Property Owners, Coworking Risk Depends On Approach
There was an article recently posted in the GCUC Facebook group called “Coworking Is Still Small, Risky But Here to Stay: NGKF.” The acronym at the end refers to Newmark Grubb Knight Frank, one of the largest commercial real estate service firms in the world.
First things first, let’s please stop listening to the coworking wisdom from large real estate firms. They really don’t know what they are talking about. At least not yet.
Second, yes, coworking can be risky for property owners, but so can any real estate venture or any business for that matter. It all depends on your approach to it. I see three approaches.
The Risky Approach
By all means, lease your space to a new coworking operator, willing to sign a lease for 5 to 10 years. However, your lease agreement isn’t worth much when the business likely folds in 2 to 3 years. Most small businesses fail, and the same goes for coworking businesses. The cream rises to the top and if your lessee isn’t experienced or a hard-working coworking machine then expect to be replacing them rather quickly.
Coworking, like the restaurant industry, is a tough business that requires a lot of dedication and passion. If your lessee doesn’t love people, connect easily with others, work hard, and have a good level of technological sophistication, I’d avoid the deal. Absentee operators will weigh the business down and ultimately fold.
The Less Risky Approach
Lease to an operator who already has functioning locations. Don’t allow them to separate the LLCs between locations, preventing them from folding the operation at your property without affecting their overall business. This will make them think twice about leaving you hanging.
This is still risky because the math rarely adds up well for coworking operators with a lease. A coworking operator is taking on significantly higher overhead by leasing from you, which is why I advocate for operators to own their property or work out alternate deals with property owners. Coworking spaces are notoriously low-margin businesses, so every little bit counts.
The Least Risky Approach
Do it yourself.
I don’t mean actually do all the coworking operating and all that yourself. Coworking isn’t your area of expertise as a property owner. You should hire somebody to do it for you. This isn’t the same as hiring a property manger. The person you hire needs to have the same qualities as the new operator described above. Passionate, hard-working, highly personable, responsible, etc. If you’re building a really cool project, you may be able to hire a Community Manager from another space with great experience who’s looking to advance their career.
This is the least risky because you are in control of the cashflow to a much larger degree. You’ll never be left completely high and dry because if you do it right you’re likely to have at least some members or tenants. Worst case scenario you can sublet parts of the property to help cover costs.
No, you don’t start cashflowing the property immediately as with a lease, but you’re building a flexible asset that you control. There’s more breathing room.
If you’re scared to do this or you need advice, there are plenty of coworking operators or former operators you can hire to help you build it out. Shoot me an email and I’d be happy to refer you to somebody.