Demystifying Coworking Space Financials: Consultant Pulls Back the Curtain of the Coworking Business Model
Anyone can start a coworking space. If planned effectively, it’s possible to secure financial backing from lending institutions or local angel investors.
As the world’s first coworking consultancy (serving coworking startups since 2014 and players in the industry since 2008), we’ve received inquiries from a wide spectrum of types who have entertained the notion of opening their own coworking space. Ranging from individual entrepreneurs to multi-national real estate groups, different people have different reasons for being intrigued by coworking and having a desire to become a player in the shared workspace industry.
Generally, the client goal that we hear most is “Maximize Revenue per square foot,” which has been the central driving force of the entire coworking industry. This is why many of the biggest players these days are real estate professionals, because they understand the metrics of space as it relates to revenue.
What if your success metric isn’t revenue psf, but is something else entirely? Great- you’ve probably caught the “coworking bug” as they say, and are blown away by the impact coworking can have on community, both among your members and with your local neighborhood and city. Coworking has a remarkable gift at a catalyzing startup communities, bringing together small business owners and entrepreneurs, and enabling dialogues between cities and citizens.
[edgtf_blockquote text=”If community is your success metric, you too can make a profitable coworking business, but you’ve got to go into it with eyes wide open.” title_tag=”h5″ width=””]
First things first- there are three modern day misconceptions about starting a coworking business:
These assumptions are partially true, but mostly just misleading.
- The coworking industry has become a “real estate play” and only real estate companies can compete any more.
- It’s too expensive to “get in the game” and unless you have an endless supply of money there’s no sense even trying.
- If a coworking space is pretty much full and filled with members, it must be doing quite well financially.
Reality check: The fact is if you start to take a look at the books of existing coworking operators you realize some operators can barely pay the bills, whereas most, are experiencing profit enough to cover all expenses, pay a salary for the owner and a small staff, and then have some left over. I would suggest for this latter group, running a coworking business is a lifestyle business. There’s also a small group of very savvy operators that are experiencing what I call a “Wow” level of profitability. These owners (often with real estate background) are experiencing ROI that is quite impressive. The high margins of a very well run (and business model optimized) coworking business is unprecedented to the commercial real estate industry, which is why the model is seen as such a disruptor, and ultimately has been embraced by the largest real estate firms in the world.
[edgtf_blockquote text=”The thing that you’ll see in common with likely all the “wow profitability” operators is one thing: Private Office Allocation. I’m not talking about 2-3 offices. I’m talking 20-30″ title_tag=”h5″ width=””]
The #1 Reason a Coworking Space might be full, but not really that profitable?
Planning. It’s all about the business model. The extra time spent here in the beginning will pay dividends for years to come. I’ve visited too many spaces where they’re brimming with people, and then you talk to the owner about how it’s going financially and they’re struggling because they didn’t build the space (or the model) right from the beginning.
What are the space allocation elements that affect your coworking business model?
Here’s a breakdown of Monetizable Space & Non Monetizable Space
Private Offices as they relate to a Stable Coworking Space Model
There’s two main reasons private offices have been driving the industry:
- Customer Demand. There is no shortage of demand for flexible term office space (in any market). Companies are shifting their workplace strategies to flex office and independents have no interest in signing a commercial lease and buying their own furniture, etc. They choose coworking for pragmatism.
- Operator Stability. – Private office “tenants” pay more and generally stay longer. It can be difficult to manage the turnover of a high ratio of hot desk users and frankly, it may take just as much time, energy, and marketing cost to sell a 10 person office (with a 6 month commitment) as it does to sell a 1 person hot desk membership (with a month-to-month commitment). For these reasons many operators have opted to focus almost entirely on offices, thus minimizing their financial risk.
Minimizing Risk, Optimizing Allocation
From here, the key: how you allocate the appropriate space and membership per office. How much square footage do you allocate for a 1 person office vs 2 person office? Depending on your market, should you have a 10 person office? Is it allocated the same per person than a 1 person office? What about a 20 person office? Which type of office is more profitable, which you should have more of? What size desks should you put in? Does it really matter?! These may seem like small details, but when you’re allocating a large floorplate, optimizing your square footage efficiently is essentially money in the bank (or in the drain), for years to come.
Stress Test Your Model + Experiment with Different Allocation and Pricing Scenarios
The beauty of having a business model with all the formulas in a spreadsheet is that you can adjust the number of private offices to “stress test” your model.
Maybe you don’t like the idea of having so many private offices and instead you want to try and focus on another dependable line of revenue. That’s fine and the beauty and of the planning process! Maybe you want to introduce a special kind of membership type or a unique (and highly profitable) event rental strategy. Just adjust the numbers in your spreadsheet and see what happens in year 1, and by year 5. Warning: Once a space is built, it is built, so do your experimentation in the model!! Sure you can rearrange the furniture, but if you later decide to build/demolish walls, run electricity, etc you’re going to run into unbudgeted expenses and variables that could hurt your business.
Industry Standard Operational Expenses
What are the industry standard pricing estimations and recommendations for operational costs?
Also, what are the estimated construction build out costs and furniture costs?
Eyes Wide Open – Coworking or Bust
The main difference between starting a coworking space in 2020 vs starting one in 2008 is that today it requires significant startup cost and ongoing operational expense comparatively. This is due primarily to spaces needing to have larger total floorplates, which have more significant buildout costs due to private offices, etc. If you’re an independent entrepreneur or small business owner the initial CapEx could immediately turn you away. But then again, presenting realistic and conservative financials to a local lending institution and/or angel investor are the most common ways a coworking space get funded. Increasingly, banks are seeing well planned and thoughtful coworking businesses as feasible projects, but only if you can demonstrate how organized and forward-thinking your finances are and your roadmap for the future.
[edgtf_blockquote text=”The other main difference is that coworking spaces today have the potential to experience ‘Wow! Profitability’, if planned and designed effectively in the initial business model feasibility stage.” title_tag=”h4″ width=””]
Are you thinking of starting a coworking space in 2020?
We help entrepreneurs and real estate professionals determine the financial feasibility of a new coworking concept. Contact us to get a quote