uber) and home-sharing website Xiaozhu.com (similar to Airbnb) are just two examples of online sharing services that have become essential for young people in China. Additionally, when SOHO China launched SOHO 3Q in Beijing and Shanghai, the coworking program was even marketed as “Uber for offices”. The fundamental concept of coworking aligns with the general shift toward the sharing economy.

Rise of the millennial workforceMore and more companies in China are recognising the rising importance of the millennial generation who are increasingly shaping the workplace. While older generations in China valued having a cubicle to call their own and prioritised job security, young workers today pursue different priorities, such as work/life balance and flexible working hours4.

Technology boomAdvanced technology underlies many of coworking spaces’ unique offerings, such as convenient online booking and the building of online communities for members. The China Internet Network Information Center reported in January 2016 that the country’s internet penetration rate had reached 50.3 percent, 10.1 percentage points above the Asia-wide average. Connectivity levels and comfort with technology are even higher in Tier 1 and 1.5 cities than elsewhere. A representative case is the popular social networking app WeChat, which has a 93 percent penetration rate in China’s Tier 1 cities and is well-known as a pioneer in a range of mobile services, from instant messaging to online payments.

“The number of newly registered companies in China reached more than 4 million in 2015, up 21 percent from the year before.”

Figure 1: Generational differences in workplace behaviour

Sources: Millennials at work: Reshaping the workplace, PWC; The next generation of workers, The Ken Blanchard Companies; Statista

Born in 1961-1980 Born in 1981-2000 (millennial generation)

Respects organisation hierarchy, corporate loyalty

Uses technology provided, technology literate, PC-driven

Prioritises own development, work/life balance, flexible working hours

Tech-savvy, mobile-driven, uses own technology at work frequently (example, WeChat), demands high-technology at work

Relationship with technology

Work style

6 JLL

Flexibility

Talent

Figure 2: Coworking space vs. traditional serviced office

Source: JLL

The coworking advantage

5 JLL. (2015). Fully engaged: How does culture impact productivity at your workplace? [White paper]. Retrieved from http://www.jll.com/services/corporates/workplace-strategy/fully-engaged

The traditional serviced office sector has long offered the ability to rapidly scale the work space up and down. Modern coworking spaces have adopted this feature to an even greater degree. Similar

to serviced offices, coworking spaces provide businesses with access to shared

resources (such as Wi-Fi, printers, and different types of workspace), all with flexible contracting arrangements.

JLL’s 2015 “Fully Engaged” report5 explores how creating a workplace strategy tailored around specific staff needs could increase employees’ engagement. Rising numbers of Chinese firms are expanding their businesses beyond China’s borders, and are competing for the best minds with not just other domestic firms, but also international competitors.

Coworking provides a way for firms to engage employees and, thus, differentiate themselves in the eyes of footloose talent. Coworking space’s flexibility and mobility are especially valuable for companies with high concentrations of young workers, as is common in the IT industry and many professional service firms. For example, domestic technology giant Huawei has hired JLL Workplace Consulting to put together international design standards, in part to cater to the needs of their large young talent pools.

Coworking space Traditional serviced office

Brands WeWork, SOHO 3Q, naked Hub, Urwork, We+, etc. TEC, Regus, ARCC, Servecorp, etc.

Typical physical set-up

More open spaces, limited assigned seating, exposed ceiling, fewer walls, bars/café/multifunction style areas

Private rooms, assigned seating, minimal open spaces, pantry, bookable formal meeting spaces

Culture and environment

Open, collaborative, casual, fun, lively, dynamic, multifunction

Private, exclusive, professional, serious, quiet

Cost Membership fee (most common), funding for start-ups Monthly rental, deposit required

Property type Office, creative space (e.g., converted heritage warehouse), retail

Conventional Grade A or B office

Coworking operators are also able to offer even greater flexibility than serviced offices, as users typically only need to pay weekly or monthly membership fees with minimal lock-in requirements.

Corporate occupiers can also take advantage of coworking’s flexibility for various purposes. For example, a video player company in Beijing, which would usually lease traditional office space, temporarily leased space in SOHO 3Q to house its staff while its office space was going through refurbishment.

“Coworking provides a way for firms to engage employees and, thus, differentiate themselves in the eyes of footloose talent.”

Co-working: Fad or fixture? 7

Collaboration

“A defining characteristic of a successful coworking space is the “buzz” that users sense as they walk through the door.”

A defining characteristic of a successful coworking space is the “buzz” that users sense as they walk through the door. In China, local culture places strong emphasis on guanxi—interpersonal connections—as critical to success. Coworking spaces are designed to facilitate interaction among people from different companies, backgrounds and fields of expertise. Users of coworking spaces thrive on the potential to germinate an idea or business opportunities through an encounter at the coffee machine, or refine an approach through conversations over a networking drinks event. An internal survey conducted by a popular coworking operator in Shanghai has revealed that more than 50 percent of its members have done business with one another, or are in talks to do so.

By mobilising space to increase interaction between different divisions, corporate occupiers can foster creative thinking and speed up the development of new ideas, approaches or technologies. In one early example, a domestic chemical company based in Shanghai

Leading operators and users interviewed by JLL agree that

coworking operators must pair their spaces with online service platforms, or

risk a challenging route to success. As one operator said: “Offline, you are restricted by your

space, always. Online, there is no limit.”

Several of China’s largest coworking operators—including UrWork, SOHO 3Q and We +—have launched member-only mobile applications. The apps do everything, enabling members to connect to services available to one another, find out about events, post jobs, invest or even, attract investors. Operating across Asia and in China, LOOP offers a free app to coworking sites that want to join its network. Today, the app connects thousands of members regionally. Members have access to multiple sites and can view the activities of fellow users, with whom they can connect and even arrange to meet face-to-face when visiting a particular location.

The best coworking spaces combine online and offline offerings, with both physical and digital signage on site, member-led events and other functions, access to free food and drink, relaxation and recreational areas, and multiple other concierge-style services that further emphasize a sense of community. For corporate occupiers who wish to convert their offices to be more coworking-like, apps such as that of LOOP will become crucial as people will need easy access to services that can satisfy user requests (e.g., registering seats online).

Online Community

Common services that create community• Exclusive mobile apps or WeChat groups

• Activities (outings, seminars, brainstorming sessions, etc.)

• Common space to mingle

• Beverages and snacks

• Access to experts from a variety of backgrounds

• Collegiate style and companionship

established a public space at its facility’s centre, where staff could interact.This move led to productive brainstorming between sales staff and R&D specialists.

8 JLL

Open parts ofoffice to external parties

Replace office with

INTERNAL

INTERNAL/EXTERNAL

EXTERNALcorners in office

Send select teamsto coworking space

Create an internalcoworking-style office

Build coworking coworking membership

5 ways for corporates to adopt coworking

The global rise of coworking is not incidental. The benefits that coworking offer fit well with a strategic push by many companies to increase flexibility, improve talent retention and recruiting, and build a sense of community.

JLL has outlined five coworking models and ranked them based on the level of exposure to coworking. Companies considering which model suits them best will need to assess their business objectives, corporate cultures, staff demographics, overall real estate strategies, capital availability, privacy concerns level, and security and compliance requirements. For example, companies dealing with high volumes of confidential data (e.g., some banks and trading firms) may want to choose models on the left of the chart, as these models limit exposure to external parties.

Build coworking corners in office Firms that want to experiment with or have limited exposure to coworking may set a specified area within their existing office footprint for internal coworking use, and then leave the rest of their space in a more traditional layout. For example, a multinational consulting firm in Shanghai allotted 15 percent of its new office space for setting up a “work café and open corner” area.

Create an internal coworking-style office Firms could choose to go a step further by converting their whole physical environment to become coworking-like. This process could involve adding flexible seating, cafés and multifunction areas, and modular or moveable personal workspaces. Such spaces will also incorporate online/offline elements to further support the community atmosphere and reinforce company culture and branding. See case study on JLL Shanghai below.

Open parts of the office to external parties A third model sees cultivation of coworking communities not just among employees, but also at spaces set aside for related external parties such as clients and suppliers. JLL Chongqing is adopting this model in its office, discussed in the case study below.

Send select teams to coworking space The final two models involve the use of dedicated external coworking spaces. In one option, companies retain their corporate offices and yet opt to relocate a select group of employees into external coworking spaces. For example, one of China’s largest food delivery service companies temporarily leased space in the Wangjing SOHO 3Q in Beijing, so that its marketing department could work out of a coworking environment during the planning of major marketing initiatives.

Replace office with coworking membership The final model relates to companies that choose to work exclusively in external coworking spaces, doing away with traditional offices completely. Currently, this is most common among small businesses, freelancers, and start-ups in China. It is also gaining traction among international companies who are considering a market entry and, thus, are looking to benefit from the atmosphere, networks and flexibility that coworking spaces can offer.

Co-working: Fad or fixture? 9

CASE STUDY: JLL embraces coworking concepts in offices across China

JLL Guangzhou

JLL has introduced coworking into its Workplace Strategy business, customizing a global WorkSmart program for its China offices. The new program emphasises the creation of alternative work settings, staff community building initiatives and an online coworking platform.

JLL Shanghai JLL ChongqingIn planning its upcoming office relocation, JLL Shanghai conducted a detailed research on staff behaviour and looked into potentially introducing coworking concepts into its new space. Titled “Shanghai Inspired,” the project introduces unique workplace designs and technologies, such as custom apps, with the goal of creating a flexible environment that builds a community among JLL staff and other users of the space.

The project incorporates both formal and informal coworking spaces that support JLL staff, clients, partners and suppliers as they move through the office. Digital signage and high-tech features—incorporated engagement-in-art programs, health and wellness platforms and concierge services—cultivate a communal office culture and give employees a feeling of membership with the new office environment. As staff grows comfortable with the new space and interacts with other departments, suppliers, and clients, JLL expects to reap several benefits of successful coworking environments, including internal and external collaboration, innovation, cross-fertilisation of ideas and increased productivity.

JLL’s Chongqing office takes the coworking concept a step further to satisfy the needs of both its own staff and visitors. As is in Shanghai, local leaders will implement WorkSmart—a JLL activity-based workplace program that encourages staff and visitors to choose from a range of work settings rather than have assigned desks. The office’s workplace environments include café style areas, phone booths, formal meeting rooms and touch-and-go seating, among others. In addition, JLL plans to work with the local government to make these spaces available to investors visiting the city, giving them a comfortable, collaborative, and fully tech-enabled place touch down. Working in proximity to JLL staff will give these visitors access to advice on real estate and other topics, in much the same way as the site staff provides advice on successful coworking and incubator-style spaces.

A recently conducted JLL Guangzhou workplace study has revealed that 61 percent of its staff need to collaborate with people outside of their own team multiple times in a day. JLL’s new Guangzhou office aims to satisfy this need. The new space has been designed to provide unique workplace solutions to JLL’s business accounts, increasing the synergy between JLL staff and external stakeholders such as clients, suppliers, local organisations and government authorities. For example, recreational elements, such as a pool table, offer alternative modes for interaction between clients and the Guangzhou office staff.

Conclusion

The various factors driving the coworking boom in China show us that one size does not fit all. The five coworking models outlined in this paper come with their own benefits and risks. Companies should first seek to understand what constitutes value for their business and how their workplace—whether a coworking space or a traditional office—can better support this. Solutions can then be developed to identify how much of a firm’s workforce could benefit from coworking, and assess whether a business should participate in coworking.

Successful participation in coworking space relies on generating a sense of physical and virtual community, collaboration and engagement by users. It is not simply about creating another place to work. The experience itself is paramount to making coworking a success.

Authors

Anny Zhang Head of Markets Shanghai +86 21 6133 5427 anny.zhang@ap.jll.com

Jennifer Huang Head of Markets Chengdu +86 28 6680 5089 jennifer.huang@ap.jll.com

James Allan Head of Markets Shanghai +86 21 6133 5425 james.allan@ap.jll.com

Eric Hirsch Head of Markets Beijing +86 10 5922 1300 eric.hirsch@ap.jll.com

Victor Ma Head of Markets Guangzhou +86 20 3891 1238 victor.ma@ap.jll.com

Joe Zhou Head of Research China +86 21 6133 5451 joe.zhou@ap.jll.com

Cathy Huang Manager of Research Shanghai +86 21 6133 5416 cathylu.huang@ap.jll.com

Daniel Yao Local Director of Research Shanghai +86 21 6133 5456 daniel.yao@ap.jll.com

Steven McCord Head of Retail Research Asia Head of Research North China + 86 10 5922 1371 steven.mccord@ap.jll.com

Claire Stephens Head of Workplace Strategy China + 86 21 6133 5774 claire.stephens@ap.jll.com

COPYRIGHT © JONES LANG LASALLE 2016. All rights reserved. For further details or to unsubscribe, please email joneslanglasalle.research@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however, no representation or warranty is made to the accuracy thereof.

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