Co-working tenants account for a small portion of Asia-Pacific’s overall office leasing market currently but that could change given the continuing demand for new and flexible office space.

According to a 2019 Asia-Pacific outlook report by Los Angeles-based property services firm CBRE, flexible space providers, which includes co-working and serviced office operators, have increased their footprint by more than 300 percent in Asia-Pacific over the past three years. However, as things stand, only 1.7 percent of the total prime office stock in the region is leased to co-working operators at the end of 2018, a modest increase from 1 percent a year before. In comparison, flexible space providers took up 2.5 percent of both San Francisco’s and Manhattan’s overall office occupancy as of early 2018, with the latter showing a 600 percent growth since 2009.

Going forward, CBRE expects flexible space operators to focus on improving occupancy levels rather than opening new centers, which could lead to slower demand-led growth in 2019. As such, the real estate services firm is advising landlords to differentiate on the basis of which operators can provide additional services for tenants, such as landlord-managed meeting and event rooms, for instance.

“Tenants will continue to redefine the usage of office space. Real estate assets will become more agile. The use of flexible space to complement core portfolios will be accelerated as tenants respond to the changing business environment and minimize costs and liabilities,” the report noted.

CBRE expects a trend among traditional tenants, such as boutique investment firms and advisory firms, to increasingly consider utilizing co-working leases in prime locations. Other traditional office-occupying sectors like finance and professional services are also set to focus on cost-effective office solutions that do not involve significant capital expenditure, including flight-to-quality relocations.

Meanwhile, tech companies accounted for 24 percent of total office leasing demand in 2018 due to rapid expansion by major firms along with new demand from start-ups, making it the sector with the biggest demand for new or additional space, outside the flexible space sector. In China and India, especially, government policies aimed at supporting the tech sector are expected to further drive demand for office space, according to CBRE. However, the report also advices landlords to be prudent on configuration of lease contracts due to the high failure rate among start-ups.

Increasing demand for flexible office space by traditional tenants as well as start-ups comes at a time of growing supply of office space. New Grade A office supply in Asia-Pacific is expected to reach a net floor area over 66 million square feet in 2019, reflecting an increase of 20 percent year-on-year, according to CBRE. A strong driver for this increase stems from delayed projects, which were originally due for completion in 2018. For instance, around 10 million square feet of stock in capital cities like Beijing and Delhi, as well as other Indian tier 1 cities, have been deferred to this year.

Bulk of this new supply will be created in China and India, which collectively account for 67 percent of stock scheduled for completion this year. Southeast Asia and the Pacific region will see a limited volume of new space, and that will be predominantly centered in Jakarta, Manila, and Melbourne.