Daybreak - What does Awfis know about co-working that Wework doesn’t?

Episode Date: August 20, 2024

Many thought the fall of WeWork – as quick and public as it was – was the final nail in the coffin for the fledgling coworking space business.  But a few years later, the pandemic is over and people are finally making their way back to their workplaces. The end of work from home has given the coworking space a new lease on life and one Delhi-based startup in particular is really standing out.Awfis, a nine-year-old flexible workspace company, is breaking pretty much every rule in the coworking space playbook. And it seems to be working out pretty well for the company. Tune in. Listen to the latest episode of Two by Two hereDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio. episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Back in 2019, a US-based co-working startup called WeWork became one of the most talked about startups in the world almost overnight. The WeWork story is pretty well documented. You probably heard about how this office rental company masquerading and

as a tech company, managed to get long-term leases in some of the most expensive commercial neighborhoods across the world. I mean, at one point, it felt like every fancy-looking office building in the world had a we-work sign. Just like that, the startup became practically synonymous with co-working. That was until it all came crashing down. All thanks to the calamity to end all calamities, the COVID pandemic. Suddenly, workplaces, co-working spaces included, were completely redundant and this company, which was once valued at $47 billion,

was suddenly filing for bankruptcy. You see, before the pandemic came along, a handful of other co-working start-ups were really riding the wave of WeWork's success. WeWork managed to make co-working spaces the cool new thing. But then the pandemic happened. Many thought that the fall of WeWork

as quick and as public as it was was the final nail in the coffin for the fledgling co-working space business. But a few years later, the pandemic is over and people are finally making their way back to their workplaces. The end of work from home has given the co-working space

a new lease on life. And one Delhi-based startup in particular is really standing out. I'm talking about office space solutions. This is a nine-year-old, publicly listed, flexible workspace company that is breaking pretty much

every rule in the co-working space playbook. And it seems to be really working for the company. Because Office has reported two profitable quarters straight and its share price has only been increasing with time. Basically, things are looking really, really good for Office. It's having

its own mini-WeWork moment and like with WeWork is also inspiring a bunch of other startups in the same space to go public. Some of its biggest competitors like Smart Work, Beehive and WeWork India are also also on track to go public.

But this could mean trouble for office, because choosing the unconventional path, the road less taken, won't be so easy anymore. It'll come at a significant price. So far, office has been paying it by foregoing the biggest corporations as its clients. But once competition is amped up,

the things that make office office may not make sense for it anymore. Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahil Philippos and I'll be joining Snickta Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Weddust Day, 21st of August. A little while ago, we were talking about WeWork and how it somehow managed to set up co-working spaces in some of the most expensive real estate across the world. It's rather premium taste in real estate also resulted in very premium clients.

And typically, that's how Moe's top tier co-working space. startup's function. They identify premium real estate, get long-term leases and try to attract some clients with really deep pockets. Office came in, took that playbook and ripped it to shreds. That's what I meant when I said that this company is unlike any of its competitors. To start with, it isn't looking for sought-after spaces. Instead, it targets less sought-after spaces, often owned by wealthy individuals or family offices. It also doesn't opt for long-term leases. Instead, it seeks to have the owner bear around 70% of the fit-out cost and receive the same proportion of the revenue in return.

It seems like a pretty fair deal, right? The higher the cost borne by the owner, the higher the amount of revenue they earn. So if the owner's share of the cost comes down, then the revenue share also generally increases in office's favour. What all of this means is that office is essentially spending far less money on actually setting up and running the co-working spaces. So it's able to open multiple centres at a price at which others open just one.

This is called a managed aggregation model and it's all about risk management. So far, it's really worked in office's favour, particularly in tier two cities, where the startup has managed to make the biggest mark. In the process, office has been able to scale its business faster than anyone else. Executives who work in this space say what office has been able to pull off is nothing short of. of remarkable. That largely has to do with the sort of work spaces it typically takes up.

Funny enough, it's easier to come by fancier grade A developments like the kind we work opts for, then it is to come by less sought after grade B developments. And yet, office has been able to track them down and scale its business the way that it has. It really is pretty remarkable.

But like I said a little while ago, being the outlier comes at a cost. More on that in the next segment. You see, there's a big downside to offices managed aggregation model that we just discussed. You know, the kind where the owner takes care of most of the expenses, and based on that, earns revenue from the office space. Basically, when property owners take on more risk, like in the case of office, they're also reluctant to give up the same size of available space. So as a result, an average office center is spread around 20,000 to 70,000 square feet. typically it leases about a floor or two of a property.

Now let's compare that to a co-working space run by a company like WeWork. They're far more spacious, say around 100,000 to 150,000 square feet. And they lease multiple floors, if not the entire building. Which is also why a seat in an office workspace is way cheaper as compared to WeWork. This also means that earnings per centred are pretty limited. A former office executive told the Ken that to earn thousand crore or $2,000 crore rupees and revenues, office will have to open a ton of centres, whereas a company like SmartWorks could do it in half the number. That's because it generates a higher dollar amount per centre.

This is also reflected in office's profit margins. Its abeta margins have hovered around 30% for the past three years. To put that in perspective, that's half the margins of table space and smart work. its closest rivals in terms of revenues. To add to that, smaller facility sizes and relatively less control over the premises have also impacted offices' ability to add big names to its clientele.

So the likes of American tech giant Microsoft or Investment Bank JP Morgan are likely to pay a premium to companies like WeWork for Grade A office spaces. But offices workplaces are able to attract slightly lower-run clients, like Cape Germany or IDEA, forge or Chinese consumer tech maker Lenovo.

Now that office is a listed company, that approach may have to change. Real estate insiders say investors may now push it towards attracting a more upmarket client base. Now, this is something that office likely recognizes, especially considering it rolled out a premium format, Office Gold, in 2020. But the category only accounted for less than a tenth of its overall centres as of December 2023. It's not known if the centres opened under office gold are operating through managed aggregation or leased from property owners directly. Most people in the industry say it's still difficult to decide which of the two models works better. That will probably be decided only after

the next player comes into the market and threatens offices dominant. And that would depend on the company's next move, either towards high-profile clients offering long-term occupancy and better margins or chasing more lease deals, even as the supply of owners willing to share the risk shrinks. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos, produced by me Snigda Sharma and edited by Rajiv Sien.