As opposed to twenty years ago, many more people are making their living as a freelancer or independent entrepreneur. Given the prevalence of the internet, the ability for individuals to make a living on their own has expanded rapidly. As such, many of these people require a small amount of office space if they need to meet clients/customers and do not want to conduct these operations out of their home. Additionally, some independent entrepreneurs and freelancers prefer to work outside of their homes in order to avoid distractions while enjoying the camaraderie of people that operate in a similar capacity. This strong demand has allowed real estate firms to develop coworking styled office spaces that allow for low costs for small office space.
One of the most important aspects to this industry is that these firms generate much higher returns on investment as opposed to standard commercial leases. However, on a per square foot basis – the rental fees are generally much higher. This is primarily due to fact that most coworking spaces (or shared office spaces) do not require long term commitments. This creates a moderately higher degree of risk for the owner-operator of the coworking space. Additionally, most coworking spaces include numerous amenities as part of a flat rate program. These amenities often include high speed internet, complimentary snacks, access to conference rooms, and other benefits. This is usually done in order to create a competitive advantage over other coworking space providers.
As it relates to geographic location, these types of businesses are very popular in major metropolitan area markets where large scale commercial office space is extremely expensive. Major metropolitan areas where coworking spaces are prevalent include New York, San Francisco, Miami, Los Angeles, San Diego, and Chicago. In markets where startups are popular, coworking spaces can be found frequently.
As it relates to the industry, there are approximately 2,000 companies that provide office space in a “coworking styled” capacity. Each year, these businesses aggregately generate $3 billion per year. The year-on-year growth of this industry has remained near 6% in each of the last five years. This rate of growth is substantially higher than that of the economy as a whole as well as for the commercial real estate leasing industry. This trends is expected to continue for at least the next ten years. It should be noted that the revenues of coworking space industry is very sensitive to negative changes in the economy. During recessions, many freelancers will turn to becoming employees of established businesses. This causes demand for rentals to drop substantially. As such, coworking space companies often need to keep a substantial amount of cash on hand to deal with low occupancy rates.
In order to remain economic stability, well capitalized firms will often seek to purchase the building that houses these operations. This allows for a mix of coworking space rental income coupled with standard long-term leases. This often alleviates the risk associated with leasing a facility with the intent to subdivide it into coworking spaces. Most financial institutions are very welling to provide the necessary capital in order to acquire a commercial building for this purchase given that real estate is excellent collateral for a debt obligation.
Overall, the industry outlook for this industry is moderately strong. The returns on investment can be substantial during times of strong economic growth. As more people become part of the “gig economy”, the demand for shared office space should remain stable. Only severe and prolonged economic recessions have a major deleterious effect on these businesses ability to generate revenues and profits.