For those unfamiliar, the concept of a coworking space involves a leasable ready-to-go office for either temporary meeting purposes, or even a more longer-term option for companies looking to enter a new market, or just create a new office. This model has been presenting a bit of competition for traditional commercial landlords, as alluring amenities and growing market presence create some space for concern—literally. Popular coworking company, WeWork, is growing close to occupying nearly 3m square feet in New York City – making it one of the top most present firms next to JPMorgan Chase.
What’s unique about the coworking option is that companies are spared from the responsibility of paying for common areas, internet, specific insurance options, and construction needs (they fall under the umbrella of the overseeing party). You could argue that if you look at what tenants pay per square foot compared to traditional office space, that they are paying for it in the long run. Also, the majority of office leases are not structured with the tenant paying for common area maintenance, so that is an additional consideration based on what a company is seeking.
Since I have a tendency to see situations through a construction angle, I was pretty interested by a recent Construction Dive’s interview of WeWork’s construction team and how they handle their construction scalability in a way that caters to both their large and small clients.
With all the growth the firm is seeing, they are using technology in construction to make their expansion a little less convoluted. Their head of construction, Tim Dumatrait, explained that the firm works with designers to integrate laser scanning to get an extremely realistic view of what’s being executed on site vs. the plans. He stated in the interview, “If it’s a demolished space and we have drawings from the owner, then the scan lets us validate our assumptions and make everything the right shape and the right size and in the right location, so we don’t upset our direct-to-fabrication workflows. If we’re modeling something that needs to go to the shop floor, we have to be accurate to within less than a millimeter.”
He goes on to explain that there are technologies making it possible to confirm actual installations are placed perfectly where intended in real-time, instead of looking back and remediating an error that will likely present costs to the project owner.
While I think of the cost perspective, I’m left to wonder how both stack up in comparison. I found a formula for a break-even model for office space cost and applied it to the average/traditional lease in Philadelphia vs. the cost of Indy Hall Philadelphia, a popular coworking space in Old City. Of course, these vary from market to market, but given the circumstance of a typical 10,000 square foot, $20/sq ft lease, the cost comes out to about $3,000 per desk per month in a traditional landlord lease agreement. Then, according to the Indy Hall website, I noticed a $300/desk per month fee for a full membership with a dedicated desk. Coming in about 10 times the cost per month, the traditional leasing model has to consider a slight shift to remain competitive given all the amenities also packed into coworking environments.
I spoke with a connection in leasing on the topic, and he offered some interesting input.
Coworking space is an effective solution for companies that are testing new markets or are unable to commit to a longer lease term for a number of reasons. However, some businesses, especially those in the medical field are unable to operate out of coworking space due to confidentiality reasons.
On a square foot basis, traditional office space offers a better value because it does not account for the free beer, on site IT staff, receptionist, networking events, and other overhead items that many coworking providers offer.
At the end of the day, coworking space offers companies amenities, short term leases, and ultimately flexibility, for which the tenant pays a premium. An alternative for high growth companies would be to explore office portfolios through which they can grow at their own pace.