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The Coworking Value Proposition – Part 3 (Commercial Real Estate)

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This part of our series will take a look into the value proposition of coworking for stakeholders on the commercial real estate side of the industry. To recap, we’re exploring the value proposition of coworking across all parts of the industry for coworking space owners and operators as a guide to craft compelling messaging to attract members and provide perspective on this fast growing industry as a whole.

Part 1 provided an overview of the potential for the coworking industry. Coworking spaces are helping drive the decentralization of the workplace. They provide a professional office environment wherever and whenever one is needed. Through these varied locations and thoughtful flexible workplace designs, coworking spaces can contribute directly to an increase in the productivity of the workforce. As the remote workforce grows, more and more of these spaces will be needed to satisfy that demand.

As discussed in Part 2, coworking spaces are the goldilocks solution for the distributed workforce. They are less rigid than a corporate HQ, more private than a coffee shop, and less isolated than a home office. Coworking spaces meet the professional needs of the distributed workforce, but they also help meet our personal needs by decreasing loneliness and increasing autonomy in how, where, and when to work.

Coworking spaces do not exist in a vacuum, however. They are dependent upon the infrastructure and supply of commercial real estate. The “space” part of the coworking model is critical.

How does the coworking model benefit stakeholders in commercial real estate? Is it a total disruption or inevitable evolution?

For the commercial real estate world, coworking represents a fundamental shift in how office space is leased & managed. It is an inevitable and necessary shift, however. Business today changes faster than ever. Company timelines that used to span decades are down to spanning years, decreasing their willingness to sign long term leases. Employees are distributed throughout the globe. To maintain revenue stability in the commercial real estate world, coworking must become part of the standard offering.

What are the benefits of coworking?

From a leasing perspective, coworking and flexible office space can increase occupancy rates. In fact, in 2018 alone, flexible workspace accounted for two-thirds of the occupancy gains in the U.S. Office market.

Coworking businesses can lease a wide variety of commercial real estate products including traditional office space, vacant retail space, or warehouse space. They frequently transform distressed properties into Class A space.

Once open, coworking businesses attract an expanded tenant pool compared to what a particular property or market would otherwise be able to attract, increasing the utilization of the property.

Why are these benefits valuable?

Real estate is an investment business, and that means it’s all about the numbers. An increase in occupancy rate for commercial real estate means more profit for building owners, across a variety of building types used by flexible workspace. Renovated & occupied buildings return higher building valuations, which means a better return on investment in the property. Additionally, once renovated, those properties can see higher rent premiums when compared to other similar properties. (Cowork Tahoe is a great example of this)

Cowork Tahoe – Before & After renovations of the former Tahoe Daily Tribune building in South Lake Tahoe, CA

Members of coworking spaces are predominantly small businesses, free-lancers, and startups. These are clients that would not otherwise rent office space on their own, or would have to rent lower quality properties. Many of these startups and small businesses are growing, so coworking is just the entry point into commercial office space for them. Coworking is part of a sales funnel that can lead to longer-term and larger contracts between landlords and tenants as smaller companies grow and take over more space. If that space is not available in their current coworking space, they may look for nearby options, increasing the value of commercial property in proximity to the coworking space.

What is the main problem being faced by customers?

The commercial real estate world has not adapted quickly enough to the changing dynamics and demands of the business world. Companies are less and less interested in signing 10-year+ leases, particularly when they don’t know if their own timeline spans beyond a few years. Landlords need to iterate on the traditional model in a way that still provides consistent and predictable revenue streams from their properties in order to protect their investments.

How does coworking solve this problem?

The popularity of coworking is driving demand for commercial square footage across a wide range of property types and markets: primary to rural, Class A to distressed, warehouse to retail space. The flexible workspace model is increasing occupancy rates & expanding tenant pools.

Coworking directly satisfies the demand for flexible & more distributed office space that companies need, but can also provide the predictable revenue stream of a longer term lease. Members are able to rent the professional office space they need at a lower rate than they would have access to if renting themselves, they get the flexibility of shorter terms, and more choice in terms of location.

Why is coworking the best solution to these problems?

The utilization of commercial real estate as coworking space helps to derisk development in new areas or markets by offering a diversified and scalable model that can expand or contract in reaction to the local market.

Its also what employees and employers are starting to ask for – the ability to work from anywhere. That means that high quality office space must be anywhere as well. The demand for flexible workspace is growing, and CRE has the supply & infrastructure to deliver on it.

Coworking with Iris interview

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I was excited to join Iris Kavanagh for the first episode of her re-launched podcast series.

Have a watch or listen!

In the episode, Iris & I talk about my experience building a coworking community as transplants to a remote vacation destination, living life true to my values, building a community from scratch in a remote location, the challenges I have faced as a female entrepreneur and operator and of course, JellySwitch, which allows operators to run their space in real-time from their smartphone.

Statistic about distributed workforce in the USA

What can indie coworking spaces learn from WeWork?

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The big news this week in the flexible workspace industry: WeWork’s S-1 and imminent IPO. If you are an independent coworking space operator, you may be wondering what it means for you.

The Movement

The distributed workforce is real, and it is gargantuan. While WeWork has 500+ locations worldwide and is growing like crazy, they’re barely scratching the surface of the market. There are 60M remote workers today and that number is growing every day. Many people believe it will grow to 100M in the next 4 years.

You can sleep well at night knowing that you’ve chosen a growth industry and the only thing that stands in your way is your own ability to run your business well.

Be Member-centric

WeWork does so well because they make decisions based on what their members want, not just what the business needs. They allocate a significant amount of space to private phone rooms because they know how crucial it is that their members always have a place to take a private call. They’re attuned to the local tastes and design their spaces accordingly. They provide high quality desks and chairs because that’s what their members want (and are willing to pay for).

Do you know how satisfied your members are? If they could wave a magic wand and change anything about the space, what would they change? Which improvements should you prioritize?

If you aren’t asking your members for feedback on a regular basis, you should. You might be surprised at what you discover.

Adaptability

WeWork has demonstrated that they’re prepared to weather an economic downturn by increasing the allocation of their memberships that are signed office leases. They’re flexible office leases, to be sure — not 5 or 10 year terms. But their ability to weather any storm is something we should all take a lesson from.

There are other market forces as well. How frequently do you change your pricing structure for flex memberships? When’s the last time you raised your prices? Do you set expectations with your members that such a thing is a possibility?

Another example of adaptability is your responsiveness to your member feedback. If you grow your membership, you’ll need to allocate your space differently. As an example, instead of building concrete walls into their locations, WeWork invests in movable walls. This way they can adjust both the size, price, and capacity of their space in accordance with market demand. Need more private rooms? No need for construction. Simply move the walls.

The WE brand

The We Company has developed a powerhouse of a brand, and has done so very intentionally and strategically. It is globally consistent while remaining locally unique. The company builds each location with a carefully curated aesthetic that incorporates not only the expected premium experience of a WeWork office space, but also including local tastes, culture, and aesthetics.

When a potential member walks into your space for the first time, have you already set expectations for the type of atmosphere they can expect? Are you meeting those expectations?

WeWork also knows how they impact everything else around a location, because they are tracking it. They even call it The WeWork Effect. This includes how a WeWork lease benefits landlords and its building valuation, surrounding communities, the companies their members are employees of, the environment, all of it. And they tell the story, a lot.

Flexibility

Flexibility is quickly becoming a key requirement for the modern workforce (that’s a post in itself). WeWork exudes this. Members don’t have to sign 10-year contracts for office space, they can sign up by the day. Members have flexibility by having locations where they need them, more than 500 globally and growing. Flexibility is in the types of workspaces that are available: desks, couches, private offices, large company suites, meeting rooms, phone booths, cafe style lounges.

Have you asked your members how they like to work? Do they prefer private spaces to focus or like the buzz of a casual cafe space? For your space, what is your most popular membership type and how do you know?

Predictability

WeWork membership agreements, while focusing on flexibility, are an average of 15 months. That brings a level of financial predictability that has not been standard in the coworking industry.

Day passes and month-to-month plans are part of what makes coworking such a desirable option. However, there can be a balance between providing customers with the ease of flexibility and having the financial security of revenue projections as a business.

Enterprise

WeWork shared that 40% of their memberships are now for enterprise clients, up from 28% just 2 years ago. These are companies with 500 or more employees. This is a quickly growing segment of coworking consumers as corporations move towards a more distributed workforce model.

They focus on the savings that corporations can expect using their locations on a per employee basis compared to a traditional corporate office. This hits right to the core of the 3/30/300 rule for total cost of occupancy.

Graph from p129 of the WeWork S-1 illustrating that a company can expect to save 57%-66% per employee compared to a standard lease.
From the WeWork S-1, p129

Profitability

WeWork’s new locations reach break even in 6 months on average and maturity within 24 months. Only 30% of their current locations have reached maturity and they are still opening more, and quickly.

Have you hit profitability, and on what timeline? If not, what do you need to do to get there?

Data, data, data

The We Company uses data for every decision: which building in which city to open a new location, what the design should be, how the workspace can make people more productive & how to track it.

What metrics are you tracking, or should you be?

What’s your strategy?

Many spaces simply open up shop and pray for business. This works reasonably well an astounding amount of time — but only for awhile. Once a competitor opens up across the street, or there is an economic downturn, many spaces discover just how much the success of their business relied on luck and timing.

Be the business that survives and thrives, despite competition. Know who your customers are, and go find them. Have the most satisfied members in town. Be always on the lookout for ways to capture more demand from that class of customers. Resist the temptation to say “yes” to every request, and instead put together a prioritized roadmap of who you’re going after as a customer, and why. Ask every single new customer how they heard about you, and be ravenous about getting more.

You might be surprised at how successful you can be by focusing on a niche rather than accepting any and all members. Imagine if WeWork moved in across the street; which customers would stay with you, and why? Which customers would jump ship?

Go talk to the customers who would stay and figure out why, and how to get more.

Coffee in a cup

Read this before you offer that free day pass

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Balancing Incentives with Good Business Practices.

Starting a new business is hard, it doesn’t matter what that business is. It takes a leap of faith to dedicate time and capital to something new. The process of creation, of bringing an idea from the early firings of neurons to the world marketplace, can be both exciting and terrifying. What makes this process even more difficult is that it’s done in isolation. The public only sees the product after it has been released into the wild. The development, the preparation, the hours and hours of sweat equity that go into getting the business to the point where its ready for public feedback are all done privately. But those efforts are vital and valuable, even if they go largely unrecognized.

I had a friend & fellow entrepreneur recently ask for advice about a business proposition that was giving her pause. She sells a hard goods product and has worked incredibly hard to develop and grow her business. A rental shop was interested in having her gear available for their customers, which was fantastic. It would provide great exposure and get customers testing her gear out. The caveat – they wanted her to provide it all for free in exchange for that exposure. They, however, would be benefitting from the rental revenue and cache associated with having a better offer for their clients. Was it worth the costs of manufacturing for the chance of brand recognition?

I told her no. I told her not to diminish the value of the core of her business, her gear, by giving it away like that.

It got me thinking about how I see this same situation in coworking all the time, through free day passes, or free trials. The core revenue generator for coworking is memberships. So why give that away for free? I don’t think we should.

When trying to build a customer base, it’s easy to lean towards doing anything and everything to get people in your door. If someone has never tried coworking, you want them to get a good taste for it and to picture themselves doing it, by actually doing it. However, there is a way to do that without removing the monetary value of what you are offering.

Free day passes and free trials aren’t loss leaders, they are just losses.

Especially if you are a new space and just starting out, it’s not a good idea to give away anything for free that you’d like to charge for. From my experience both in my own space & from talking to dozens of other coworking space operators, the conversion rates on the freemium model are terrible. Free coworking is called a coffee shop.

We really love coffee shops

To get customers, keep it simple (but not free).

What can you do instead? Here are a few quick ideas:

Events

  • Bring people through the door other ways – host events, support meetups, offer space to non-profits. At Cowork Tahoe, for example, we have members that host everything from Women in Networking lunches, Conversational Spanish happy hours, entrepreneur roundtables, and the newest idea, a “Yappy” Hour with the office pups & their owners. We have frequently host local artists & open our doors to the public for gallery nights, which brings in members of our broader community that would otherwise not think to schedule a tour. Our conversion rates for these events is excellent and they are super fun.

Promotions

  • Offer to host a specific Jelly* on a set day in lieu of more broad based free trials. This way, you can target your specific customer segment rather than hope someone will wander your way. We have seen great success with these when focused on something like a Summer break day for parents that work from home or a Freelancer Friday, for example.
  • Participate in International Coworking Day!
  • Create partnerships with other local businesses like hotels and provide a small discount for their clients if they are referred to you.

Guarantees

  • Upsell, upsell, upsell! Offer to apply the cost of a day pass to any purchased membership.
  • Offer a trial-period with a money-back guarantee. If they hated their experience, the internet went out, they signed up for a membership but can’t stand you after 2 days, then give them their money back without hassle.

By doing any of the above, the goodwill you are trying to establish is still there, but it goes both ways. A free day is only extending goodwill one direction, to them. Do yourself a favor and recognize that you are inviting them into a space and community you have poured blood, sweat, and tears into. When the value you are providing is clear, it will be recognized by your customers. And that is good for business.

 

Footnote: I HIGHLY recommend reading Alex Hillman’s post on this topic: https://dangerouslyawesome.com/2010/06/a-case-against-free-trial-coworking/

After drafting this out, I did a web search to see who else had an opinion on the topic and wasn’t in the least bit surprised to see that Alex had an incredibly thorough write up on it.

 

*If you’re curious about our name, jellyswitch, this should give you a big clue about its origin, but that’s for another post.

The lobby of Cowork Tahoe in South Lake Tahoe, California

Coworking & the 3/30/300 Rule of Thumb

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The lobby of Cowork Tahoe in South Lake Tahoe, CA. Photo credit: Erin Ebright.

Coworking & flexible office spaces are quickly becoming a permanent fixture in the global office space landscape. As more and more employees utilize these spaces, the gap between coworking & the traditional corporate office will continue to narrow. It is important for both corporations and for the owners & operators of these flexible workspaces to understand how this type of office environment fits into their operational model, and how it provides value.

As remote work increases, it will become vital for companies to track & measure the impact their distributed workforce has on their bottom line. Coworking space community managers are becoming corporate productivity officers. This role serves as part of the value proposition for coworking businesses, but also as a critical tool for companies when determining their operating costs.

When opening a new office, there is an overwhelming list of expenses to consider. These expenses go beyond the lease price for the physical square footage and are vital to track in order to drive costs down. Commercial real estate services firm Jones Lang LaSalle (JLL), has a simple rule that can be used to estimate the order of magnitude of real estate occupancy costs for an organization. Its called the 3/30/300 rule and is as important for coworking space owners to understand as it is to traditional commercial real estate facility managers.

The 3/30/300 Rule

The rule of thumb is to estimate, on a per square foot annual basis, a total cost to the organization of:

  • $3 for utilities,
  • $30 for rent, and
  • $300 for employees (salaries & benefits).

The 3/30/300 Rule is a particularly important tool for facilities managers when making decisions to help reduce costs for an organization. Traditionally, the focus has been on developing strategies to either lower utilities costs or to reduce the total lease price.

Energy efficiency is a great area to focus on to lower the cost of utilities & is relatively easy to implement. Replacing fluorescent or incandescent light bulbs with LEDs, installing a smart thermostat to regulate the temperature, and using natural light as much as possible can all result in lower utility bills. An energy efficiency initiative that reduces consumption by 10% will impact overall costs by $0.30 per square foot.

Another area of consideration is to reduced rent. To achieve a 10% savings in the lease price, that could mean negotiating the price for a longer term or moving to an area that already has lower rents. Lower rent might also come in the form of an older or less updated building, with less amenities both in the building and in the surrounding neighborhood. That 10% savings, however, equates to a $3 per square foot reduction in overhead.

So even if utility costs are significantly reduced, which is very difficult to achieve without significant investment, a 10% savings in the rental price overshadows the entire cost of utilities to begin with.

But what about the 300 column? Can changes in the workspace impact the cost of keeping employees in their seats?

The answer is a resounding yes, and is in fact where the greatest potential for organizational savings can come from.

Based on the 3/30/300 rule, 90% of the costs for an organization staff salaries & benefits. Anything that results in savings in this area can make a big impact on the balance sheet. A 10% difference, for example, is a $30 per square foot savings. That completely covers the cost of rent for that space.

For a facility manager, reducing costs in this category by having fewer employees or lower salaries is not only not within their purview, but is also not the best way to optimize the potential for savings. Instead, the best strategy is to take into effect how the workspace can increase employee productivity. According to a study published in IZA’s World of Labor, employees that are “happy” are 10-12% percent more productive in their jobs.

Measuring for Productivity

Productivity is not straightforward quantity to measure. It is dependent upon a lot of different interlinked variables, many of which are beyond what a space manager can control. However, there are good indicators and concrete strategies that have been shown to positively impact productivity in the workplace.

The World Green Business Council released a report in 2015 that divides productivity metrics into three areas: financial, perceptual, & physical.

Financial

Financial metrics for an organization include, among others, tracking changes in employee absenteeism & turnover, both of which can have a clear and drastic negative impact on progress on organizational productivity and costs.

Perceptual

Assessing perception can be accomplished by regularly surveying employees and correlating their responses with the more quantitative data in the financial and physical categories. Questions covering things like general comfort in the workspace, rating design elements, the layout of the space, or location and amenities, can all provide valuable insight into the impact of the office space on its occupants.

Physical

Taking direct measurements of the physical space, especially when correlated with responses about comfort, can play an objective role in determining what factors are contributing to or diminishing productivity in the workplace. The more measurements that can be taken easily and by a manager (or even someone using the space) the better. This could include indoor air temperatures, relative humidity, light levels, CO2 levels, and background noise. Additionally, tracking the levels of workstation density, numbers of private spaces versus social spaces, use of plants and greenery, etc. can all contribute to an in depth understanding of how the workspace is used to boost productivity, and how to improve it.

Community Managers as Productivity Officers

Coworking space operators & corporate facilities managers have a lot in common, especially as the modern workplace trends more to a distributed flexible model. For both, “How can we increase productivity for our users?” is a question that should be top of mind. For coworking spaces, an increase in the productivity of members is good for business. If members are getting a lot out of working from the space and are happier, the coworking business will likely see lower member churn, a more engaged community, and more referrals (and thus more members). And for the companies those members work for, the value generated by that additional productivity can be immense, even more so if it comes without the cost of maintaining a large corporate office.

By actively working to improve the office environment to optimize for productivity, community managers in flexible office environments can bring real value to their members and the companies they work for understanding & acting on what increases productivity. Good coffee & green plants are just the beginning.