COMMENT: Co-working is booming, but many providers are setting themselves up for a fall with business models and approaches that are unsustainable, writes Natasha Guerra, chief executive of Runway East.
Strong financial fundamentals might not be as sexy as building a trendy brand, but relying on one without the other is a recipe for disaster.
Fuelled by low barriers to entry, an all-time high demand for flexible space, and changes to how individuals and companies work, co-working is the core driver of growth in the UK commercial property sector.
In 2017, flexible workspace providers took on more than one-fifth of all London commercial property leases, according to research by Cushman & Wakefield – up from just 8.5% in 2016.
WeWork alone has rented more central London office space than any other company since 2012.
But it’s not just a London phenomenon; uptake of shared workspaces tripled in the UK’s largest regional cities last year.
However, co-working faces increasing scrutiny as cracks emerge in the business models of some providers. What are the common mistakes, and how can providers build a defensible business model for sustainable growth?
Why co-working is not working
Some operators and investors seem to think success in co-working is just about space.
Making profit in co-working is easy, the theory goes: raise money, complete a lavish fit-out, provide space at a loss to undercut incumbent high-end spaces, and hold out for the market price to rise.
Unfortunately for their long-term prospects, this doesn’t account for others doing the same to undercut them.
It’s a vicious cycle that we’ve seen keep prices down and swallow potential profit.
It’s especially prevalent in London, where desk prices in open plan spaces have remained largely unchanged for the last few years – bad news for providers who have modelled increases into their plans. WeWork’s private office spaces, for example, have remained around the £700 per desk mark.
Another common move is for providers to reject the benefits of a well-curated membership as they chase continued growth, instead opening up their spaces to any industry and accepting any type of company as long as they can pay the bills.
In theory, this is fine – it derisks the business by reducing the provider’s susceptibility to one particular industry collapsing and unlocking more reliable revenues from more established companies.
However, this approach demands that your operational ability and lease negotiations are as tight as possible as your only way of winning will be on price – a battle where big incumbents always have the upper hand.
Even more importantly, if a provider becomes just another serviced office, their offering is commoditised and brand loyalty among members is harder to foster, as there are no longer significant networking benefits available for them.
They will be left in the most vulnerable position of fighting competitors on price alone.
Building a better model
What does a sustainable co-working business model look like?
It is founded on two essential – but often overlooked – factors: cultivating a clearly-defined brand, and paying close attention to financial fundamentals from the outset.
Co-working providers must recognise that they can’t rely on winning all their members on price, an approach that neglects the importance of brand.
Providers must be more than a fancy logo and filament light bulbs, and create identity and desirability for themselves by curating a focused membership and actually delivering on their promises of community.
Female-only spaces such as The AllBright and The Women Collective, for instance, or industry-specific offices such as Chisel, a US space for lawyers, have become more than spaces, adding tangible commercial value for their members through their specialisation and networking efforts.
At Runway East, we define ourselves by the community we build for our members, the network effects they experience thanks to events we run to connect them with each other and experts, and the commercial impact that has on their startups – because that’s what creates value beyond office services.
If co-working providers focus only on price and fail to create something that keeps members loyal and engaged, they risk high churn as members transition off introductory discounted rates and begin shopping around.
A great brand and loyal customers are not enough, though. Co-working spaces must nail their financial fundamentals from the outset – ensuring, for example, that they break even at a low enough occupancy rate to weather inevitable churn, bad months, staffing challenges, market downturns, increased competition, desk price drops, and more.
Providers must also leave enough room in their desk price to accommodate it trending down significantly over time, whether as the result of an economic downturn, an increase in supply, or other factors.
The co-working revolution is inevitable, and as the market moves towards its eventual consolidation – in which a small number of big providers and a few smaller players serving specific niches dominate the landscape – the fate of both revolutionaries and their less progressive counterparts will ultimately depend on running a operationally tight ship, built on solid financial fundamentals and a strong brand defined by community and value-add.
