The red-hot co-working market has been showing a few cracks lately, which according to those on the inside are signs that Asian markets are leading the way into a new phase for the industry – one that will bring more risks to landlords, but opportunities when they and their operating partners are better aligned.

Recent weeks have seen myriad stories about how the landscape is changing in major ways. IWG’s Spaces took over several floors in Shanghai from the faltering Kr Space, which is itself the subject of a lawsuit from Chinachem Group after the former backed out of a $500 million lease at One Hennessy in Hong Kong.

“I think for all new businesses, there is an early period where everyone is very excited. It is easy to get money from capital markets, so you see fast expansion but not always accurate or smart expansion,” says Thomas Hui, CEO of theDesk, a co-working operator in Hong Kong.

“I’ve been saying for a year now that we’re going into the 2.0 phase – where everyone is more concerned about sustainability and quality compared to the past,” adds Hui.

He says that Western co-working brands’ tendency to target small, startup businesses is too one-dimensional for Asian markets, due to the relative number of such businesses in key Asian cities, and governments’ heavier involvement in the markets.

Chris Mancini, CEO Asia Pacific for Savills, agrees that what’re seeing a correction in the market and that it will make life challenging for smaller operators:

“I would take a very skeptical view of long-term leases being extended to co-working operators, particularly the ‘Johnny-come-lately’ firms that tend to be undercapitalised,” says Mancini.

These risks are most apparent by Kr Space’s fall from grace, which follows its failed US$200 million fundraising round last year. It announced a new round of RMB 1 billion in funding, but question marks remain. Even industry darling WeWork is reported to have backed out of discussions to take five new spaces in Hong Kong. 

“Though it hasn’t happened yet, if a big operator like WeWork were to decide that it needed to consolidate its spaces because of underutilisation, it could have a major negative impact. Particularly in markets like Seoul where co-working is a significant proportion of total office space, but no one outside of the operators knows how well utilised those spaces may be,” says Mancini. 

However, for markets like Hong Kong and Shanghai, Hui says that he is still positive about the need and growth for co-working spaces, though he says businesses like his will need to adapt quickly:

”There is going to be some consolidation in the industry for sure. But it’s very exciting to move into this second stage, as I think you’ll see more creativity. It won’t just be about expanding square footage, now you can expect more new ways of developing.”

Enticed by strong brands like WeWork, Spaces and Naked Hub (since acquired by WeWork), many landlords have been using co-working spaces as a quick – and to be fair, revenue-generating – way to brand their buildings and build a profile. However, with the changing market, the risks of this quick-fix approach may change their calculations.

“Many landlords in Asia-Pacific have been getting in co-working operators as a way to brand their buildings – I don’t really see how it is beneficial as a brand building exercise, save for its potential appeal for a very narrow market segment,” explains Chris Mancini, CEO Asia Pacific for Savills.

He continues: “A single tenant building leased to a co-working operator is challenging to sell and the price will be risk adjusted to reflect broader investor concerns that the co-working universe has grown beyond its ability to sustain itself.”

Amid these larger concerns, landlords need to be looking for more than just a brand name and some rental income from their co-working partner. Thomas Hui, CEO of theDesk, says that the traditional way of operators securing a space, doing some cool interior design work, then moving on and repeating it, won’t hold up any more.

“We need to be asking ourselves if we are creating a real value proposition to members,” Hui says.

“Are you just making a nice, well-decorated office? Or are you building real, community value for members and the landlord? We want to create a real community – that is co-working 2.0 – and not just for our members but for all the tenants in the building.”

Landlords should seek out more than just a name brand for their co-working spaces, as the users of the spaces can offer far more than just filling desks, but become the heart of a community for the building and its neighbourhood.

Looking to the market as a whole, he expects number of operators to decrease, but the overall size of co-working spaces will still grow.

“It is still very early for our industry, think of it like smartphones, a little more than 10 years ago there was Palm, the industry standard for smart, pocket devices. Now, Palm is gone and we’re all on our iPhones,” Hui says.

“Co-working still has a lot of room to grow, but the brands that survive for the long-term may not be the ones carrying the big names today,” Hui adds.