Coworking bubble and will it burst soon-

Coworking bubble and will it burst soon?

There is a bubble in the coworking industry especially here in the Tier 1 Cities of the United States. You have been warned, and you should be careful before opening a new space or signing on the dotted lines. Some may disagree with me and call me plain old crazy because everyone is in the boom mode. The bubble will not pop tomorrow or in the next six month. Rather I feel that the bubble will pop in the next 18-24 months. Why do I feel this way? Well here are my reasons:

Supply & Demand – This is Economics 101. Too much supply brings down the price. Tier-1 cities such as Washington DC, New York, and San Francisco have added new coworking spaces in the last 12 months. And more new spaces are slated to be open. Right now the commercial real estate market is depressed, and landlords are sweetening their offers by lowering rent as cheap as by 50% for the first couple of year or in some instances even charging zero rent for up to 24 months. Coworking business owners are under this illusion that if they have the 24 months of runway, then they have ample time to fill up space and turn the space into a profit generating machine. This would be true if no new spaces came into the market or member churn was low. Given the type of demographics coworking space targets, managing churn, keeping costs low and attracting new people through the door will chip away the bottom line.

Interior of a coworking space

In addition to the challenges posed by competition from existing and new market entrants, do remember to factor in the threats posed from local coffee shops, restaurants, etc. Now very recently I also saw a rental apartment in NYC open up a coworking space in the building. If this trend continues and apt companies start to repurpose a chunk of their lobby, game room or another under used space as shared work area then it eats away our addressable market further. Presume more and more of this to continue. While you are at this point, do not forget new commercial buildings, townhome communities and condominium developments.

And do not forget the flexible industry veterans – business centers and executive offices such as Regus. These spaces have been in business for many years; they have already broke even on their initial capital investment, optimized their operations, centralized their marketing and can lower their prices. Plus we have already seen some of these companies add coworking to their offerings.

Now if supply and demand did not get you to start thinking then may be this point will. Many small cities, counties or towns have begun to invest (in the form of grants) coworking spaces. And this is a worrying matter. Government entities should be investing in things that create a level playing field not give a leg up to the grant winner. Plus they should not be in the business of opening or operating coworking space. Wish they enacted new laws or rules making it easy to open space or lowered the barrier to entry.

Then there are traffic and accessibility issues to consider. Your members will not commute for thirty mins if a new place pops up ten mins away. Plus the traffic gets worse by the day. Expect that to continue and factor that into your initial assessment.

Scenario of a coworking space

But wait, if the traffic is getting worse that means the number of people moving into my addressable market is growing which means I have a larger market now. Somewhat true also consider that as the market grows so does rent, salaries and other items. I’ve seen coworking spaces start which brought positive impact and change to the community and became a victim of their success. Why? Because the landlord raised the rent on them and they could not live with that increase. One way to protect yourself is if you purchase the property out right.

Lastly, broker/listing sites are popping up. They allow anyone to list their unused or underutilized office space for rent. And don’t forget that some people have gone as far as renting out their basement as a workspace. They are calling it the Airbnb of office desks.

In conclusion, if you are thinking or about to sign a lease, then please weigh the pros and cons carefully. It is not all gloom or doom. However, be careful who you talk to and whose advice you are considering. If you are working with a consultant, then be super concerned. Why? Well, the professional makes money when you open the space. Not the other way round.

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