Coworking Case Study: Can I make money on a coworking/ cowarehousing space?
The following question was posted to the Everything Coworking Facebook Group. It’s a hefty question that requires a response too long and detailed for a Facebook Group, so I thought I’d answer The Poster’s questions here.
First, there are a couple of Everything Coworking podcast episodes that I suggest the Poster, and anyone with similar questions, listen to as they relate directly to your questions.
#72 How Big Should my Coworking Space be?
# 107: Niche Coworking with Palletized
Let’s start with a few notes about the poster’s particular situation:
The fact that owning the building is a significant advantage for the coworking business model.
Combining coworking and co-warehousing is a growing trend. As Darren Westenhaven mentioned in his response to this post, there are a couple of spaces out there that are already running this model and more on the way. In podcast episode #107 I interview Maximilliano co-founder of Palletized outside of Miami.
Niche coworking spaces tend to be more profitable and fill up faster. This is based on a small sample size of data from the 2017 GWA Industry Benchmarking data but also based on observation and qualitative feedback. I would consider your offering to be niche and that’s a positive in a busy coworking market such as Denver.
Denver’s population grew almost 20% between 2010 and 2018. That typically corresponds to high demand for real estate... And if you have attractive space on flexible terms, that’s a good position to be in.
What are your goals for your Coworking Business?
In episode #72, I help listeners think through their goals and what type of coworking space they might create depending on their goals. The poster referenced an assumption of $4-5,000/month in profit. That’s $60,000/year. For some, that level of profit on a second business that is fully staffed and doesn’t require much of the owner’s time, might be adequate. That’s a very personal decision and likely depends on the investment required and if the project has a positive return after paying for build-out costs, furniture, etc.
What is a typical margin on a coworking business?
That depends :-)
The margin for a coworking space depends on:
Size of space (margin generally goes up as space size goes up, but is impacted when there’s a trigger to add more staff).
Number of staff required.
Offices vs. open space.
Virtual mail revenue.
How good your location is for your target member.
Do you have enough parking?
How good your staff is.
How well you’ve matched your business and space design to your target end users.
How good your marketing is.
How well you systematize and automate your business to reduce the amount of time you spend on admin functions.
The supply/demand of real estate in your market. How much pricing power do you have? As Jerome Chang mentioned in his response to the post, a rule of thumb would be that ideally, you want to be able to charge 2-3x market rent for your space. This may be challenging in smaller markets with less expensive real estate that may already be available on shorter terms.
Do you need to sell coworking or is your end user already aware of it as an option?
Healthy margins for well-run coworking spaces in good locations that are designed to match the needs and desires of their target member can range from 25% to 40%. Again, generally, the larger the space, the higher the margin because you’re spreading out your fixed costs and hopefully optimizing your second-largest expense which is staff.
In the poster’s case, it is important to consider a few additional factors:
If you own the building, then your rent is an expense for your operating business (your coworking space) but it is also building equity in your real estate asset.
You will likely want to create a separate LLC for your operating business and your real estate entity will want to charge your operating business market rent.
If your coworking business can’t afford market rent, then your coworking business may not be the highest and best use of the space. You may want to find a longer-term, single tenant for the office space. Or you may look at a model that doesn’t require staffing. Break the space up into floor plates of 1,000 square feet to 3,000 and offer 3 year leases. Don’t offer services such as coffee and community that require staff. It’s a real-estate focused version of “coworking” but may yield the most financial return if that is the poster’s goal.
What should you assume for an occupancy rate for a coworking space?
Most coworking spaces that are office-heavy are profitable at roughly 80% occupancy. This is not a business that you can run profitably if it “kind of works.” The good news is that, especially if you own the building, it would have to *really bomb* in order to not cover your expenses.
In your post, you mentioned an assumption of 70% occupancy. I would increase that to 90% to be conservative, but you should be confident that you can get to 95% on your private spaces and e-commerce memberships.
How do I create a pro forma for a coworking space?
First, you are just guessing on your revenue projections until you get a test fit done by an architect. You may already have done this step, but for others reading that have not, I’ll provide some details.
In order to get a test fit, you will need to determine your “program:”
How many offices would you like?
How many people would you like those offices to accommodate and in your market, what does that mean the dimensions will need to be?
You can get to this by determining desktop size. Is your user ok with a desktop that is 24x48 or do they want 48x60 to handle a larger monitor and a storage ped underneath?
How many meeting rooms?
How many people should those meeting rooms seat and therefore what dimensions do they need to be?
Will you have a kitchen?
How many bathrooms and what size?
Will you have storage space?
Flex seating?
Event space?
Reception/seating area?
IT closet?
Storage?
An office for you?
Once you have your program laid out into your actual space by an architect to verify that what you want actually fits, and that you’ve addressed any code requirements (ADA bathrooms, ADA hallways, etc.), then you can drop your program into the revenue side of your pro forma and assign pricing to each revenue-generating “product.”
How I know what to Charge for Coworking Memberships?
The poster mentioned that she assigned $1,000 per office based on what she saw in a nearby coworking space. This is a good place to start, but let’s get more detailed in order to verify those assumptions.
Tour a number of coworking spaces in a radius around your potential space. One could be an anomaly and not a good data point. Get several.
Take notes when you visit. Ask for square feet on offices - they may not give it. If not, try to guess what size the desks are in the sample offices and note the size in your notebook. Also note how many desks are in the office. Generally we think about office pricing not based on square footage, but based on the number of people in the office. A simple rule of thumb is to base your office pricing on your dedicated desk pricing.
For example, if your dedicated desks (or those of your competitors if you don’t offer any) are priced at $400, then your office pricing for 4 people might be $1,800 to $2,000. The math I did here was $400*4 people plus a premium for privacy. Now, some will get more artistic on the pricing and factor in natural light, corner locations, etc.
How Many Community Managers/Employees will I need in my Coworking Space?
The number of employees needed to support your coworking space will vary depending on your product offerings. For example, if 90% of your space is private offices, you will be able to staff more leanly. If you have a lot of external meeting room traffic, flex space members or other more transient members, you may need more staff.
A general rule of thumb is that you can get away with one full time staff up to about 7,500 - 8,000 square feet. After 8,000, you’ll likely need to go to 1.5 to manage the busy hours - morning through after lunch.
At 15,000 square feet, you may need 2 full time staff members, but that depends on how self-serve the warehouse space is in the poster’s case.
How Much Should I Pay my Community Managers?
The average salary for a Community Manager is about $40,000/year, not including benefits. This will vary by market and experience level.
Can my Community Managers help me with my E-commerce Business AND Run my Coworking Space?
This is a question that I think many of us that run other businesses ask when we start looking at the financial requirements of staffing our coworking space. The answer again, is “it depends.”
I recently looked at the time my manager spent on her daily requirements thinking that she had extra time to help me with my other businesses and she does not. I tend to under-estimate how much time daily tasks require. Now, in my case, my Community Manager wears a lot of hats. She is responsible for weekly member events, giving tours, managing leads, posting to social media, creating a monthly member newsletter and a monthly marketing newsletter, requesting Google reviews, posting images to our Google my Business page, reconciling monthly payments in our accounting system, making coffee, ordering supplies, etc. etc.
I will also note here that in the past, I have pushed my manager to help me with outside projects and this inevitably comes with a tradeoff - typically community building and foundational business tasks such as the Google my Business posts, social media, etc. will suffer.
That being said, if you have a membership that is low-maintenance, you outsource your marketing and maybe even sales, then your manager may have time for additional projects.
The trick is that it’s hard to know until you’re up and running and you’ve sorted out what your on-site manager is responsible for and how much time they need to get everything done.
What Does it Cost to Run a Coworking Space?
Put another way, what are the expense lines I should include in my coworking pro forma?
Here is a sample pro-forma that you can use to estimate your expenses for your pro forma.
It is important to note that expenses such as coffee, toilet paper, cleaning supplies, snacks, etc. go up as your membership grows.
Closing Thoughts:
The Poster, or anyone else with similar questions, should do the work to ensure that their layout, pricing and expense assumptions are accurate.
More coworking trends and how-to’s can be found on the Everything Coworking Podcast.
If you are considering opening a coworking space, check out my ebook: 8 Steps to Creating a Profitable Coworking Space that you Love to Run.
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