Is it Working or Crashing? How expensive is it to run a “co-working space.”
Recent news from WeWork says that they will be closing additional locations. With more large companies adjusting their real estate needs with flexibility in mind, there were expectations that coworking companies would see a windfall.
According to WeWork’s CEO, “Memberships rose in the third quarter. But occupancy was slightly higher in WeWork’s 647 consolidated locations worldwide, rising to 71 percent in the third quarter from 70 percent in the second." With the numbers in flying colors, WeWork challenged the traditional commercial real estate business model and changed the market dynamics, but why are coworking offices so hard to be profitable?
The coworking business is not effortless with its low margin
Most coworking spaces like WeWork do not own their buildings but lease office space and parcel it out to their customers, which include individuals, small businesses, and larger companies. They offer space for shorter periods than traditional landlords to provide businesses with more flexibility. See the below equation: WeWork is closing 40 locations, and the average occupancy rate for these locations is 42%. It means the performance sales are only 42% of its projection, but all the costs still have to be at 100%, which caused the margin of the company to be extremely low.
Economies of scale would not give you a higher margin
Higher management costs occur when you expand to another location. Coworking spaces are physical products that require lots of labor expenses. When a company expands a low-margin business, it will double the low margin and often increase its management costs as they have to put in certain studies, efforts, training, and necessary software to manage the remote spaces. The other solid fact is your clients would not expand to where you are as you thought. Offices offer multiple business purposes, but the principal element is the proximity to all its existing employees. For coworking office companies, it is positive to position their flexible and all-inclusive service advantage, but it is also an on-demand location product that sometimes people might forget.
It’s easy to start a coworking business but hard to keep up with the expensive acquisition cost
Starting a coworking space has a low entry of barrier. However, most of this membership is charged at a low membership fee and with a non-bonding flexible term. It means clients can leave ANYTIME. Operators must expand the volume and offer to acquire new clients while retaining the old. This cause the acquisition costs to become extremely high. Let's say the membership is $100 per month, but acquiring that one client costs $400, so the membership needs to stay at least four months to cover the acquisition costs, excluding other operation costs. Especially in today's climate, coworking space is a highly competitive market, and low price is the strategy to be in the game.
The coworking business is not a technology platform to solve the pain of the office industry
Many landlords and operators are continuously looking into adapting flexible operations, and technology is needed to solve the pain point that has lasted for centuries in this industry.
Pain point 1: High Client Acquisition Cost Office space would need a platform to help reduce the high client acquisition cost. Several start-up companies could help, such as LiquidSpace (day office booking), Peerspace (event booking), Veery (Office booking)
Pain point 2: Low management efficiency The management efficiency of commercial real estate is often a headache. Some start-ups, such as Veery and OfficeRnD could be of help.
Pain point 3: High operation expenses Companies often spend high operating expenses on lawyers, brokers, property managers, and front desks. Coworking space provided value in streamlining these services and sharing costs among different companies. While there is also a technological solution like Veery, serving the same purpose that does not only apply in coworking scenarios.
With the plummeted demand for traditional office space since the pandemic, new and flexible office lease term has growing demand. The new working culture might work or crash, but a solution that solves people's pain would last. Contact Veery for more information about how we solve your problems.
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