The Economics of In-Firm Coworking

The Economics of In-Firm Coworking

As I have suggested recently, the key drivers behind the growth of corporate coworking have been for the most part real estate drivers. The economics of this simply make sense, despite the skeptics. If one looks only narrowly at the price per square foot for a workstation in a private office in a coworking space (such as WeWork), the ‘cost’ of coworking at first appears astronomical. With a closer look, though, the math of coworking is quite interesting.

Some Comparisons

Consider, for example, a market where the price per sq ft for Class A office space is $45/yr. If we use a total sq ft per worker of 183 sq ft (much smaller than even a decade ago when it was closer to 250-300 sq ft), this comes to a per worker/yr cost of $8,235. Note that this is inclusive of the common spaces allotted per person, assuming an actual workstation footprint of between 80-100 sq ft.

By contrast, in the same market, the per month membership fee at a WeWork will range from $700/mo/person (for a 1 person office) to as low as $450/mo/person in a larger office with 8 or 10 people. Using an average of $575/mo/person, the annual cost of that worker is $6,900.

If one focuses, as some coworking critics do, on the cost per sq ft of just the workstations within a WeWork, there is indeed a potential for sticker shock. If one is looking at a 1 person office at a WeWork, the price per sq ft can reach as high as $180 sq ft. But this is precisely the wrong way to look at it, as it is more or less comparing apples and oranges.

The Coworking Disruption

Among other disruptions around the social norms of sharing workspaces with people from different companies, coworking is also consistently putting pressure on the size of the footprint per workstation across the office industry. In some coworking spaces, a workstation can fit within 40 sq ft, which is a half or a third of a workstation footprint even in a dense open-plan office (not to mention the massive amount of sq ft allotted in yesterday’s corner offices).

Workstations in conventional corporate offices are slowly shrinking in this era of the shared workspace, yet there is still a norm/practice of lavishing massive amounts of (often underutilized) space on knowledge workers. This is due, in large part, to the legacy systems and practices of asset owners, brokers, and corporate real estate professionals.

The awkward truth is that the “system,” such as it is, is designed to lease more space to tenant companies than they (will ever) need. Under the warning/scenario that “you wouldn’t want to be short on space if you grow and need to add staff,” companies enter into long leases on floor plates they will utilize (most likely) at around 50-60%.

And the world turns. The REITs feed dividends to shareholders, brokers receive their commissions, and CRE professionals receive their kudos. Looking at these industry dynamics from a 35,000 ft perspective, it is perhaps not too extreme to say that commercial (office) brokers may easily go the way of the travel agent. But that is for another article…

Coworking Economics Inside the Company

The first step in re-calibrating what an office is and what a workstation is, in the spirit/economics of coworking, is to deal straight on with the Great Utilization Dilemma. In this era of cloud computing, worker mobility, and cloud officing, it is no longer the case that people need to go to ‘their’ office every day. By definition that means tons of empty workstations everyday. We know this from the coworking world. People come into the space some days, but not others. It depends on what they are working on. Flexibility and choice are largely what coworking is about. This is the stuff of the 40% space utilization rates that are commonly reported across the office industry.

What follows here is a brief what if scenario that asks:

If a company in a specific city with a specific number of staff members is looking for an officing solution, how would an in-company coworking model compare, financially, with a traditional leasing model?

The purpose of the comparison is to help bring about a shift in thinking. Rather than viewing coworking strictly as a 3rd party alternative to the (same as it ever was) officing norm, I am suggesting that coworking, in some form, can become a new norm.

The Basics:

  • Acme Company has a staff of 600 people
  • The cost of Class A office in their market is $45/yr

Note that in the comparison below, I bake in the inevitable poor utilization rates that most companies experience into the coworking model, and account for workstations for only 60% of the staff. This assumes that many people work from different locations (office, home, coffee shops, vacation, etc) in a given week. Granted, these are extreme comparisons, but that is the point. The stark contrast is intended to be illustrative of the potential disruptive economic advantage of the in-firm coworking model.

Traditional Officing Model

  • Space for- All 600 staff
  • Sq ft/Person (total)- 183
  • Sq ft/Workstation- 90
  • Total Sq Ft Required- 110,000
  • Cost/Worker/Yr- $8,235
  • Lease Cost/Yr- $4,950,000

Coworking Officing Model

  • Space for- 360 (60% of staff)
  • Sq ft/Person (total)- 85
  • Sq ft/Workstation- 45
  • Total Sq Ft Required- 30,600
  • Cost/Worker/Yr- $3,825
  • Lease Cost/Yr- $1,377,000

This is indeed a simple and crude comparison, and is presented in the spirit of provocation. There are numerous institutional forces that will never want to see the economic model of coworking applied to everyday officing solutions in companies. At the same time, though, I would think that when (tenant) companies begin to look closely at the numbers, they might be intrigued.

Operations & Transitions

Finally, simply allocating space according to coworking principles is likely not enough. Coworking works because of the many soft and squishy things (operations, events, programming, etc) that differentiate it from activity based working. For corporate coworking to take off as a viable, long-term officing model, some level of intentional programming and operations will need to be included.

Incorporating coworking operations and programming will inevitably add some costs back into the coworkng model. Even still, on the whole, in terms of both the costs and the effectiveness, the coworking office, in our opinion, will soon prove to be an attractive strategy for companies interested in coworking but who also want to keep their employees together under one roof.

 


This article was originally posted on LinkedIn by OpenWork Agency Partner, Drew Jones, PhD.

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