As a freelancer always looking for ways to be more productive, I’ve found myself researching coworking spaces and how they cater to the needs of entrepreneurs today. A fresh change from your traditional office set-up, they tend to offer short-term agreements instead of long-term leases. Some people find this setup challenging to maintain. Here’s what I found out while looking into the topic.
Will coworking providers have to offer long-term leases to continue operating? The quick and direct answer is: No. With short-term agreements, coworking spaces can have better control over their prices, are more profitable, and have greater flexibility over terms and conditions. Moreover, a growing population of freelancers, small enterprises, and even large corporations keeps them in business. Offering long-term leases would negate the benefits they enjoy from short rentals.
In this article, we’ll have a short rundown of what coworking spaces are and how they differ from traditional offices. Additionally, we will further discuss the differences between short-term agreements over long-term leases. The article will dive into the advantages of such, showing why they work well for today’s businesses. In the end, you’ll see why offering long-term leases can, in fact, be the downfall of coworking providers.
Just so we’re on the same page, let’s have a quick look at what coworking spaces are and how they work. To make things easier, we’ll describe them while comparing them to how traditional offices work.
One difference is in the length of their leases. Traditional businesses typically have their employees working in a high-rise building with desks that they come to every day and sit in from 9 a.m. to 5 p.m. Because of the nature of their operations, firms will rent out these office spaces long-term. This agreement means that they’ll be staying within the building for at least ten years. These leases can last up to decades. It’s similar to renting out an apartment or house you plan on living in for years to come.
In contrast, coworking spaces appear somewhat more like a hotel or Airbnb for companies and freelancers. Although they don’t rent the space out for just a few days, their agreements typically last for a full month, up to 5 years. This length of time is considerably shorter to leases that traditional office spaces offer. Although some conventional offices may short let, this is quite rare.
Next, the setup of the space differs as well. Conventionally, firms would assign a desk to an employee. They often stay within this area for the duration of their stay with the company, unless they get transferred to a different department, promoted, or moved to a different desk. They typically do not share the cubicle with anyone else. However, for coworking spaces, these tables are not seen as such permanent places. The arrangement is more like a communal area. Instead of having a single desk to yourself, these spaces have large tables and office equipment you share with others. Other coworking providers may adopt “hot desking” where people use the workstation in shifts. If you’re interested in this and more information, we have a more in-depth discussion on this topic, “What Is the Point of Hot Desking?” It explains the benefits of hot desking to companies. The practice saves them money, makes the office easy to maintain, and reduces a company’s carbon footprint.
Lastly, the environment in these spaces is also different. Traditional offices tend to house employees of a single organization. Some companies may choose to rent out office space to outsiders if they have an extra room. Additionally, these settings are more formal. This type of office best caters to businesses that need a more professional environment. It also gives management more control over organizational culture as well as the general atmosphere.
On the other hand, coworking spaces are more open. If you’ve ever been to one, it may resemble a cafe more than your usual cubicle-filled office. In this type of office, you have people coming from various organizations working within the same room. This setting encourages collaboration and networking. Because of the environment, coworking spaces are best for small businesses, freelancers, and those in creative fields.
If you want to know more about the differences between coworking and traditional office spaces, check out our article, “Has Coworking Transcended the Effectiveness of the Traditional Office Environment?” It explains how coworking spaces are revolutionizing the way we work.
As mentioned earlier, one of the characteristics of coworking offices is having short-term rent agreements as opposed to letting someone lease the place long-term. There are numerous reasons why they do such, and it comes with multiple advantages. It’s because of these factors that coworking spaces need not offer long-term leases.
One of the most important reasons to short let is the potential for higher profits. We all know that renting a place long-term saves you money the same way buying things in bulk does. For providers, they can make more income by renting out their space for shorter periods. According to the Telegraph, prices when short-term renting are about 30% higher than that of long-term leases. Thus, coworking spaces with rentals lasting from a month to a year can be quite profitable.
The way that you can make it profitable is to price your space well. For this, you’ll have to satisfy three conditions, according to the MIT Department of Economics.
First, the provider should be able to afford the rent, similar to a traditional company, to acquire a lease from landlords.
Second, they should charge at a higher hourly cost than what the tenant would have paid the landlord directly. For example, if the landlord was renting out the office space at $16 a day for 8 hours, a coworking provider could set the price at $3 an hour.
Third, the rent they charge for part-time rental should be lower than what the tenant would have paid the landlord for a full-time lease. In this case, if the client were to work for only 4 hours a day, they still would have paid $16 a day for a traditional office. Through the coworking provider, they would only have to pay $12 a day, thus making it a more cost-efficient option for them.
With long-term leases, the involved parties set the price of rent at the creation of the agreement. Unless otherwise stipulated, this amount is often at a fixed rate throughout the lease. So whatever you set at the start, you expect to receive that amount for the next ten years or so.
However, outside factors may influence how much you may have valued the space. For instance, a larger population in the city you’re in would mean higher rent as there’s a greater demand for office space. Providers locked in long-term contracts would be unable to change their prices as this may violate the agreement they have with the tenant.
Conversely, coworking spaces that offer short-term options can better adapt to such changes in the market. While they can’t change rates immediately or force their clients to pay a more substantial fee at once, they don’t have to wait as long to draft up a new agreement. Once a contract with a client expires, they can then change the rate they charge.
The growing industry of small enterprises, freelancers, and entrepreneurs means more people are looking for modern spaces to work. Providers can thus better control the prices they charge.
Admittedly, there is a sense of security when it comes to long-term leases. As mentioned earlier, tenants cannot easily break a contract. Thus, this guarantees that space providers would earn an income for an extended period. There’s often a penalty when a company chooses to move out and break the lease. This fee serves as a buffer or safety net for the landowner. It’s to keep them from suddenly losing tenants.
On the other hand, short-term agreements can appear risky. You won’t know if you’ll be able to find tenants after their contract expires. There isn’t that same guarantee you get from long-term leases.
However, coworking spaces can manage risk in another way. They do not only rent out the area to a single company. This setup gives them the opportunity to have a variety of tenants. If one company had to close for whatever reason—bankruptcy, for example—other tenants could make up for the loss.
Coworking providers will typically have at least one renting organization at any given time. This concept is called “economic diversification.” It’s like when they tell you not to put all your eggs in the same basket. It allows them to have buffers to absorb whatever economic shocks or disruptions that one business or industry might experience. For example, a brokerage firm is renting with a coworking provider, but there are large fluctuations in financial institutions. The provider would still have other tenants to rent out the space, even if the company has to move or close down.
Not only do providers have greater control over prices, but they also enjoy flexibility from short-term agreements.
The terms of a long-term lease are, in a way, set in stone. They will be in effect for years to come, after all. However, with short lets, it would be easier to update terms as soon as a contract ends. This arrangement allows you to update not only prices but also other conditions. This flexibility is particularly advantageous if you have unruly tenants or clients who are causing problems with others. It will save you a considerable amount of time and even money if you rent short-term. Such an arrangement allows you to better screen the people you’ll be providing the space to.
Additionally, you can make changes to the space more manageable. If you need to make repairs in the building or room, it wouldn’t be as difficult for you as you don’t have to let anyone “move out,” so to speak. Since they wouldn’t have been staying long-term, they wouldn’t have settled into the place as they would have in a traditional office.
5. High Demand
One of the concerns when it comes to a short let is the worry that you won’t be operating at full capacity all the time. Such is also a concern for a hotel. While they’re often fully booked during peak seasons, they don’t always have someone renting out the space for the entire year.
However, coworking spaces aren’t entirely like hotels. For one, they don’t have clearly defined “peak” seasons. Unlike the tourism industry that has more clients and customers during times such as spring and summer break, coworking spaces have people working year-round. The need for a comfortable and properly-equipped area doesn’t stop during any particular month. There will always be freelancers and small businesses looking for places to work in and collaborate no matter what season it is.
Additionally, they are in high demand. Over the past years, the coworking industry has grown significantly. Commercial Observer reports that since 2013, the sector had grown at an average of 22% per year. From having only 3.7 million square feet dedicated to coworking offices in Manhattan, this amount increased to 9.2 million in the first quarter of 2018 alone. This development shows that more people are looking for such spaces in which to work.
Coworking Insights also found that in 2019, the price per desk on a global average went down from $205 in January 2018 to $187. What this observation means is that more providers are opening up businesses to clients to meet the increase in demand. The increased number of providers creates a competitive market where they have to offer the best and most affordable prices to their tenants.
The community of the coworking sector consists primarily of independent workers. In 2010, they made up more than 69% of those leasing space from such providers. Following this population are those who are part of small to medium enterprises or businesses that employ 100 people or fewer. These individuals are those who would not have access or the means to large office spaces.
Many of those in coworking spaces come from fast-growing sectors. In the lead is the IT industry, followed by press relations, marketing, and then those in sales. These are industries that don’t seem to be slowing down. Their work requirements are a good fit for the environment that coworking spaces can provide.
The median age of individuals using coworking spaces was 35 in 2017. This measure is higher than that of 5 years earlier, at 33.5. Experts anticipate the age to further increase over time as more people try out coworking from all over the world. This observation shows that more older adults are beginning to take to coworking spaces. Such could mean that these places are effective in boosting productivity at work.
But it’s not just people in the gig economy. Startups and small enterprises have made the most significant contribution to the growth of this industry. Even giant corporations such as Google and Amazon are on the client list of coworking providers. These businesses have turned to these modern offices to hold meetings and events. They may also send their remote workers to stay here. With these ideas in mind, it won’t be surprising if future demographics show large corporations as leaders in the coworking industry.
Likewise, companies are discovering what their employees want when it comes to the workplace. As these businesses fight for the best talent, offering up the best arrangements may include the option to work flexible hours and in coworking spaces. If you’re interested in finding out how coworking spaces are influencing large corporations, check out another one of our articles, “Coworking is Taking Over the Enterprise. Here’s How”. It explains how companies are beginning to cater to employees’ need for a progressive office culture.
These statistics show that there’s a growing need for short-term rent. This arrangement is precisely the setup that clients are looking for to meet their different requirements.
Lastly, short-term rentals allow providers to reach out to niche markets. A coworking space can brand itself as a writer’s hangout, a haven for artists, or a stomping ground for your 21st-century female bosses. Because of the flexibility of the contracts, you can attract these markets that would not have been interested in traditional offices with long-term agreements.
Likewise, it also allows you to rebrand to meet the needs of such niches. As trends come and go, evolve, and change, your short lets can provide the people in these markets what they need. You can switch up terms, designs, and marketing ideas to meet whatever is trendy and flourishing at the time.
Because of all these factors, offering short-term rentals to clients or tenants is still viable. It allows the provider better control and flexibility for a growing market. As analysts predict the coworking industry to grow in the future, changing the business model of these providers would be akin to fixing something that isn’t even broken.
Earlier, we said that one of the reasons why coworking providers can survive without offering long-term leases is because of the significant demand for short-term agreements. But what exactly is it about this type of arrangement that encourages tenants and clients to short let? We’ve found these to be the factors that convince them the most:
At first, we may be quick to believe that long-term rent is the smarter option as it can save us more money. While this is true for many traditional businesses in a typical office setting, it may not be true when it comes to smaller enterprises and freelancers.
Think about it this way. These individual workers don’t make the same amount of money or income as corporations. That immediately limits what space they can rent out. They would be unable to rent out ample office space the same way a more prominent business would. They have to look for other options to conduct business.
Typical offices rent out space per square foot. In 2018, The World Property Journal reported that the average cost of a prime office was at $81.50 per square foot. In San Francisco, prices were even steeper, averaging at $85.04 per square foot. If you do some mental computations, you can see how expensive it can be to have a comfortably sized office in these areas. And with a tight budget, you will likely have to take this option off the table.
And that’s just talking about renting the physical space. There are other expenses you’ll have to consider. These added costs include utility bills, Internet connection, phone charges, and furniture. Then, of course, you have to look at the appearance of the office and spend on decoration, paint, and others. There’s also janitorial services to keep your place clean. These expenses would undoubtedly be daunting to a startup or a freelancer.
In comparison, a coworking space in the heart of Broadway charges about $1,050 per month. With that payment, you have access to a comfortable and sufficient space, office equipment, and utilities. You also have the opportunity to build a community or network with other like-minded individuals and businesses. Some spaces will even have coffee and food included. Some also have on-site staff to help you with personalized tech and legal support. A simple hot desk may cost even less but still provide you with the amenities you need to operate and work effectively. If you want to see other coworking options for comparison, we have numerous articles, such as “11 New York Coworking Locations That You May Not Know.”
Moreover, even if these organizations can afford long-term contracts, they may not be the most practical choice. Having a large office is not only costly, but it’s also inefficient. The nature of freelance work can be vastly different from that of a traditional company. While the latter may require employees to stay in the office from 9 to 5, freelancers and small businesses tend to have flexible hours or focus more on output. Thus, they may not need to be at a desk for 8 hours a day or stay at the same place for an extended period.
The MIT Department of Economics explains how coworking providers help companies save money. As mentioned earlier, for many of us today, flexible hours have taken over fixed schedules. Similarly, many of them may need to travel between different places, meaning, they don’t have to stay within one office all day. Some organizations may only need a space to work in from morning to noon. In contrast, others need somewhere to stay in the afternoon. Likewise, some companies may have matters to attend to at a city for only a few months before they head back to their main office. Coworking spaces serve as an option to such remote workers.
If both were to rent out an office on a long-term lease, they would typically have to rent such full-time, meaning, they have access to the office for the whole day for several years. For instance, company A would rent out a traditional office space for $10 a day for a year. Company B would likewise do the same. However, company A only has employees at the office from 8 a.m. to 12 p.m. In contrast, company B only has people working at their desks from 1 p.m. to 5 p.m. This system is inefficient. Both companies would be paying for the rent of a full day for an extended period but would only actually use it for half the time.
Thus, what coworking providers can do is offer the area to these organizations only when they need to be there. The cost would be lower than if they had rented the space out through a traditional lease. The provider could rent it out to both companies A and B for $7. This amount is lower than the $10 they would have been paying earlier. While it’s more expensive per unit of time, it saves them more money per person and in general.
Long-term leases for office space often only include an empty area for you to work. The cost of these rentals usually does not cover other expenses such as utilities, furnishing, and the like. Those who would rent out the space would have to provide desks, computers, printers, paint, or wallpaper, sometimes even lighting, for themselves.
With coworking spaces, these things are already available. The providers supply their clients and tenants with the equipment they need in an already furnished area. Your membership fees or rent would already cover whatever utilities and other amenities you use up.
Another advantage of short-term agreements that draws tenants is flexibility. As today’s market is full of businesses that must adapt to changes quickly, their needs also change just as rapidly. For instance, a company based in Los Angeles may have a project or meetings that they have to attend to in New York. Instead of renting out a full office space, they may look for a coworking provider to stay with instead.
Moreover, with long-term leases, it would be difficult to end an agreement before it’s reached its end. Most landlords will charge a hefty termination fee if a company decides to end their contract prematurely. And it’s sometimes even more challenging to change terms when necessary. Negotiations will have to take place, using up a lot of your time and energy. Imagine being a freelancer who finds a great opportunity in a different state. Ending a long-term agreement would cost you a great deal of money, and keeping the lease even without being there would be a waste of time.
With short-term contracts, companies have the benefit of being able to change or update terms when they need to. If they needed to move to a different city, they would only have to wait out a shorter period until the contract ended. With a long-term lease, the wait would last for years.
Given that these factors are what attract tenants to go for a coworking space, switching to or offering long-term leases may become the downfall of such providers. Long-standing contracts are the opposite of what coworking spaces are about. They feel too rigid and can be too much of a commitment for freelancers and entrepreneurs. They may also be out of the price range of these individuals who have turned to coworking providers in the first place as an alternative to costly traditional long-term leasing offices.
Are coworking agreements the same as a lease? Not necessarily. There are specific requirements that a contract has to have for people to consider it a “lease.” The two are very similar, and it all just boils down to technical aspects of the contract. The difference, however, may have a meaningful impact on the business as it may determine whether or not the accountant records the lease in the balance sheet.
What other benefits do you get from coworking spaces? People don’t only benefit from lower costs when it comes to short-term agreements with coworking spaces. They can also network with other individuals and small businesses working in the same area. This benefit is not something you can commonly enjoy with traditional offices.
What do people use coworking spaces for? For most of the people in a coworking space, they use the area to work. This task would be the same thing they do in a typical office setting. These areas are a common choice for freelancers who don’t want to work at home or remote workers who are away from their home city. Others use it to network with other businesses and individuals. Additionally, some companies rent coworking spaces to hold meetings and events. They may likewise stay to work on a project in a remote city from their base or headquarters.
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