By Jeff Revoy
Chief Operations Officer
New coworking spaces spring up daily in major U.S. cities. Each may offer different themes or amenities, but they share the same value proposition: affordable space for business professionals seeking temporary work environments. Coworking spaces are in high demand, but questions linger about long-term business viability. Namely, are coworking spaces worth it?
Coworking is relatively new commercial real estate trend (learn more about coworking). The concept has been around for more than a decade, but only recently gained major market traction. As a result, there’s not a lot of long-term data to show if the business model is sustainable. Couple that with the fact that lease management is a cost-heavy endeavor and it paints a rough picture of a viable business.
Despite the clear and present concerns about the coworking business model, there’s also a lot to love. Operated efficiently, the positives of coworking can outweigh the cons. And, coworking can be quite lucrative. You just need to understand the costs.
Keep reading: The benefits of coworking.
Breaking down the cost of coworking
Is coworking space worth the cost? A cost-benefit analysis will reveal the answer. If a coworking space costs $5,000 a day to run, it needs to make more than $5,000 in profit to remain viable. It’s a pretty cut-and-dried business model—measure expenses to paint a picture of profit.
There’s a lot of overhead in running a coworking space. The space-as-a-service model must cover commercial real estate leases, which range in cost depending on square footage and location. Or, if a coworking company chooses to buy or develop a building, the cost comes in the form of a commercial real estate loan.
Next, there are operational costs. These include utilities, insurance, employee salaries, upkeep and maintenance, technology—anything vital to the everyday operation of the space. These costs are variable, yet easy to budget. Additional costs including furnishings, decorations, amenities, etc. Let’s not forget contingencies for unforeseen repair costs, one-time purchases, and other outlays that affect profitability.
A business model built on variability
Figuring out cumulative monthly expenses provides a baseline for creating successful coworking spaces. From there, it’s about setting the right fees and attracting patrons. This is where the true pros and cons of coworking spaces come into play—namely, variability.
Coworking has two types of clientele: members and walk-ins. Members pay monthly subscription fees to show up at any time; walk-ins pay per use. A viable coworking business must balance the needs of both client types.
Member fees generate consistent monthly cash flow, whether someone uses the space or not. You give up a modicum of control to generate guaranteed profit. This profit is also subject to utilization. Someone using the space 20 times per month is getting more value than someone using it 10 times per month and paying for the same subscription. Another issue: too many subscription users and you run the risk of overcrowding.
Walk-in clients are unpredictable, but easier to manage. Walk-ins tend to pay higher one-time fees, which are more lucrative for the business. The problem is consistency—it’s hard to predict occupancy based on a group defined by high turnover and unforeseeable behavior.
The balancing act between members and walk-ins is a product of whatever combination is most manageable and lucrative. It also depends on the number of available seats, total workplace capacity, and operating cost. Here’s an example:
A coworking space with 60 seats needs to generate $6,000/mo. to stay profitable. It sells 50 monthly subscriptions at $100/mo., knowing not every person will use their subscription every day. This equates to $5,000 in monthly revenue. For walk-in clients, the price in $20 per day. This means they need to bring in a minimum of 50 walk-in clients throughout the month for the remaining $1,000.
There’s immense variability in how a coworking space can structure its subscription vs. walk-in pricing and accommodations. What matters is maintaining proper availability for members and meeting profitability goals consistently.
Keeping up consistent occupancy
Another key consideration is who uses coworking spaces. Do they need a consistent workspace? Can they afford the subscription fee? Geographically, is there a broad enough user pool to accommodate high turnover?
External variables like these play a big part in determining the profitability of a coworking model. The best way to manage uncontrollable variables is to set prices that drive consistent occupancy without falling short of profitability. Often, it’s a model that relies more on subscriptions.
Justifying the cost of coworking
Running a coworking facility is a numbers game. There are big upfront leasing costs and property ownership, plus upkeep costs to consider. However, there’s a major upside in a membership subscription business model. Given the ability to keep seats filled and customer loyalty high, coworking spaces are worth it. There are many companies and coworking spaces out there proving themselves every day.
Keep reading: Who uses coworking spaces?