72. How Big Should my Coworking Space Be?
Everything Coworking Featured Resources:
Masterclass: 3 Behind-the-Scenes Secrets to Opening a Coworking Space
Creative Coworking Partnerships: How to negotiate and structure management agreements from the landlord and operator perspective
Transcription
72. How Big Should My Coworking Space Be?
Welcome to the Everything Coworking Podcast is where you learn what you need to know about how the world wants to work. My name is Jamie Russo. I own a co-working space in Palo Alto, California, I am the executive director of the Global Workspace Association, and the host of the Everythingcoworking Podcast.
A recent question was asked in the Everything Coworking Facebook group: “How big should my co-working space be?” I think I might have overwhelmed the person who asked this because I replied with a number of follow up questions because there are so many things that factor into this question. But, I think one of the most challenging aspects of getting started on the journey to opening a coworking space is understanding the types of fundamentals that I asked that user about.
So today, I want to help think through the spaces you are going to create and use a high level framework that takes into account financial goals, startup resources, and market demand. There are going to be a lot of details in this Podcast; I am going to lay them out in a more visual digestible format that you can download, if that is helpful for the way you learn and think about things. Those will be available in the show notes at www.everythingcoworking.com/72.
A big factor on space size will of course be the question of: “What do you want to accomplish in your space?” To answer this question, you probably have a vision for what you want to create. For example, if that vision includes a high amenity space with a coffee bar, fitness studio, or working kitchen, drop-in childcare, etc., then those requirements alone will start to drive your space needs and your space needs will be larger and then you are looking at a bigger project. However, that is kind of another topic- these things that you may want to include are called the components that you have in your space and the types of workspaces are called your program and that will help definitively drive the size.
Today I want to start with a more fundamental question that I think should be one of the first questions on your list as you decide to start a business. So if someone tells you something like: “You can start a co-working space for less than $100,000.” The next question you want to ask is, well, “How much net income will that generate for me on an annual basis?” The startup costs is irrelevant to you if you do not know what that yields. So I am focusing here on the financial aspects of the how big should the space be in question, because I think if you do not have a project that meets your financial goals, that you are going to shut down the project, then all of your community related objectives will be irrelevant. So I very much care about the non-financial objectives of the project.
Most of us get into doing this because we have some sort of “why” around creating community or just a really amazing place for people to work but I firmly believe, and I say this a lot, but I will keep saying it, that you have to get the under-business model right in order to have the opportunity to focus on the other aspects of a co-working business. So we are going to start with this question: What are your financial goals for this project? I created five segments that you might fit into, and you can decide which one best describes you.
The first of the five is the Extra Space Sharer. So you have extra space that you already pay rent on, and you just want to use the revenue from coworking members to contribute to pay your rent. So pretty simple, low pressure. The next segment is the Community Is All I Need Operator: you have space and you just really want to fill it with other professionals to create a community for you and help you enjoy the work that you do more.
You may just want to break even, and help contribute to the rent on breakeven using the revenue from that space to help pay rent, or you may not even care you may be paying rent easily with the other business and just want interesting people in the space to collaborate with. The third segment is the No Pressure Extra Income Operator. These Operators want a profitable business, you want it to generate net income. It is separate from your other business, but it is an additional income stream to augment the work that you already do. So you probably have some funding that you can use to start the space. You do not want partners or investors, you want to keep it pretty simple. So maybe you have a marketing agency that is already generating a nice income. You could even be an anchor tenant for the space and you would like to create a co-working space in addition to that marketing agency, and add some income to what you already have.
So again, you want it to be profit generating, but it is just extra income, it is not supporting your family. The next segment, however, is This Is Going To Pay My Bills group. These folks want to create a business that replaces their current income or creates an income that they do not already have. So if you fit into that group, kind of put that number into your head now and know what sort of your must-have number is to pay your mortgage or save for your kid’s college or whatever it is that you need to support you or your family. And then the next segment is the Optimize Real Estate I Already Own. In this segment, maybe you have a fixed amount of space, which means the size of the space is not relevant. But you want to know how much you can make by renting a co-working space versus doing traditional leases with a few tenants.
Here is where we are kind of get into the frameworks and some examples for each of those segments. So if your goals line up with Number One, the Extra Space Sharer, or Number Two, the Community is All I Need Operator, and you just need to break even or maybe you do not even care that much about contributing to the rent, you may have some resources that can help do the administrative tasks for the space, you might have an office manager that could double as a community manager, and we are probably looking at a relatively small amount of space here.
Maybe you have a few thousand square feet, 3000 square feet for this example which is $914 million. What I would do here is do some good market research to get a realistic goal of what this might take to work. For example, say you are a small software development company, your staffing needs flex up and down based on project demand, you have some extra space right now that you would like to fill, you already have the furniture, you have an extra 10 desks that you are not using, they have chairs and a little bit of storage, you already have a pretty nice office space with a break area and two meeting rooms and phone rooms. So you would like to market the extra space that you have a dedicated desk or co-working seats.
Maybe you are trying to cover, say $2,000 of your rent a month. Again, these numbers can vary based on rent in your area or based on a number of things, keep in mind that I am just kind of doing this as an example. So you have 10 desks, and you may say: I am going to charge $200 a month for each desk so that 200 times 10 is the $2,000 that I would like to make to cover my rent. Essentially, you have no startup costs because you already own the furniture and you have the space that you are paying rent on, but you need to market the space. So what I would do is talk to other co-working spaces owners in your market, visit ones that are not close to your office so that they do not feel so competitive. Ask them about their demand for dedicated desks and co-working and try to get a sense if this will work in your market. If they tell you that everybody only wants offices, for example, then this may be harder than you think.
In addition to co-working spaces, do things like visit coffee shops within about a mile or even closer to your office. Are they full? Are they pretty busy? Does it seem like people are kind of getting out and looking for other places to work, get some market data on the number of self-employed residents that are within a mile or two of your office, try to stay as close as you can, because the data we see and the anecdotal evidence that we are getting is that people are really pulling members from a very local range. I think especially if you are just doing sort of a more casual approach to this and you have only open seating, then those folks are going to come from really close to your office. Your local chamber may be able to be with us, or there are probably other online resources in your area that can help you get those numbers.
Another thing you can do is just post your offer on Craigslist with a nice photos and see if you get a response. Craigslist does not work in all markets, but in some markets, it is quite useful for posting extra office space. So you could just try it and see what you get, you also probably want to reach out to your professional network through events that you attend or groups that you are in and you may be able to fill those seats just by doing that.
Moving on to Segment Number three, the No Pressure Extra Income Group, if you are in this group you already have a business that generates income and covers your basic financial needs, but you would like to start a space, you are super passionate about co-working and you would like an extra income stream. So again, you want this to generate a profit, you are not doing this to break even, but you do not have a minimum dollar amount that you need to produce in order to survive.
In this situation, you are trying to kind of figure out “How do I look at how big the space is going to be?” and that again, depends on a lot of things. Things like: how much time do you want to spend on a bigger space, it can take more time, or just has more financial requirements, bigger risk, more startup cost. But here is kind of an example to help you start to think about this. So you probably have a startup budget in mind. Say it is about $100,000. You have an idea of what you want to make and then you pick a number, this project needs to make $48,000 a year or $2,000 a month.
That is what makes it interesting to me. And this is before taxes, so you do not have any upper limit on this additional income. You will take all that it will generate, but you want to figure out a model that will ensure that it is pretty likely to make $48,000 a year. This is kind of where that startup budget can impact your upper limit. Your ability to sell open plan co-working or dedicated desk seats is not unlimited. There is a level of market demand for this product that you want to try to determine to figure out what is my product mix look like? And therefore, what are my startup costs going to be?
To find this out, do some market research, get a sense for what the demand is for open space and how easily people are selling that. Again, this may mean you need to try to find a friendly operator in your market that will give you some insight into how they are doing. After that, you need to kind of figure out, how private spaces fit into my product mix? How many of those do I need to generate this sort of very likely $2,000 a month in net income? The trick here is that the private spaces are generally the factor that's going to impact your startup costs. So there is this balance between, the product mixes that will generate the income that I need but that I can also afford to build out from the beginning? I think this is really like the crux of the question, right? Especially if you are trying to not go raise outside money. If you are raising money for a project, then this equation is a little less stressful. You are just trying to sort of optimize the model for your market.
Anyway, so what you probably want to try really hard to do here is find a space that pretty much looks like the product mix that you need to have to get that $2,000 a month. Let’s say you find a space that has 3,000 square feet, which is 914 meters. It already has 10 offices to meeting rooms, enough space for a kitchen cafe area, so you can do co-working seating and some dedicated desks. It also has a community area that can double is mounted eating and event space, you can kind of fit in all the things that you are trying to do in a smaller space. Again, in a smaller space, we are not going high amenity, it is pretty much only workspace. At this point, you would sort of take a look at the layout of the space that you found and assign pricing to the offices.
Figure out about how many people can fit into the open space - and I know you are guessing without getting a professional designer involved and assigning pricing to those and then, you know, sort of add up all the revenue that you think you'll get out of the space that is there, and then add up your monthly costs and sort of see what that looks like. We are after about $2,000 a month after expenses, and you do the math of the startup cost of furniture, internet infrastructure, conference room technology, coffee equipment, etc., and it is less than $100,000, which is your budget. So this project works. You basically found a space, you have added up the revenue that you can get from the offices in the open space, you have calculated your expenses, and you figured out how much it is going to cost to start the space, and you do not have to do a lot of construction.
However, you can only find spaces that are in shell condition, which basically means they are big, empty room. Maybe they need electrical work, or back work, you need to build offices, you need to build sort of any walls that you need. These things start to crank up your startup costs. Now you are up to $400,000 because of all the construction that you have to do, in addition to the furniture and the internet and that kind of thing, and the landlord has said he'll fund about $100,000 of it in tenant improvement dollars. So now you are paying $300,000 just start up but you do not have $300,000 and you do not want to get a loan or an investment. This scenario does not work for you now. At this point, you might think, “I just won't build the offices, I will just create 3000 square feet of open space and sell only co-working and dedicated desk memberships, because that fixes the startup budget problem.”
I would just be careful about this because co-working and dedicated desk memberships take a lot longer to sell, and you are selling them at lower price points. Think about this: for every person who comes in and tours and wants an office and takes one that's you know, say it is $1,000. For an office, that is you just have to sell one to one person to make $1,000 to sell $1,000 in co-working say your co-working pricing it is $200 a month, you have to sell to five people in order to make $1,000 and in most markets, these just sell more slowly. Half of the people who come in my offices, half of them want co-working memberships, it just takes a lot longer to sell those.
Your risk of breaking even on 3,000 square feet of OpenStack becomes much higher, especially if you are in a market where there is a lot of good office supply a competitive prices. I would be careful to not take a space and say, well, it fits my startup budget. But there, it is riskier that I can get to the $2,000 of net income every month that I am looking for, because it is all open space. I would just kind of think through those scenarios related to your goals.
If you are in the next segment, where you have a goal to replace your current income with co-working space, net income, and you are willing to raise money for the startup costs, so let's say your current income is again, for easy math $100,000 a year, you want to make the same amount of net income in your co-working space. That means you need to make roughly $8,300 in monthly net income in your steady state. That may take a year to a year and a half to get to. Try and make sure you consider that as you are transitioning. So in very, very rough terms, you are looking at a space that's closer to 8 to 10,000 square feet to hit that kind of net income.
This depends on a lot of things, including local market demand, but you may need to build a mix of 70/30 or 60/40 office to open space ratio. In order to get that net income in that size of space. You are in most markets, not going to build a 10,000 square foot space and fill it with open space dedicated desk and co-working.
Due to this, your startup costs are going to vary entirely on how much the space you find matches the product mix that you need in order to hit that monthly net income number. In order to build out 10,000 square feet, you may need to seek outside funding in the form of a loan from a bank or friends and family. Then you will have to factor that debt repayment into your pro forma.
So the next scenario is you own your building and you want to run a co-working space as an operating business on top of your real estate asset. So in this case you have a fixed amount of space, but you are just focused on if you have the right access to capital for the build out which you may need to pay for yourself rather than having a tenant financed some of it in the form of free rent or reduced income for a period of time. If you have the access to capital, then you just want a pro forma that yields a better return than a standard lease. And this is probably pretty easy to do.
Because even if you are not operating at full capacity, you will avoid the repeated investments every time a lease comes up and you have a new tenant, you will avoid downtime in the space when tenants turnover and you are waiting for a new tenant to take the space, so you will avoid those periodic full vacancies. You are just trying to create a pro forma and a product mix that fits the type of space that you want to run and that generates a net income that makes sense for you versus a traditional tenant.
So as I said, this is a very high level way to think about the size of a space and there are lots and lots of detailed factors that go into this. But I think just thinking about it in terms of what am I trying to accomplish? And what does this need to generate will impact? And then what you know, startup, what sort of funding do I have available? Or what am I willing to do for startup costs?
All will factor into you getting to the right space for you. And again, I am creating a visual version of this framework that will be in the show notes at www.everythingcoworking.com/72 to help you if you want to kind of really sort through this and think through this for your own needs.
Since it is a lot to listen to an audio version, but I think it is an important topic, so I wanted to kind of walk through it. I hope this was helpful.
As always, if you have any feedback or follow up questions, feel free to send me an email at Jamie@everythingcoworking.com.
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