Coworking Site Selection: How Renting Could be the Final Nail in Your Coffin
If you’re like most coworking space founders, you started looking for a space immediately, checking out websites like loopnet.com and calling local commercial real estate brokers to find affordable spaces to rent in a few hip areas of town. Maybe you even wandered around looking at “for rent” signs in the windows of sexy brick buildings.
It makes sense. You’re excited and you’ve seen photos of beautiful coworking spaces in New York, San Francisco, London, and other urban metropolises. You understand that a quality space is key to the success of your coworking business; rightly so.
After narrowing your choices down to a select few, you find the one. Exposed brick; big and open spaces; large windows that flood the space with light. It’s perfect. Then your agent tells you the price tag.
Even though you play it off like you know what you’re doing and have piles of money under your house, secretly you’re thinking “How many $ per month?!”
What’s more, after speaking to the landlord, you learn he won’t be providing any tenant improvements (TIs). He says the building is fine as it is. He also won’t budge on the rent.
Unfortunately this is the issue with trends. Once a certain style becomes popular, people sell things based on the style alone, regardless of actual quality (electrical, plumbing, HVAC, etc).
There’s only one thing to do in this situation.
Here’s where most founders go wrong. If you can’t get a deal, don’t make a deal. Instead of walking away many founders fudge the numbers on their P&L. “Well if we just sell this many memberships every week, we’ll be fine. I mean, sure, we’ll get dangerously close to zero in the bank, but that will just motivate us to sell more!”
The same excitement that’s driving these founders to do the project in the first place, and rush into a property, is the excitement that will make them sleazy, desperate used car salesmen (no offense to used car salesmen).
My recommendation: own your building.
There are at least 3 solid benefits to owning your building:
- Cheaper “rent” (AKA mortgage) due to no middle men
- Spending money on building improvements makes YOUR investment better
- You’re diversified between two businesses, a real estate holding and a coworking space
- You can borrow against equity in your building to improve the space
Contrast this to renting:
- More expensive rent because everybody wants to make money (landlord, broker, etc.)
- Initial tenant improvements (even if rolled into the lease) are ultimately a total waste and destroy your profit margins
- You are at the whim of the landlord for rent price and lease terms
In fact, some coworking spaces primarily exist because they are a holding place for prime real estate (which is an angle to sell to property owners; if you can’t buy, make the landlord your partner). They create a coworking space in a building they own, with full knowledge that someday the property may be worth more than keeping the coworking space in that location or even alive at all.
I can hear you complaining loudly, “But I can’t afford to buy a building!”
You only have two options then: convince an investor (better if it’s a commercial real estate investor, not an angel of VC) to provide the capital or convince a commercial property owner to be a partner in the business (if the space has been empty for some time, you can use that as a leverage point).
Many coworking spaces work while renting, but they give up a lot of control. Own, don’t rent, whenever possible.
I’d love to hear from you. If you have any specific questions or disagree with anything here, shoot me an email at [email protected]. I’d love to chat and help in any way I can.