Coworking Needs a Rethink

by | Aug 20, 2018 | Coworking, LaunchPad

Here’s a sad truth — Coworking probably won’t make it.

As much as I want to believe the enthusiasm of my fellow Coworking Space founders, there probably isn’t enough momentum in the market for it to reach a tipping point and become mainstream.

We founded LaunchPad because we were sick of corporate ‘beige’ offices — we wanted to build spaces in which we’d love to work.

Our first rule was ‘Create spaces that were profitable and sustainable’ as soon as possible. We spent a long time figuring out how we could make the business model work for the life of a long-term lease and we think we’ve got it right.

All our spaces are profitable at a relatively low occupancy rate, even after we fund all the programs that make our space ‘sticky’ to members.

Sadly, we’re unusual. Most spaces aren’t even close to being profitable let alone sustainable.

In 2016 there was there were over 1.1 trillion sq. meters of office space in the US, but only 0.5% of the space was classified as Coworking. While the amount of space dedicated to coworking is growing at a rapid rate, the low starting point means it will be a while before we see 10% penetration (a tipping point).

Worse, we know that the majority of spaces are struggling to make money. One estimate from the Australian GCUC conference in 2017 indicated that 60% of space is yet to show a return, while DeskMag’s Global Coworking Survey gave an estimate of 58%.

I bet these numbers are understated because when I ask space founders if they are paying themselves, the answer is often ‘no’.

A quick analysis by Pieter Levels (who acknowledges he’s a coworking nomad) shows why — most spaces are neither high volume or high margin.

It seems to us that most founders who start spaces do so more for emotional reasons — it feels like they left reasoned thinking behind.

Most landlords have made the significant capital investment and are looking for a good return per sq. meter for a long-term commitment. They typically want to sell to businesses who have healthy cash flows.

Coworking spaces on the other hand mostly target start-ups and freelancers who are resource constrained and have little appetite for long lease commitments.

This means you end up with coworking space founders taking on a risk they can’t afford. In simple terms, the founders need to work their butts-off to maintain high occupancy rates and stay afloat — it’s not sustainable!

Worse, this effort has to be funded from the margin between what the landlord charges per meter and what it can be sold for to risk-averse members.

Something has to give. There’s a very good chance a bunch of smaller spaces will disappear from the market in the next 12 months and the larger spaces will pivot to become just like the serviced office vendors they were trying to disrupt — a shake out.

If coworking space founders thought through what they are signing up for, they would realize that over a ten-year lease you’d need to survive at least two economic downturns and the cost of shutting down the business at the end of the lease.

For the Coworking Movement to reach ‘mainstream status’, profitability will need to become commonplace. Coworking spaces will need to become 10% of the available office space. It will need to find a way of becoming economically sustainable and pass through the tipping point.

Coworking needs a rethink.

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