Without a doubt, real estate is your primary asset when starting a Coworking space. It’s the most expensive and essential service you offer to your members. Most coworking space owners have never searched for or signed a lease for commercial real estate so below we layout the various approaches to getting your hands on a workspace to build your community.
Choosing a Location
Your location may have significant dependencies on the real estate model that you choose below. But try to keep in mind that you don’t want the model that you choose to dictate your location in a way that negatively impacts your ability to run a successful shared workspace.
Location is likely the most important decision you’ll make when starting a Coworking space. You want to do a lot of due diligence in an area before you commit to a specific location. Different factors are more important in different markets. For example, in Europe proximity to foot traffic can be imperative to attracting members. In the U.S., members report in the GWA 2017 Coworking space member survey, commuting an average of 30 minutes to their Coworking space in the city and 20 in the suburbs. So make sure that your target demographic lives within a 20-30 minute radius of your potential building. There are a number of specific aspects of the space that you’ll want to consider when you narrow down your general location. I go through these in detail in episode #52 of my podcast and this blog post which includes a downloadable PDF that I developed that you can take with you on space tours to keep notes and compare location options.
Once you decide on your neighborhood and find a space you’re interested in, it’s time to acquire the property. Here are the most common ways to lock down a location for your new Coworking space.
According to the essensys Worldwide workspace survey, 80% of Coworking operators surveyed lease their space. Leasing removes the large upfront capital expenditure required when purchasing a property. It also prevents you from having to deal with the headaches associated with owning a commercial real estate property such as taxes and expensive facilities maintenance. However, it does require what usually becomes a long and taxing negotiation process with the landlord. You’re also at risk for high rent spikes when your renewal is up if the market rate in your area has increased. These increases can be enough to put you out of business. While it can be intimidating to sign a long-term commercial lease, the basic premise of this business model is that the operator signs the lease so that the member doesn’t have to. So do your homework, work with a broker experienced in the coworking business model, and then secure a long-term lease – consider ten to 15 years or at least five years with very favorable renewal terms.
You may be able to find a great deal on an office sub-lease opportunity for your first Coworking space. The objective of a sub-lease would be to find a turn-key space that has a floor plan that is similar enough to your model that you would be required to do minimal construction to get the doors open. For example, maybe the previous tenant built out a nice mix of team suites, meeting rooms, open space and a community kitchen. Win! Your job is now to make it yours, choose the right furniture, technology, access systems, etc.
The upside is that you might find a move-in-ready option with say, three years left on the lease that allows you to build your community, get your business operations rolling and give you a little time to find the space into which you can transition when the sub-lease expires. It’s also possible that you might be able to take over the lease if market rates don’t require you to re-negotiate at a much higher rate.
The downside is that you may have to move locations within a short timeframe, so you can’t afford to do much construction. You don’t want to put $100k into the space and then move out before that investment is paid back by revenue from the business. So be very careful with sublease opportunities. Make sure the space is mostly turn-key. You can take furniture with you to the next location, but not electrical, sprinklers, drywall, etc.
Joint ventures are becoming more and more common in the Coworking industry. These generally include some combination of profit-sharing and/or management fees between the landlord of a building and a Coworking space operator. The benefit to the landlord is that she can partner with an experienced operator to bring flexible office options to her portfolio without having to venture outside of her core skills of owning buildings. The benefit to the Coworking space operator is that generally, the landlord will cover most capital costs, allowing the Coworking space operator to more easily develop a space that meets today’s sophisticated market demand and also to scale more quickly if that’s a goal.
Generally, operators charge members of Coworking space about double the amount per square foot that the operator is paying in rent to the landlord. The opportunity for a landlord to take a cut of the profit and a piece of the Coworking pie can be a win-win. Property and asset owners are increasingly acknowledging the financial advantage of partnering with a shared workspace operator who knows how to launch and run a workspace. New and creative ventures, such as profit shares and management agreements of Coworking spaces are increasingly attractive to landlords who can appreciate the value of their commercial real estate in the growing Coworking market.
- Profit share leases can be a win-win for operators and landlords. The structure of the lease is designed to protect the operator from fluctuating real estate prices and market conditions. Rather than locking into a long, 5, 10 or 15-year lease, operators might share buildout and construction costs with the landlord, who would then take a below-market rent rate in exchange for a percentage of the profits from the workspace. In this profit-share business model, the more lucrative the operator, the better off the landlord is. But the operator is also more protected from an extreme downturn in the market that might cause a sudden loss of members or an extreme up-tick in market rental rates.a. Profit share leases can be a win-win for operators and landlords. The structure of the lease is designed to protect the operator from fluctuating real estate prices and market conditions. Rather than locking into a long, 5, 10 or 15-year lease, operators might share buildout and construction costs with the landlord, who would then take a below-market rent rate in exchange for a percentage of the profits from the workspace. In this profit-share business model, the more lucrative the operator, the better off the landlord is. But the operator is also more protected from an extreme downturn in the market that might cause a sudden loss of members or an extreme uptick in market rental rates.
- Management Agreements are another way operators can work with property owners. In this situation, they would agree to provide shared workspace and related services within the space owned by the landlord for a management fee.
Each of these relationship options requires many factors to be clearly and thoroughly defined between the two parties. An agreement must very clearly outline management or consulting fees to the operator, rent commitment, who will finance the build-out, who will fund the furniture, among other details, For more information, the Global Workspace Association outlines non-traditional leasing structures here.
If you want to open a shared workspace and reduce the trial-and-error that comes along with launching a new business, you may want to consider a franchise model. Workspace providers such as Serendipity Labs and Venture X are demonstrating success with a franchise model that is also contributing to the growth of the sector. Part of the franchise value is partnering with trusted vendors and service providers, from designers and architects to Internet and software, that support the first site, scale with following sites and ultimately enable a suitable environment for franchisees to grow and replicate the model successfully.
Purchase a Building
If you’re in a position to purchase a building, this may be a great option for you as not only will you build equity in the property, but you can run a cash business on top of the asset. Owning the building allows the business operator unique control over each and every aspect of the building, which enables you to deliver a more customized experience to your Coworking members. While we won’t go into the details of purchasing a commercial real estate building, you can view a great general guide put together by 42 Floors.
Once you’ve got your physical workspace, it’s time to bring your vision to life. Up next in the series: your Coworking Infrastructure: construction, design, and architecture.