Wednesday, December 18th, 2019 December18th2019

Sell for More News: Predictions for how the coworking business model will change

Published on December 18th, 2019

Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.

 

I follow the coworking business closely. Having started and later sold two coworking centers, I know the positives and negatives of the business model better than 99% of the population.

I can tell you that most of the positives flow to the occupants of the coworking space. They get simple. They get flexible. They get short-term.  Demand is there.

And most of the negatives flow to the coworking center operator. The operator gets a substantial monthly overhead to cover before having a chance at turning a profit. The operator gets a long-term lease obligation. The operator usually gets debt. The operator gets constant occupant turnover.

The biggest challenge to a coworking center’s profitability is payroll. Payroll is by far the largest line item in most businesses. Americans are expensive. Being an employer is burdensome.

So as the coworking center operator you’ve got to pay rent to your landlord plus staff the facility…and then try to recoup both costs by charging your short-term tenants a higher rent/SF than you pay…much higher.

The dirty truth is that many coworking centers don’t turn much of a profit, if any…while taking substantial risk and many times taking on debt.

And the centers that are profitable usually didn’t start that way. Usually Year 1 is a negative cash flow year while the operator works to fill offices. So in Years 2 and beyond you’ve got to recoup your initial cash investment, pay off any debt, cover your first year losses…and then you may begin to earn a true profit. It’s not a walk in the park.

Knowing this, what changes do I expect to see in the Coworking industry?

First, I expect to see technology replace payroll. Removing the biggest expense line item on your Profit and Loss Statement makes profitability much more attainable. And makes the business model much less burdensome for the operator.

Second, the coworking centers with the best opportunity for success will be operated by the office building owners themselves.  This is because office building owners have the ability to deliver the coworking space at a lower cost basis than a third party coworking operator.

They don’t necessarily have to manage the coworking center themselves either. They can sign a management contract with a coworking center operator to manage the day-to-day of the center.

For the coworking operators the potential returns won’t be as attractive, but it will circumvent the fundamental issue of having to sign an expensive long-term lease and offsetting that liability with short-term revenue streams.

 


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About Beau Beach, MBA CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com