Last week, in the first of essensys’ market-focused webinar series, we spoke with industry leaders about the state of the coworking market. Based on a brief review of Deskmag’s Global Coworking Survey global results our three panelists Liz Elam of GCUC, Harsh Mehta of Work Better and Carsten Foertsch of Deskmag weighed in profitability, operational costs, revenue streams and market trends. If you missed the webinar, read on below to see what had to say. If you didn’t even know there was a webinar, click here to stay up to date on future market-focused events.
Maturity of the Coworking Market is Driving Profitability
This year’s survey results demonstrate a slight 2% increase in profitability across respondents. The consensus across the board of panelists is that the coworking market has matured tremendously and more time has given respondent operators the opportunity to turn a profit. Naturally, longer standing coworking locations have had more time to acquire members and therefore generate higher revenues. Like any business, young coworking spaces require a ramp-up time before breaking even and subsequently achieving profitability. The numbers show that it’s difficult to generate profit in coworking space with few members. The greater the number of members in a coworking community, the more profitable you’ll be.
According to Liz Elam who runs three centers in Austin, Texas, coworking operators are embracing new services such as virtual offices and are diversifying revenue streams. Harsh Mehta, who runs a total of 5 locations in two large U.S. markets, noted that there’s been a reduction in hobbyist coworking operations. There’s a more professional approach to running a coworking business due to maturity of the market. Harsh notes a more precise focus on numbers and data and diversification of revenue streams among workspace operators.
As the market has matured, center managers and operators are better positioned to charge members for the use of services, rather than leave money on the table in an all-inclusive model. Liz cautions about including too many services with a membership fee. “People don’t value free,” she notes. The fine line between driving revenue and customer satisfaction is managing expectations from the start. Harsh explains that your entire workspace staff – from sales and management to operations – must understand what core and additional services your business provides, the pricing structure and why. Clearly and consistently communicating your value proposition and services to customers – starting from your website to your member portal – will prevent issues around pricing.
The key takeaway on profitability from the Coworking Full Speed Ahead webinar is to listen to your member community without losing sight of the basics. Operations and logistics are fundamental to ensuring you’re driving member satisfaction while also running an efficient and profitable workspace business. Speaking of operations, we touched on that in the webinar too.
Shifting Operational Costs in the Coworking Market
Deskmag’s global coworking survey results demonstrate a shift in operating expenses. Both operating costs and staff wages have increased, while rental costs have decreased. Controlling operational costs is ultimately a balancing act, but these results suggest key shifts in the coworking market. For example, the workspaces in growth mode are subject to more expenses driving up their operating costs. Harsh Mehta put it best, “growing up as a business is expensive,” and it requires keeping a tight eye on your processes and closely reporting on performance.
Both Harsh and Liz have been running their workspace businesses for around eight years and have been able to scale a proven business model. Both have experienced a decrease in operational costs. For one, Harsh spends less on providing IT services. He contributes this to the commoditization of technology and platforms such as Operate and Connect by essensys, which simplify complex tasks and eliminate manual tasks associated with running a flexible workspace.
Liz and Harsh both noted an increase in human capital expenses, consistent with the coworking survey results. The driving factor is the changes to HR structure associated with a mature market. No longer do interns or cheap hires make the cut. Now operators are focused on hiring people who can drive member satisfaction, albeit at a greater cost. Growing workspace brands are also forced to hire employees specialized in a certain aspect of the business. For example, a junior accounts manager won’t be able to manage the critical responsibilities of managing your workspace finances as you grow; a CFO or controller may be required.
Promoting Your Services in Today’s Coworking Market
The interactive Coworking Full Speed Ahead webinar was an open forum for participants to submit questions to expert panelists. A question of interest was marketing services. Deskmag’s coworking survey results demonstrate that there is an association between the most profitable coworking spaces and the marketing activities they carry out. These include coworking associations, coworking visa programs, social and online media, community building and free trials.
The operators on our panel delved into some other marketing tactics that have been successful. For starters, because coworking is no longer a niche market, it’s important to appeal to a broad audience and move them through your sales funnel. This means casting a wider net – starting with your website – to capture anyone who could even remotely be interested in any category of flexible workspace. Your marketing process should include qualification steps along the way.
Liz Elam recommends advertising in real estate market and talking to local brokers in addition to partnering with broker sites such as Instant Offices and Liquidspace. You’ll get plenty of leads and traction. However, success can be inconsistent. It’s unlikely a lead from a third-party platform will convert on the first impression. Subsequently, it may be difficult to ascertain what exactly leads to a conversion event.
When it comes to reporting on the success of your marketing campaigns, Liz and Harsh admitted to not having cracked the code to that issue just yet. However, as a general rule of thumb, Harsh suggests allocating your budget comfortably in tactics where you believe you’ll get the greatest return and then calculate top-level numbers. Your cost per lead must be within a livable range for your business. The conundrum of this approach is getting a granular view of where you’re spending money to acquire leads and confirming how and where such leads are converting.
Investing in SEO, Google analytics, and making sure your website communicates your value proposition and drives leads through the funnel is essential. Operators can leverage workspace management software to track incoming leads and even deduplicate leads that are received from third-party search platforms.
Commercial Real Estate Taking a Seat at the Coworking Table
Landlords and CRE companies will continue to grow within the shared workspace market. Harsh Mehta suggests that landlords will increasingly integrate shared office space into the base buildings offering throughout their portfolio. Existing independent operators can expect their business environment to change and to be prepared to polish their service offering and how they’re running their operation.
“Coworking, shared office, flexible space is a byproduct of a specific need in the market that has expanded tremendously over the past few years that wasn’t met by core suppliers like landlords,” explains Harsh Mehta. “Larger smarter landlords with a longer-term purview of asset ownership are moving towards a model where they understand they’re not well equipped to become coworking operators themselves.”
Liz Elam added that the increase of RFPs in the market speaks to the broad-spectrum of CRE, landlords, and developers who are dipping their toes in the water. It’s not just large institutional developers, but the smaller developers who are also seeking management agreements with operators to develop their own coworking brands.
Intelligent investment in coworking and shared workspace by operators is “an indication of how great this market is and how many people are flocking to it,” says Elam. “Ultimately maybe coworking is what’s really going to really disrupt a somewhat archaic real estate industry, because that model doesn’t work anymore.” According to Carsten Foertsch, coworking’s greatest impact on traditional offices is how corporate offices are mimicking the structure and design of their space after coworking spaces, something much bigger than the coworking movement itself.
Coworking Market Trends and Insight
The most in-demand question leading up to the Coworking Full Speed Ahead webinar event was around trends and insights. Our panelists had plenty to say about this.
- Niche coworking spaces will continue to rise.
- Health and wellness will grow to be a focus of coworking operators basic value proposition. Some of the wellness efforts Work Better is undertaking involves dedicated yoga and meditation rooms, mother rooms, light systems that sync with circadian rhythms and improving natural and fresh air flow throughout the space. Liz Elam made a special note about loneliness, and the responsibility operators should be mindful of the mental health of people within their space.
- Growth is trending. The sheer volume of coworking spaces and money continuously being raised by big national brands is indicative of the high-growth market we are operating in. “There is enough volume out there for everyone,” says Elam.
- Longer-term contracts are becoming the norm. It’s not so standard in shared workspaces to sign up new or renewing customers for month-to-month, but rather for two to three-year contracts. This is an indication that the economy is strong right now and companies can afford to commit to flexible office space for longer periods of time. It also demonstrates, however, that the preference continues to be flexible office rather than traditional office space.
- Corporate coworking uptake is hot to trot. It’s cracking into massive markets and driving growth and profitability for coworking and shared workspace operators. According to Elam, the challenge for operators taking in corporate customers is educating these users about coworking and learning how to build a community and bring “the magic of coworking” to corporation-driven workspaces.
- Private office uptake in coworking spaces is on the rise. Based on the global coworking survey results, this category of office space will shortly become the primary source of income for coworking operators. It may pose a threat to smaller coworking spaces who don’t currently offer private offices and have limited space to integrate it into their value proposition.
Final Points from a Thriving Coworking Conversation
Our panelists agreed that currently there are few threats to the coworking market. The evolution of coworking will continue regardless of the economy, technology and commercial real estate stakeholders taking a bigger piece of the pie. From a business perspective, however, Harsh Mehta pointed out that coworking businesses are susceptible to the same threats as any other business operating in any other industry. Whether technology, the economy or any other disruptive factors, operators must be able to establish and manage a sustainable business model that can adapt to market changes and customer demands.