Last month, I met Michael at an investment seminar in Central. Three years ago, he bought a unit in a Kwun Tong industrial building for 8 million HKD and converted it into a co-working space to rent out. At that time, the monthly rental income was stable at 80,000 HKD, with a return rate of 12%, which made many peers envious. But at the beginning of this year, his occupancy rate plummeted from 95% to 60%, and the monthly income was halved to 48,000 HKD. "I don't understand why there are suddenly so many vacancies," he said helplessly. Michael's experience is precisely what the Hong Kong co-working space market is going through—a fierce reshuffling.
This reshuffling is not accidental, but the result of multiple interacting factors: changes in work patterns after the pandemic, excess supply, rising rental costs, and the exit of major operators. For owners of industrial buildings or those considering investing in shared office spaces, understanding the logic behind this reshuffling is key to avoiding pitfalls and even seizing opportunities.
Three Major Turning Points in the Shared Office Space Market
The Post-Pandemic Work Model Completely Changes the Rules of the Game
Before 2020, co-working spaces in the Hong Kong property market were considered "bargain" investment projects. At that time, start-ups, freelancers, and small to medium-sized enterprises had a strong demand for flexible office spaces and were willing to pay higher rent per square foot (HK$40-60 per sq. ft.) than traditional offices in exchange for short-term leases and support services. However, after the pandemic, remote work (Work From Home) became the new normal, and companies found that employee productivity at home did not decrease, leading them to reduce their demand for physical office space.
According to JLL's Q1 2024 report, the vacancy rate for Grade A office buildings in Hong Kong rose to 12.8%, reaching a 15-year high. More importantly, companies have changed their definition of 'flexible office space'—they no longer require a fixed desk all day, but instead use meeting rooms or temporary workstations on demand. This directly impacts the business model of traditional co-working spaces with 'monthly rental desks.'
:::warning Investment Warning: If your shared office space still relies primarily on 'fixed desk monthly rental' as its main source of income, the risk of declining occupancy is extremely high. The market has shifted to 'hourly billing' and 'hybrid office solutions'. :::
Oversupply: The Aftermath of the Wave of Industrial Building Conversions
Between 2018 and 2021, the government relaxed the policy for revitalizing industrial buildings, and many owners converted old industrial buildings into shared office spaces. In areas like Kwun Tong, Cheung Sha Wan, and San Po Kong, the cost of renovating an industrial unit is about $800-1,200 per square foot, and after completion, it is rented out at $15-25 per square foot per month, making the return rate seemingly attractive. But when everyone rushes into the same lane, supply quickly becomes saturated.
Take Kwun Tong as an example. In 2021, the total area of co-working spaces in the district was about 500,000 square feet, and by 2024 it had increased to 850,000 square feet, a growth of 70%. However, during the same period, demand only grew by 15%. The result of oversupply is intense rental competition. To attract clients, some operators have reduced the monthly rent from $3,500 per workstation to $2,200, significantly squeezing profit margins.
:::tip Insider Tip: Before investing in the conversion of industrial buildings into shared office spaces, you must first investigate the number of competitors within a 500-meter radius. If there are already more than five similar projects in the area, it will be difficult to stand out unless you have a unique selling point (such as top-notch renovations or specialized industry facilities). :::
The Exit of Major Operators Triggers a Chain Reaction
In 2023, the global co-working giant WeWork filed for bankruptcy protection, shocking the entire industry. Although WeWork's operations in Hong Kong were taken over by a local team, its exit released a large number of vacant units back into the market, further exacerbating the oversupply. More importantly, WeWork's collapse exposed the fundamental problem with the co-working space business model: high rental costs + low occupancy rates = difficult to sustain profitability.
Many small and medium-sized operators have begun to reassess their businesses, with some choosing to close or downsize. This is a double-edged sword for owners of industrial buildings: on one hand, the risk of tenant loss increases; on the other hand, if they can offer more flexible leasing options, there is actually an opportunity to attract high-quality customers who have been abandoned by larger operators.
How Can Investors Find Opportunities During a Shakeup?
Transformation Strategy One: From 'Shared Office' to 'Hybrid Office'
The Achilles' heel of traditional shared office spaces is their excessive reliance on monthly rental income from fixed workstations. Smart owners have begun to transform, reconfiguring the space into a 'hybrid office center' that offers three types of services:
- Temporary workstations charged by the hour ( $50-80 per hour)
- Meeting rooms charged by the day ( $800-1,500 per day)
- Short-term project offices (1-3 month lease)
The advantage of this model is the diversification of income sources, so it won't collapse entirely if a certain type of client is lost. Take a unit in an industrial building in Tsuen Wan as an example: the owner renovated the 3,000 sq. ft. space, allocating only 40% to fixed workstations, while the remaining 60% was used for meeting rooms and event spaces. As a result, the post-pandemic occupancy rate did not drop but actually increased, rising from 85% to 92%, because it attracted a large number of corporate clients needing temporary meeting venues.
:::highlight Success Case: A 5,000 sq ft co-working space in Kwun Tong converted 30% of its area into a 'Podcast Recording Studio' and 'Live Streaming Room' for rental in 2023, charging $200-300 per hour. This new service accounted for 25% of total revenue, successfully making up for the shortfall from the decline in fixed desk income. :::
Transformation Strategy Two: Targeting 'Downturn-Resistant' Industry Clients
Not all industries have reduced office space due to the pandemic. Some industries, on the contrary, have seen an increase in demand for physical offices, such as:
- Financial Technology (Fintech): Requires a physical office address that complies with regulatory requirements
- Professional Services (Accounting, Legal): Client meetings still require a formal venue
- Creative Industries (Design, Video Production): Requires professional equipment and collaborative spaces
If your co-working space can provide dedicated facilities for these industries (such as finance-grade security systems, professional photo studios, soundproof meeting rooms), it can create a differentiated advantage and avoid falling into a price war.
An owner of an industrial building unit in Cheung Sha Wan repositioned the space last year as a 'creative industry studio,' providing professional lighting, green screen, and editing equipment, attracting 12 film production companies to move in. Even though the monthly rent is 20% higher than traditional co-working spaces, the occupancy rate still reaches 100%, because these clients cannot find other places that offer the same equipment.
Transformation Strategy Three: Reduce Holding Costs, Enhance Flexibility
During uncertain times in the market, reducing fixed costs is key to survival. A common mistake made by many business owners is investing too much money in renovations and equipment, resulting in high mortgage payments and a lack of flexibility to adjust rental strategies.
Practical Recommendations:
- Renovation adopts a 'light asset' model: Use movable partitions and leased furniture instead of fixed renovations. This way, future transformations or exit will incur less loss.
- Cooperate with operators instead of self-operating: If you are not familiar with running a co-working space, consider leasing the units to professional operators and collecting a fixed rent. Although the return is lower (around 6-8%), the risk is also greatly reduced.
- Make good use of government subsidy programs: Some industrial building revitalization projects can apply for the 'Industrial Building Revitalization Scheme' subsidy to reduce renovation costs.
:::tip Mortgage Strategy: If your industrial unit mortgage has a high loan-to-value ratio (over 50%), it is recommended to make early repayments when the market is good to reduce payment pressure. When the market reverses, you will have the flexibility to lower rents to attract tenants without being forced to sell cheaply due to 'mortgage payments being lower than rent'. :::
Avoid the Three Major Investment Traps
Trap One: Blindly Following the Trend of 'Industrial Building Revitalization'
Not all industrial building units are suitable for conversion into shared office spaces. The following three situations should be avoided:
- Remote location: Industrial buildings that are more than a 10-minute walk from the MTR station are much less attractive.
- Overly aged buildings: Industrial buildings over 40 years old have high renovation costs and are difficult to pass fire safety and structural safety approvals.
- Intense local competition: As mentioned earlier, areas such as Kwun Tong and Cheung Sha Wan are already oversupplied, making it difficult for new entrants to break through.
Trap Two: Overreliance on a Single Tenant
Some property owners, in order to rent out quickly, lease the entire unit to an operator or a business. This seems convenient, but the risk is very high. Once the tenant moves out or goes bankrupt, you will face the pressure of a long vacancy and rehiring tenants.
Recommended Approach: Divide the space into multiple separate units to spread tenant risk. Even if one tenant cancels their lease, the other tenants can still maintain cash flow.
Trap Three: Ignoring Legal and Fire Safety Compliance
Converting industrial buildings into shared office spaces must comply with the Buildings Ordinance and fire safety regulations. Many owners, to save costs, skip the formal approval process, resulting in orders from the Buildings Department to restore the original state, causing heavy losses.
:::warning Legal Risks: Unauthorized renovation of industrial buildings not only faces fines (up to $200,000 and 1 year of imprisonment) but may also affect the property's resale value. If buyers discover illegal modifications during due diligence, they may significantly lower the price or even refuse to purchase. :::
Professional Advice: Hire licensed architects and fire safety consultants to ensure that renovation works are legal and compliant. Although the initial costs are higher (around $50,000-100,000), it can prevent larger legal and financial risks in the future.
Market Outlook for the Next Three Years: Who Can Survive?
In the co-working space market within Hong Kong's real estate sector, there will continue to be a reshuffle over the next three years. Those that can survive and make a profit will be projects with the following characteristics:
- Flexible and diversified revenue model: Does not rely on a single service and can quickly respond to market changes.
- Clear target customer base: Provides differentiated services for specific industries or needs.
- Reasonable cost structure: Low mortgage burden and light asset operations, allowing flexible adjustment when market conditions reverse.
- Superior geographical location: Close to MTR stations and business districts, convenient for transportation.
For investors, now is not the time to exit, but a crucial moment to reassess strategies and optimize operations. Those owners who can clearly see market trends and decisively transform will occupy advantageous positions in the post-restructuring market.
:::success Investment Confidence Summary: The reshuffling of the co-working space market eliminates projects that lack competitiveness, rather than the entire industry. As long as you are willing to adjust your strategy, improve service quality, and control costs, this market still has considerable potential for rental returns and asset appreciation. :::
Do you have questions or want to share experiences about investing in co-working spaces? Feel free to leave a comment below to discuss, or send us a private message for professional consultation. Subscribe to our blog to get the latest investment strategies and property guides for the Hong Kong real estate market first!