WeWork has backed out of an agreement to occupy space in Hong Kong’s Hopewell Centre even before it got a chance to move in, according to sources familiar with the decision who spoke with Mingtiandi.
The troubled co-working pioneer is surrendering two of four floors which it had agreed to lease in the skyscraper two subway stations east of Central, as it scrambles to stem losses which contributed to the departure of its CEO following a failed IPO attempt in September, and precipitated a $9.5 billion bailout last month.
The walkback in Wanchai is part of a wave of foundering deals for WeWork in Hong Kong, according to industry insiders, with the company said to be exploring opportunities to escape from commitments in five to six buildings around the city.
The climbdown comes just a week after WeWork announced that it would be opening four new spaces in Hong Kong, and follows a report in The Financial Times last month which indicated that 22 percent of the company’s 8,900 flexible desks in the city remained unleased. The news of the Hopewell Centre change and general shift in Hong Kong were first reported by Bloomberg.
Calling a Halt to New Openings
In the Hopewell Centre, WeWork is giving up a 30,000 square foot slice of a 60,000 square foot office space, just three months after reportedly agreeing to lease the premises for HK$2.7 million per month.
The company is also said to be on the verge of backing out of leases on five other centres currently being given the WeWork retro-chic makeover in preparation for opening. The news of WeWork’s search for office options was said to have been relayed to directors of other shared office providers in Hong Kong who have been approached by agents offering opportunities to take over centres leased by the troubled New York-based firm.
“New executive leadership is evaluating our operations and assets across all geographies, including Hong Kong,” a WeWork spokesperson told Mingtiandi without confirming the reports of changes in its leasing plans. “We are fully committed to improving the business and ensuring our long-term viability to the benefit of our landlords, members, and employees,” the spokesperson added.
The operational review comes after the company had reportedly issued a minimum two year ban on expansion activities as WeWork’s new management team try to stem spending increases that led it to losses of nearly $2 billion in 2018 and reportedly put it on the brink of running out of cash before receiving the bailout from Softbank.
Re-Examining a Hong Kong Portfolio
Of the company’s 528 locations worldwide, WeWork’s website currently lists 12 spaces in operation in Hong Kong with another three – including the Hopewell Centre – that are indicated as opening soon.
Also listed in the same “opening soon” category with the Hopewell Centre is WeWork’s Octa Tower location, where the company has leased 50,000 square feet across two floors. The company is said to have leased the space in Kowloon East in July this year for HK$1.25 million per month.
The third representative of WeWork’s on-deck trio in Hong Kong is a 67,000 square foot centre at the Generali Tower at 8 Queen’s Road in Central, which the company reportedly agreed in March to lease for HK$5.03 million per month.
Including the Hopewell Centre, Generali Tower and Octa Tower, WeWork had signed five leases in Hong Kong between March and August this year for more than 425,000 square feet of office space.
In May, the company rented 100,000 square feet at Henderson Land’s new H Code lifestyle building on Central’s Pottinger Street.
Just a month before that, WeWork took on six new floors, totaling 150,000 square feet, in Wharf’s Harbour City complex near the Star Ferry terminal in Tsim Sha Tsui.
Falling Rents Pose Co-working Challenges
The company’s abrupt halt to its expansion in the city comes as rents slip across the city and office vacancy in Central hit 2.9 per cent in September, up from 1.6 percent for the same month last year. Citywide, vacancy rates have risen from 4.2 percent to 5.6 percent after five consecutive months of protests.
The pressures placed on the sector from rising vacancy levels, falling rents and the fallout of the WeWork IPO withdrawal is forcing co-working operators in the Hong Kong to adapt.
“The WeWork IPO failure is the end of the first chapter of the co-working story but the second chapter is now beginning and the story will become more interesting,” the CEO of Hong Kong-based operator The Desk, Thomas Hui, told Mingtiandi. “Not only WeWork, but the whole industry needs to address the issue of sustainability.”
Hui said that operators will need to make hard decisions about trimming down operations while landlords must select operators with sustainable business models. Operators and landlords need to build strategic relationships with each other rather than the typical landlord–tenant model, according to Hui.
Hong Kong co-working operator WorkTech also emphasised the need for sustainability.
“While growth is key to any business, it has to translate into profitability for stakeholders and real value creation for our members,” Eddie Lin, COO of WorkTech told Mingtiandi.
The tech-focused shared office provider tailors its co-working offering to the needs of its members by forming partnerships with financial institutions and large corporations that are interested in digital innovations in sectors like fintech, blockchain and virtual banking.
CEO and founder of Garage Society Elaine Tsung told Mingtiandi that her company entered Hong Kong’s co-working market in 2014, two years before WeWork, and has so far weathered the storm
“We don’t have big backers, but we’re very careful with numbers, and we’ve been profitable for three or four years, which has given us the opportunity to reinvest our profits – for example in India where we opened five sites in April and are in talks to open more,” she told Mingtiandi.
The current downturn in the market has even allowed the Garage Society to renegotiate some of its leases – including one in Central – down to what it had been when it was first signed in 2014. The company’s five centres in Hong Kong, although at their lowest occupancy for three years, are 94 percent full on average, according to Tsung.
“People have been distracted by crazy valuations and some operators have been more interested in scaling up than driving and delivering value – and it’s those guys who may have to make some difficult decisions,” she added.
Note: An earlier version of this article attributed comments by WorkTech COO Eddie Lin to another executive of the company. The story has been updated and Mingtiandi regrets the misunderstanding.