How much does your office really cost, and does coworking really belong in the Sharing Economy?

This post is both a big picture look at whether coworking is really worthy of being included with Uber and Airbnb in the booming “sharing economy” and also goes into extreme detail to help you analyze the total cost of your office space.

Huh? What on earth do these two things have in common? How do I even tag this article? Reading this post will have value for a diverse audience, from partner level people at top VC and PE firms who currently have a major misperception of coworking to practically every single entrepreneur and company manager who needs an office or will need an office.

There’s a method to my madness. It turns out that understanding the total cost of office space is the key to understanding why coworking represents an innovative disruption to the traditional office space model and thus worthy to be included along with businesses like Uber and Airbnb.

Let’s start at the big picture in the sharing economy. Ride sharing services like Uber are disrupting the transportation market. Using Uber instead of buying a car can cost less than owning a car, depending on whether you drive a little or a lot. Home sharing services like Airbnb are disrupting the hotel market. Aside from the saving money compared to a hotel, renters can also enjoy being closer to the authentic local community. One very cool side effect of Airbnb is that the rental income can materially help hosts to afford their homes. These companies are worth billions of dollars because they fundamentally disrupt the economics of huge traditional markets.

So what about coworking services like WeWork? Is coworking also changing the fundamental economics of the office real estate market? Can coworking materially improve the value proposition for people who buy office space?

Yes.

But the large majority of market participants don’t yet know it.

Most people do not know the total costs of their offices, only the rent, so they mistakenly conclude that coworking costs more than traditional office space.

Even real estate insiders cannot clearly articulate the value proposition of coworking. For example, in this sponsored post Colliers recently stated that “start-ups often prefer the newer coworking arrangements, finding that while these spaces often cost more per square foot in rent than conventional office space, the reduction in capital expenditure and the flexibility offered (usually on month to month “memberships” rather than leases) is enough to off-set the higher rates.”

To be clear, Colliers is correct that coworking membership fees quite often exceed rent expense. But that’s comparing apples to oranges. A better way to say it would be “companies often prefer the newer coworking arrangements, finding that the total cost of these spaces often cost less than conventional office space, even setting aside the other benefits such as reduction in capital expenditure and the flexibility offered (usually on month to month “memberships” rather than leases).”

Key point: to have an apples-to-apples comparison we need to compare the total cost of a traditional office against the total costs of a coworking space.

There are four major components of the total cost of a traditional office. When these components are added together, they usually exceed the total cost of a coworking space. It makes intuitive sense because in coworking spaces many of these expenses are shared by the entire community, reducing the cost for each organization. Here are the four components:

1. rent;

2. renovation & furniture depreciation (i.e. in accounting parlance, you make a ‘capital expenditure’ to pay for office renovation and furniture, and in your financial statements your accountant will divide the total by the assumed useful life of those items to calculate a monthly expense);

3. internet and utilities such as telephone, electricity, water; and

4. management, reception, cleaning, security.

The following diagram sums it up: the total cost of coworking is usually less than the total cost of traditional office space.

How about your office?

To help you figure out your total office cost, we created a calculator tool called “How Much Does Your Office Really Cost?” and I’m happy to share it here. It also automatically compares your total office cost against a total coworking cost so that you can see the difference.

Click here to access “How Much Does Your Office Really Cost?”

The calculator tool currently contains default assumptions for Shanghai, but you can easily plug in your own numbers and the output is universally valid.

Feel free to overwrite any of our assumptions with your own actual numbers.

You might be surprised by the renovation cost. In my case with my last office, we didn’t invest a lot into renovation because the office space was already in move-in condition. But it was the internet expense that surprised me and contributed to my old office costing 10% more than coworking would have cost.

This post focuses on the tangible costs of traditional office space versus coworking space and ignores the harder-to-quantify aspects of coworking such as financial and legal flexibility, off balance-sheet accounting benefit as mentioned in the Colliers article, ‘mobile office’ aspect from being able to use work space and meeting room space at any location in the network, and of course the community factors that are often the top reason people prefer coworking over traditional office space. I’m going to try to quantify those in a future post.

So what’s your conclusion? Which one offers the superior value proposition for you? Let’s discuss in the comments!