Making the business case
The interviews we conducted were immensely valuable and further cemented our beliefs that there is a need for the Zensors technology. However, just because these people are excited about the Zensors technology doesn’t directly make it a good business opportunity for us. We filled out the product fit matrix to evaluate the fit between Zensors capabilities and domain characteristics, but except for an insight into case-by-case financial resources, this matrix doesn’t evaluate the market vertical as a whole. Some of the coworking spaces we interviewed were actually running at a loss, and margins are thin, prompting us to take a deeper dive into the economic landscape of coworking spaces. The rest of this article will be a faux financial analysis of coworking spaces, looking at the growth, and scoping the opportunity in this space for our product.
Growth and finances
If taken at face value, the financials of co-working spaces may seem a little spooky. Only 37% are profitable, 36% run break-even, and the remaining 27% run at loss. We believe that it doesn’t matter so much which side of these our customer is on, what matters more is that Zensors can deliver a return on the investment.
Without a doubt, the popularity of coworking spaces has increased massively over the last 10 years, and coworking is now one of the fastest-growing sectors of the commercial real estate market. Where back in 2005 just 30 coworking spaces existed, that number rapidly ballooned to 15,500 in 2017, with 3,400 additional spaces projected to open in 2018. The total market value is estimated at about $15.75 billion. Despite early success, the buy-bulk-sell-piece model does not promise a high return today due to the increasing cost of rent. In the face of intensifying competition, major coworking players are expanding their businesses aggressively, aiming to benefit from economies of scale. While a small number of real estate companies choose to start their own spaces, more are looking for strategic cooperation with coworking players that have established memberships and reputation.
Although most coworking spaces aim to increase revenue and profits, it is not always the main motivator in setting up a coworking space. Hotels, banks, fitness studios, retail stores, and restaurants are exploring whether the co-working model can serve as an acquisition channel for new customers.
For established companies that are putting up hot desks in their vacant space, coworking can be seen as a way to bring potential customers through their doors. Hotels for example, are opening coworking spaces, with the idea that people that utilize it will use the auxiliary services (food and drinks, conference room bookings) offered in the hotel. Similarly, State Farm hosts a coworking space that offers classes and access to help from the company’s investment and insurance advisors, with the idea of upselling their insurance products.
The majority of coworking space operators are still small (covering less than 5,000 sq ft). This is steadily increasing, as the average size of coworking spaces has doubled between 2014 and 2016, indicating a strong upwards growth trajectory. Based on the initial interviews, a 5,000sq ft space can easily be managed by a single office manager, and at 10,000 sq ft, additional staffing is required.
After lease payments, staffing costs come in second when looking at the overall operating expenses of coworking spaces. Slimming down staff increases margins. Next is maintenance at 5% trailed by equipment, food and drinks making up 4% and 5% respectively. Our hypothesis here is that if Zensors can decrease the amount of staff required to overlook and manage a space, and optimize equipment and resource allocation, Zensors will be able to deliver a positive ROI.
It is important to be aware of the divide in the operational scale of existing co-working companies. Less than one third (32%) are full-time operators, meaning that the majority of spaces are managed by a part-time office or community manager. On the other end of the owner spectrum are the industry behemoths like Regus, Premier Servcorp, and WeWork, which all tether on the edge of being real estate companies more so than coworking spaces. This inverse normal distribution will likely force us to focus on the larger coworking spaces. This is reflected in the average revenue metrics. Across all coworking spaces, the average monthly income is $42,000. However, with an average monthly income of $72,000, we can see drastic increases for coworking spaces that are located in cities with a population of more than 1 million. Similar to the division of full-time/part-time management, less than a third of the coworking spaces are in cities with a population of 1 million or more, which also host the most profitable coworking spaces (as a percentage of revenue).
Powering growth
The speedy growth of coworking can be attributed to a combination of economic, demographic, social, and technological factors. The rise of the contingent workforce (80% of employers increasing the contingent workforce) has played an important role. In fact, as commercial real estate executives face pressures to bring down real estate costs, employed workers and corporate coworking memberships have now overtaken the share of freelancers that make up the coworking memberships, and the amount of small business ventures has decreased. Openness and familiarity with the sharing economy has made people more receptive to coworking.
When looking at value flows of coworking spaces, there are two core elements where Zensors can layer on value. On the supply side, data from the Zensors platform will improve the ramp up speeds, optimize occupancy, and as a result of optimized space and utilization drive more revenue and profits. On the demand side, the data from Zensors can be leveraged to improve the marketplace and service experience. Zensors data can be used to communicate live desk and resource availability, and give the user insights into when the space is most active. We’re excited to explore more in-depth queries as we talk to more coworking space and community managers.
Membership and retention, optimization
On average, coworking spaces hit a 52% utilization rate during operating hours. Based on data published by DeskMag, the average coworking space has a total of 75 members over 64 desks and member happiness peaks between 50–75% utilization. Less utilization will negatively impact the social aspect of coworking spaces, while a higher utilization will reduce productivity and comfortable access to resources provided in the coworking space. The average reported duration of a membership has increased by 8 months between 2012–2016 and in that same period the amount of members that holds a membership for more than 36 months has tripled, indicating an increased commitment to coworking by the general population.
Survey data shows that community and coworking space managers find community and communication most important in creating an engaging coworking space. This is followed by attention to the interior (decoration) of the space. Tertiary factors include service diversity, and pricing structures.
Now that competition is heating up, managers of coworking spaces will need a way to differentiate themselves, and data can become an important way to do that while achieving organizational optimization. A report by DeskMag highlights a few metrics from which valuable intelligence can be gathered.
Here are some of the new metrics to consider:
- Daily peak utilization, indicates the maximum number of people using your space within the given day.
- Daily peak utilization by business unit, indicates the maximum number of people from a specific company entering the coworking space. Corporate customers from different businesses might have different needs, or interact with a space in varying ways, but still share the same space.
- Average peak utilization, the maximum rate of usage within various periods of the workday.
- Frequency of peaks, the amount of times the peak usage of the workspace is reached.
From a business perspective, as a manager, there are some key ways in which Zensors can be used to collect feedback on key performance indicators. In the end, you want to see how the members of your space respond to the optimizations, or use it to provide insight into which areas can be further optimized. Zensors can collect data on some of these key performance indicators. As an example, usage of group work areas will show which areas in a space are ‘activated’ and facilitate interaction and collaboration, and by looking at the types of interactions, you’d be able to tell not only where people are, but also how they are using a space in combination with other people, and whether there are any missing resources that could be valuable in further facilitating those interactions.
Where does that leave us?
The warm reception our concepts have had from co-working spaces we talked to, in combination with the above insights highlights that the appetite for data provided by Zensors exists, and that financial resources are generally available if Zensors provides a return on investment. With additional research interviews in the space we want to tease out more key performance indicators that directly map to use cases and value propositions for managers of coworking spaces. Also, with coworking being an avenue for commercial real estate, co-living and serviced office spaces are not out of reach for exploration. The line between coworking and managed offices is blurring further and traditional offices will slowly start to transform their spaces from cubicles to more open areas. The data that is collected by Zensors can then serve not only to provide realtime insights, but can be leveraged to inform designs and transitions of existing spaces.
References
https://www.theinformation.com/articles/weworks-gamble-on-growth?shared=c532b5
http://www.hok.com/uploads/2017/11/08/us-coworking-report.pdf
https://www.slideshare.net/AlexanderJarvis/wework-pitch-deck-55170129
