Last week I went to meet a business associate in his new downtown LA office. I drove up to a very industrial building with retail and restaurants on the ground floor and wondered if I was in the right place. The last time we’d met, it was in your traditional office building on the 35th floor, and now I was headed into an office called Spaces. What is Spaces, you ask? Spaces is one of the latest companies to enter the coworking office space market. The innovator of coworking office space is a company called WeWork. In spite of this being an innovative concept, you might have heard of them lately because of their failed IPO in September, which we will circle back to shortly.
What Is Coworking Office Space?
In the simplest terms, a coworking office is a subleased hip office space. Instead of renting a traditional standalone office with its own entrance and four walls, the tenant rents time to work in a shared, open floor plan office space.
What Does a Coworking Office Space Look Like?
The office space can be in trendy, gentrified areas or traditional office buildings. Ideally, the space should be located near good public transit, be walk-able or have ample and affordable parking. The space also needs to be in close proximity to restaurants, entertainment and have the elements of a work/play environment. Since one of the attractions of coworking is the idea that work can happen at any time of day, the location needs to accessible and safe 24/7.
Coworking office space is an open floor plan environment. It is meant to invite collaboration while still being in a professional setting. The design consists of open workspaces, with more traditional offices and meeting spaces incorporated. This gives the workers options.
Benefits of Using Coworking Office Spaces
The philosophy behind these coworking offices is to bring community, workspace and technology together to create a holistic experience. The open space provides room for recreational enterprises and the ability to create community as well. For example, WeWork has community managers who facilitate engagements and events which bring people together for recreational activities. The premise is that people can work at home or in coffee shops – but they are missing the element of community which also brings with it an opportunity for collaboration. In addition, many telecommuters or those travelling on business need a place for meetings or access to advanced technology to, for instance, have large virtual conferences.
How is Coworking Space Rented?
Coworking office space was the brainchild of WeWork, however, there is nothing proprietary about what they created, and so there are many copycats – Spaces, Co-lab, NextSpace, and the list goes on. The revenue model works very similarly for all of them – there is a basic membership fee which generally allows access to the office and some of the amenities like mail and package handling and meeting space. There are also more permanent options like renting a private office, suite of offices or desk space. With the larger operations like WeWork, you’ll also receive reciprocal agreements, so if you are in another town that has a We Work location, you can use a workspace or a meeting room while there. In fact, I’ve visited my son in Dallas and we have both gone to work for the day at WeWork. It was a great experience (however, I must admit, I felt like the oldest one there).
WeWork and Their Failed IPO
There are a lot of theories as to why WeWork’s IPO was not successful, but to me, the biggest issue is the long term lease obligations vs. future revenues. WeWork’s lease obligations on their properties range from 10-15 years, so they are obligated to pay those leases for that amount of time. Projecting future leasing costs, their expenses will increase over those 10-15 years from the current $17.92 billion (with a B) to closer to 47.2 billion. The question is: does WeWork have the revenue to service those leases? From the outside, it is hard to understand how, with membership and office spaces ranging from as low as $45.00 a month to $840 for a private office, and the average time for a membership agreement being only 24 months. My concern is, when the economy takes a downturn and all the freelancers, independent contractors and entrepreneurs go back to working out of their homes or coffee shops to save money, will the company be able to adapt and service those leases? Time will tell.
Innovation is essential in real estate investing and this model proves that. I always say – people need a place to Live, Work and Shop, but what that looks like can, and will, change.
Diana D. Hill – email@example.com