Korea CoworkingSPOTLIGHT

Savills Research

Korea - August 2020

Source FASTFIVE

2savills.co.kr/research

Korea Coworking Market Post-COVID

“COVID-19 has accelerated the role shift of coworking operators as comprehensive space service providers.”

MARKET OVERVIEWIn June 2020, the total supply of coworking

space in the Seoul office market reached 578,700 sqm, a six-fold increase compared to 2016. The domestic coworking space market, which in 2014 totaled 50,000 sqm offered by eight operators, began to grow significantly in 2016 when WeWork opened its first branch in Korea. In 2016, coworking space represented 0.3% of total Seoul office stock, until expanding to 1.0% in 2018 and further to 1.6% in 1H/2020.

Total supply of coworking space in the Seoul prime office1 market also expanded five times in size during the same 4-year period. As a percentage of prime office stock, coworking space rose from 0.6% in 2016 to 2.4% by 1H/2020. By district, coworking space accounts for 2.8% of prime office in CBD, 2.6% in GBD, and 1.1% in YBD as of 1H/2020. CBD – approx. 50% of prime inventory – has witnessed the most dynamic growth in coworking space among the districts.

CBD has seen more new prime office supply in recent years, leading to higher vacancy rates and more area available for coworking space. Significant vacancies were taken-up by FASTFIVE in Signature Tower, and by WeWork in Twin Tree Tower, Seoul Square, and Jongno Tower.

GBD leads in terms of area leased to coworking space operators, though most of the area is in secondary office buildings. Since the coworking space business model involves leasing space to start-ups and new venture capital firms, operators have tended to focus on remodeled secondary building in the fringe rather than on prime offices to lower the rent burden.

On the demand side, the ratio of individuals to Small and Medium-sized Enterprises (“SMEs”) engaged in the IT-related industries is highest in GBD versus the other two districts, and a few later emerged as new tenants of prime offices in GBD. Despite strong demand levels for new offices, low vacancy and limited new supply in GBD have encouraged more companies to consider coworking space.

YBD, characterized by headquarters of securities firms and occupiers in the financial industry, was the last district to see new branches, and the pace of new openings has been relatively slower.

GRAPH 1: Coworking Share of Total & Prime Office Stock, 2016- 1H/2020

Source Savills Korea* Gross Leased Area of Coworking & Flexible Space in operation as of June 2020

GRAPH 3: Coworking Stock by District and Building Grade, 1H/2020

Source Savills Korea

-

50

100

150

200

250

300

350

CBD GBD YBD Others

(Office GLA, 1,000 sqm) Prime Secondary

0.3%

1.0% 1.6%

0.6%1.9% 2.4%

-

5

10

15

20

25

30

35

40

Coworking inTotal Stock

Coworking inPrime Stock

Coworking inTotal Stock

Coworking inPrime Stock

Coworking inTotal Stock

Coworking inPrime Stock

2016 2018 2020*

(Office GLA, sqm in millions)

1 Savills Korea classifies office buildings based on GFA, location, accessibility, completion year, building facilities, maintenance, and other factors, and prime offices comprise approximately 120 buildings in the 3 major business districts of Seoul

GRAPH 2: Coworking Share of Prime Office Stock by District, 1H/2020

Source Savills Korea

2.8%

2.6%

1.1%

-

1,000

2,000

3,000

4,000

5,000

CBD GBD YBD

(Office GLA, 1,000 sqm) Prime Stock Coworking in Prime Stock

3

Korea Coworking Market Post-COVID

growing financial deficits of U.S. company headquarters, the COVID-19 pandemic has normalized social distancing and made people wary of sharing spaces. This has driven up vacancy rates in WeWork, a platform built on large shared spaces for intimate networking and collaboration. The challenge is most significant in prime CBD office buildings occupied by WeWork and is likely to generate instability in the leasing markets for the foreseeable future.

Nevertheless, not all coworking space operators are in crisis and others have demonstrated healthy growth. Notably, FASTFIVE and SparkPlus are proceeding with their IPOs. After securing an additional investment of KRW 39 billion in July 2019, FASTFIVE shared plans to extend its coverage from the current 25 branches at the end of June to 28 by year-end, and then to 35 by the end of next year2. SparkPlus, which has successfully raised KRW 30 billion in series B funding in December 2019, also announced the opening of upto 40 branches across Seoul by 2021.

In order to supplement the currently limited function of sub-leasing, FASTFIVE is pursuing a new growth business strategy titled “Building Solution.” The plan is to act as the leasing agent and property manager under a dedicated consignment contract with the landlord, and the managed properties will be in the three major business districts but located on the back roads to minimize lease expenses. According to its 2019 financial statements, FASTFIVE registered revenue of KRW 42.5 billion and EBITDA of KRW 24 billion. SparkPlus also improved its EBITDA from a loss of KRW 4.8 billion in 2018 to a surplus of KRW 4.9 billion in 2019.

Domestic operators such as FASTFIVE and SparkPlus are known to be concentrating their efforts on sustainable business by offering more competitive prices to end-consumers and various services most suited to local needs. For example, in May 2020, FASTFIVE launched a shared child daycare center available to all members to use at no additional cost. The cost burden on FASTFIVE is lowered by a government subsidy that covers about 33% of the operating costs. As for SparkPlus, a partnership to support tenants with talent acquisition and recruiting was established with Drama & Company, the firm behind the business card management app

DIFFERENT GROWTH STRATEGIES The major coworking space operators

in Korea are differentiated by distribution portfolios. Foreign operators including WeWork and JustCo, have established nearly half of their branches in prime offices, exceeding the 10-20% figure for domestic operators.

Two early market entrants, WeWork and FASTFIVE, have expanded their presence using different strategies. While 41% of space leased by WeWork is located in prime offices, the figure is only 19% for FASTFIVE. For WeWork, over 75% of leased area in prime offices is gathered in CBD, a probable outcome of its aggressive expansion in the district where the vacancy rate is higher than GBD.

When WeWork first entered Korea in August 2016, its “long-term lease contracts of large areas” was welcomed by many

buildings in CBD that were struggling with vacancy and because they contributed to asset attractiveness. Assets such as The K-Twin Towers (Sold for KRW 28.1 mn/pyeong in 2018), Seoul Square (Sold for KRW 24.6 mn/pyeong in 2019), and Jongno Tower (Sold for KRW 25.3 mn/pyeong in 2019) were all successfully sold after securing WeWork as a major tenant. This was also the case for O2 Bldg. (Former HP Bldg.) (Sold for KRW 16.0 mn/pyeong in 2018) in YBD which was transacted after the move-in of WeWork.

However, in May of 2020, WeWork – the market leader based on the number of branches – raised concerns after reportedly appealing for termination of its lease in Jongno Tower currently owned by KB AMC. WeWork is known to be in negotiations to terminate its underperforming branches in CBD. On top of the failed IPO and the

GRAPH 4: Share of Major Coworking Space Operators, 2016 and 1H/2020

Source Savills Korea

GRAPH 5: Take-up of Key Operators by Building Grade, 1H/2020

Source Savills Korea

41%

19%10%

52%

-

20

40

60

80

100

120

140

160

180

200

WeWork FASTFIVE SPARKPLUS JustCo

(Office GLA, sqm in thousands) Prime CBD Prime GBD Prime YBD Secondary

WeWork8%

FASTFIVE10%

SparkPlus3%

Others*79%

2016

*Percentage indicates prime office proportion of total leased area by operator

*Others comprised of Regus, TEC and 10 other operators in 2016, and 88 operators in 2020

WeWork33%

JustCo6%FASTFIVE

19%

SparkPlus10%

Others*32%

1H/2020

2 Based on interview with FASTFIVE, July 2020

4savills.co.kr/research

Korea Coworking Market Post-COVID

“Remember”.For JustCo, the operational strategy

is providing tenants with “customized office” as well as emphasizing security and privacy. Walls are installed rather than transparent glass to separate tenant areas, and when glass is used, opaque film is attached to highlight individual space. The operator is known to maximize tenant satisfaction by being attentive to local needs, focusing on the “productivity” of the office itself and ensuring independence between companies.

POST-COVID The spread of COVID-19 at first

lowered interest for coworking space until new sources of demand emerged. As remote working rose in popularity, companies quickly chose to use coworking space as “satellite offices.” In order to minimize exposure to the virus as well as productivity losses from working at

Crystal LeeCEOSouth Korea+82 2 2124 4163csjlee@savills.co.kr

Savills KoreaSeunghan LeeSenior Director Office Advisory & Marketing+82 2 2124 4253seunghanlee@savills.co.kr

JoAnn HongDirectorSouth Korea+82 2 2124 4182jhong@savills.co.kr

Simon SmithSenior DirectorAsia Pacific +852 2842 4573ssmith@savills.com.hk

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home, many companies preemptively adopted a system to shorten commute time and disperse their employees by setting up satellite offices, translating into new activity for the coworking space market. The demand has diversified from the traditional segment of freelancers, startups and Korean headquarters of foreign companies, to domestic conglomerates with a need to break up into separate units.

The flexibility offered by month-to-month lease periods and the tailoring of the deposit payment are also favorable traits for potential tenants amid uncertain economic conditions. Such advantages will become more prominent as the impact of COVID-19 continues to lag the real economy. Another factor is the cost-savings associated with not having to commit to a long-term lease, from interior design to equipment setup.

However, as competition intensifies to secure a limited number of tenants, there

is potential for conflict between landlords and coworking space operators. It will become important for operators to become a comprehensive business platform to satisfy current and potential tenants by ensuring a sense of belonging to the SMEs and startups.

For landlords, there also lies the option to take operations into their own hands. An example of a landlord directly providing coworking space is the launch of “The Smart Suites at IFC” by IFC Seoul.

Unexpected challenges in the operating environment – such as COVID-19 – will continue to impact the corporate workspace, with demand diversifying to satellite offices. The commercial real estate market remains tenant-oriented, and only the operators who effectively adapt to facilitate occupier needs are expected to survive.