STA ADVISORY SERVICES LIMITED

CO-WORKING FEASIBILITY REPORT

August 2018
CONTENTS

MARKET OVERVIEW 2

BARRIERS TO ENTRY 4

PROFITABILITY 6

FLOORPLAN CONSIDERATIONS 9

SPACE UTILIZATION 10

EXECUTING FLEXIBLE CONTRACTS 11

HIGH LEVEL ISSUES 12

BEST PRACTICE STAFF MODEL 13

SOURCES 15

1
Market Overview

LONDON
The flexible workspace sector has seen exponential growth in London. In 2017, flexible
workplace providers accounted for 21% of central London office space. The largest amount
of space occupied by flexible operators is in the city (26%), followed by the West End (23%).
Higher growth can now be seen in non-core locations due to delivery of new buildings,
supporting faster letting activity.

Distribution of Central London Flexible Workspace Stock

In 2016, the UK’s flexible workspace sector was worth £16bn (or £19bn considering
additional income from services supplied by operators). From 2012-2016 4.5 million sq ft of
flexible workspace was leased through 210 transactions. During the 5 years prior to this,
only 1.2 million sq ft was leased and in 2017 alone there was 2.5 million sq ft let in total.

Drivers of such growth include:

 Growth of start-ups and SMEs. London has seen a 41% increase in small and
medium enterprises (SMEs) since 2010, much of which has been driven by a marked
increase in funding from venture capital. 40% of the workforce will be freelancers and
independent contactors by 2020.

 Economic & political uncertainty have created volatile economic conditions,

increasing the appeal of avoiding long-term lease commitments.

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  Technology as an enabler for change. Working practices have evolved to include
collaboration, sharing and a desire to be part of a community.

 New lease accounting standards where leases under 12 months can be excluded
from International Financial Reporting Standards.

 Increased use of flexible spaces by corporate companies. HSBC, KPMG, Amazon

and more have taken hundreds of co-working desks.
[More about corporate co-working here].

It is expected that 30% of all commercial office space will be consulted as ‘flexible space’ by
2030.

REGIONS
Competition in regional cities is intensifying. Two thirds of the UK’s flexible workspace
market is based outside of London. Take-up of all leases in the UK’s largest cities (excluding
London) jumped from 2% to 7.5% in 2017. This was largely powered by the growth of large
operators that are now seeking to grow outside of London.

Flexible office demand across the UK’s regional cities at least doubled last year, with
Manchester, Birmingham and Bristol experiencing the biggest increases. Although Bristol
has a below average supply of co-working spaces, it’s considered the third most desirable
city for coworking when considering key factors including the cost per workstation, business
insurance and the number of office spaces available. Bristol is also attractive for its low costs
and high broadband speeds.

Average regional operator sizes are:

 Manchester: 24,000 sq ft
 Birmingham: 22,670 sq ft
 Glasgow: 21,950 sq ft
 Leeds: 22,000 sq ft
 Newcastle: 19,500 sq ft
 Cardiff: 13,950 sq ft
 Bristol: 12,250 sq ft
 Edinburgh: 7,900 sq ft

2018 is set to be the year in which the co-working revolution hits the UK regions. The
booming tech sector and supportive environment for start-ups should feed demand over the
next 12 months and companies seeking to reduced overheads look more towards regional
cities.

Last year, combined take up in 10 key cities was 1.3 million sq ft above the 10-year average.

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Barriers to Entry

COMPETITION
Barriers to entry are generally low, which is why there are so many operators. However, this
means competition is high. Co-working providers must invest highly to keep up with
competition and effectively differentiate themselves from others within the market, which
many fail to do when simply maintaining the same facilities as many other providers.
The consequence of such competition has resulted in mergers, acquisitions, restructures
and in the worst case scenarios, closures. One example of the worst case scenario is the
closing of Rainmaking Loft in St Katherine Docks due to intensified competition and more
specifically, WeWork leasing space within the same building.

COST OF MAINTENANCE
Leasing space to multiple tenants means there are high maintenance demands and
operations require intense management. This is due to the high turnover of occupants, which
results from contract flexibility. Investment in staffing is one way to overcome the
maintenance demands, in addition to the hybrid model where co-working spaces sit within a
building for other use.
FAILURE TO DELIVER LIFESTYLE SERVICES
Developing a lifestyle brand isn’t easy to display in facts and figures, but members grow very
attached to a space which becomes more than just a place to work. To be able to socialise,
grow professionally and network alongside the basic daily work tasks is an attractive bonus.
Many co-working spaces go the extra mile by throwing in free desk massages, running
‘mindfulness’ workshops, creating morning running clubs and organizing international
getaways.

Meeting the basics of a co-working brand includes consideration of:

Membership: Offering an attractive package along with the basic office provisions.
Building local partnerships.
Community: Effectively introducing members to one another and curating a
network through event programmes, social events and if possible, an
online network.
Concept: Developing a niche, targeting a specific membership base (such as
tech, fashion, finance) or offer something unique to your space
(biophilic, smart-buildings, crèche included etc).
Business Support: Business support through mentoring schemes, professional surgeries,
advice, investment opportunities through pitch nights.

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 Typical Services Offered by Flexible Workplace Operators & Demand from Users

The most preferred features of flexible workspaces, in order of preference - as defined by

the Global Coworking Survey 2017 - are:

1. A social and enjoyable atmosphere

2. Interaction with others
3. A community
4. Close distance to home
5. Like-minded people
6. Good value for money
7. Good tansport connections nearby
8. Basic office infrastructure
9. Knowledge sharing
10. A big open workspace

5
Profitability

REVENUE STREAMS

Only 40% of all coworking spaces are actually profitable. In terms of breaking even:

 39% break-even within the first 6 months.

 25% break-even within 7-12 months.
 18% break-even within 13 – 24 months
 18% take over 24 months to break-even.
Profits are heavily reliant upon levels of occupancy. For a coworking space to be profitable it
must be 80-85% occupied. I have therefore included a free copy of my book on how to reach
or maintain 100% occupancy.
Flexible workspace operators typically operate with low margins and low volumes. Revenue
is produced through 2 main income streams:

1. Membership fees
Typically 80% of revenue, or 74% within the first year as shown below

2. Bolt-on services
Typically 20% of revenue, or 26% within the first year as shown below

Revenue Streams of Co-working Spaces Under 1 Year Old

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COSTS
The largest costs for co-working spaces globally are as follows:

INCREASING MARGINS

Scale is the main way to improve margins. The percentage of co-working spaces making a
profit increases with size.
< 9 members = 10% profitable
10-24 members = 15% profitable
25-49 members = 20% profitable
50-99 members = 45% profitable
100-199 members = 55% profitable
200+ members = 70% profitable

Due to dependability on scale, space occupancy and the burden of high maintenance costs,
the hybrid model has become increasingly popular and there are fewer ‘pure’ co-working
spaces in the market. Many are now merged with hotels, accommodation, retail centres and
more.
Profit margins can also be increased through density rates. UK operators typically seek
densities of 50 sq ft per desk but some go as low as 30 sq ft per desk. New spaces being
opened by WeWork are now planned to be 35-45 sq ft per desk.
Whilst the map on the following page shows profit margins based on highest rent paid for
leases and indicative desk rates, these are often only achieved due to high density rates or
generous rent-free periods.

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 Flexible Workspace Profit Margins in Central London

TIPS FOR INCREASED PROFITABILITY

According to the Global Co-working Survey:

 Providers who invest in community building are 10% more profitable than those who
don’t
 Providers who offer free trials are 14% more profitable than those who don’t
 Providers who are open to everyone within their first year of opening are 11% more
profitable than those who only open to a particular niche of members within their first
year of opening. [The niche focus as suggested on page 4 may therefore be better
executed as a longer-term plan after assessment of the most popular incoming
members.]
 Providers who are profitable within their first year of opening have an average of 114
members, 85 desks, 8 employees and space consisting of 10,000 sq ft (averages are
not synonymous with one another).
 Providers who open new locations are 19% more profitable than providers who
expand within their existing space and are 36% more profitable than providers who
move to a larger location.
 Providers with less open spaces and more private offices are more profitable.
 57% of providers make profit when over 60% of space consists of private offices,
whereas only 37% of providers make profit when less than 60% of space consists of
private offices.

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Floorplan Considerations
As of 2018, the average co-working space at a global level is 22,300 sq ft, an increase from
2016’s average of 15,000 sq ft. The average co-working space in London in 2017 was
40,072 sq ft – a rise of around 10,000 sq ft since the previous year.

Average size of unit leased per annum in Central London

There are various types of member spaces to consider for the floorplan:

1. Private offices
2. Dedicated desks
(open workspaces where members are assigned an individual desk)
3. Hotdesks
(open workspaces with unallocated desks)
4. Collaboration space
(open areas with features including furniture, whiteboards etc.)
5. Meeting rooms
6. Member kitchens
7. Games rooms

DIVISION OF DESK TYPES

There is a misconception that all co-working spaces must be dominated by a large areas of
dedicated desks and hotdesks for freelancers and small companies. This might have been
the case a decade ago, but as the sector has matured allocation of space has altered.
4 years ago the golden split was typically 60% private offices with 40% dedicated to shared
spaces. However, in 2018 providers aim more towards an 80% provision of private offices,
which are now the most popular offering and largest stream of income, followed by
dedicated desks. Whilst hotdesk memberships represent the highest number of members
due to small company sizes, they don’t necessarily produce the highest revenue as they
experience more churn than other membership types.

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DESIGNING SPACE WITH PURPOSE

Interaction is one of the core reasons members choose co-working spaces, so it’s crucial to
design spaces which facilitate this. It’s very easy to throw a few tables and chairs together in
an open space and call it a ‘break-out area’, believing members will naturally gravitate
towards it, but greater interaction is seen when space is designed more purposefully. For
members to effectively interact, tools such as coffee machines, games and books can be
used to better instigate conversation in a relaxed environment.
Members need to feel comfortable enough to talk to one another, so a stale and silent
environment must be avoided and background music is a great solution for this in the right
areas at a reasonable volume.
Members also need to find purpose to remain in a certain area for a long enough time period
to instigate and hold a good conversation with fellow members. Many will inevitably meet
over lunch, but if you can provide additional facilities other than a kitchen to enable
interaction, members are typically happier in a more social atmosphere.

Space utilization
FACTS AND FIGURES
Most London-based co-working providers offer 24-hour access. At a global level, co-working
members typically utilize the space for an average of 9 hours per day including breaks. This
timeframe is longer in the city and less in the regions.
Only 40% of members show up 5 days per week and 30% show up 3-4 days per week. Only
20% of members work exclusively from their coworking space, but this figure has increased
from 10% five years ago. The most frequent users of the space are employees under the
age of 35. Members who freelance or have children show up less frequently.
The most popular form of membership is the monthly subscription (83%) whereas hourly,
daily and weekly memberships account for 6% of global memberships. More than 40% of
members work standing up at least some of the time, with 3% working exclusively at a
standing desk. 70% of members would like a window-facing desk.

LOGISTICAL CONSIDERATIONS
Event Space: This can be an extra income stream if utilized well. It might even involve
investment in rolling or stackable hotdesks for removal during events.
Member Kitchen: From my experience, any space which has set up their own café or
restaurant has lost money from it. There is usually too much competition locally or not
enough traction from members to cover the overhead costs. Member kitchens, on the other
hand, are successful as a social space and with provisions for members to eat cost-
effectively with their own food.
Post Room: Depending on the size of your space and rules around receiving packages,
many spaces struggle to store post effectively and eventually install a post-storage room,
which is much easier to consider in the early days.

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Executing Flexible Contracts
MEMBERSHIP TYPES
Private Offices
Dedicated Desks
Hot desks
Virtual Memberships
Daily and Hourly Rates
Provision of any amount of desks with floor-to-ceiling partitions
Provision of an allocated desk in a collaborative workspace
Provision of an unallocated desk in a collaborative workspace
Membership allowing access to the hotdesks or meeting rooms
for a certain amount of days or hours per month. Includes
extras such as print credits.
All of the above memberships are usually provided with the
same contractual terms, built around the 1 month commitment
on a rolling basis.
These are less popular and more likely to be used by digital
nomads or travellers. They are likely to be more successful in
the regions as opposed to global cities, where travelling
workers are typically have access to workspaces through
international access schemes. Regions have less international
provisions.

TERMS AND CONDITIONS

A deposit of 1.5 months is typically taken upon signing of the contract. Although all contracts
are ‘1-month rolling’, there are still mechanisms to be put in place to protect the provider
against losing members too quickly. For example, a common term is that notice can only be
given after 1.5 months which essentially locks members into a 2 month period to begin with.
Thereafter, the provider must be given notice that a member is leaving “on the last day of the
month prior to the month of departure”, which most members forget to do and therefore
allows the provider 2 months to better anticipate the churn ahead and assess the current
waitlist or lead pipeline.

FASTER SALES
The monthly rolling contract brings the benefit of faster sales. Many spaces witness a 1
week conversion period from lead generation to sale. It is the industry standard to encourage
members to sign contracts on the day of their viewing with the reassurance that they are not
committing to long lease lengths.

ELECTRONIC SIGNING
To cut the paperwork and allow members to sign contracts on the day, there are various
tools you can employ to send contracts to members on the spot or allow them to sign by
passing them an iPad. Contracts may be executed through Salesforce or by utilizing new co-
working specific software platforms which produce membership contracts, invoices, manage
payments and more. The two most prevalent platforms in the UK include Nexudus and
Essensys.

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High Level Issues
Besides intense competition, high maintenance costs and pressure to deliver a niche service
with a lifestyle brand, there are a few high level issues to consider when working to ensure
occupancy of at least 80-85% to be profitable.
In order of importance, here are the top reasons why members choose to leave their co-
working space. These reasons are ordered using data from the Global Co-working Survey,
in addition to my observations made throughout my experience.

REASONS MEMBERS LEAVE

1. The office is unable to meet basic office requirements: phone signal, functional air
conditioning systems, building access, print facilities.

2. The noise is constantly at a level which is too loud, leaving members unable to
concentrate and therefore unproductive throughout their working day.

3. There is a lack of interaction between members which leaves the space feeling like a
traditional corporate office.

4. There is a lack of privacy which has been unresolved through soundproof phone
booths, soundproof meeting rooms and effective privacy screens on glass partitions
between offices.

5. Bad internet connection. Constant outages are common and one of the largest
frustrations for members. Many spaces develop schemes to compensate whenever
an outage happens or develop partnerships with local cafes or fellow co-working
spaces where members can be shifted to for Wi-Fi connection when this happens.

6. Incomplete infrastructure. Whether the bike racks haven’t yet been installed, the
buildings 24 hour security system doesn’t work yet or whether the management team
consists of only 1 person so far – missing pieces to the overall infrastructure can
drastically affect the services delivered to members.

7. Cleanliness. Many spaces contract ‘Porters’ for the busiest hours of the day to
ensure a constant flow of clean mugs, to help with the post-event clean up and to
generally maintain high levels of cleanliness. House rules are often developed for
members to clear up after themselves but the success of this depends largely on
culture which can be difficult to curate.

8. Prices are too high. If members feel they are not getting enough value for their
money and the co-working space across the road is able to offer a discount, they are
often fast to leave.

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Best Practice Staff Model
A typical community team will consist of the main employees below. As the space gets
larger, providers may employ more Community Associates, contract Porters or employ for
specific duties including Sales, Relationships, Operations and more.

Community
Manager
Community
Associate

Front
Desk

AREAS FOR BEST PRACTICE

AREA 1: COMMUNITY
1 Member Service Typically community teams work from desks within the
community to be member facing, rather than working in a closed
office. Teams are expected to be positive and enthusiastically
make themselves available to members through frequent, daily
conversations. The remit of what the community team deals with
is often extremely broad and varied.

The ‘community’ member-facing role is still very new in the job

market and management will often have to advise employees on
how to cope with intense workloads. (Here is an article I wrote
about the challenges faced by these employees and how to
incentivise them.)
2 Stakeholder Time must be actively spent building relationships with members
Relationships to retain them. Good practice might include the scheduling of
quarterly or monthly meetings with the company’s CEO or the
‘office location decision maker’ within the firm. Feedback should
be gathered and updates on progress should be sent back to
individual companies.
3 Events Weekly event segments include:
 Wellbeing classes including yoga, mindfulness,
massages
 Fortnightly social events to bring members together
 Monthly business and professional development
events
4 Member The industry standard is for an exclusive weekly newsletter to be
Communications sent to members. This mailer updates the community on
interesting topics, new tenants and new opportunities.
5 Member Benefits Member benefit packages are useful to use as a USP during
tours and to list within follow-up material. These might include:
 In-house professional services: Legal, HR, Finance

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  Local and corporate discounts
 Free food and beverages
 Free event space hire
6 Business Track the amount of introductions made between members and
Introductions what the results are in terms of multiple members gaining new
business partners or clients. Use technology applications to ease
the difficulty of tracking information on members in large spaces.

AREA 2: OPERATIONS
1 Daily Walk This is another industry standard whereby the space is checked
Arounds in the morning for any mishaps. These are recorded through your
choice of software for analysis and fixed before the working day.
It’s also a great opportunity for staff to speak to all members at
the start of the day.
2 Inventory Setting up a constant flow of supplies seems basic but is always
Management a challenge in the early days and is crucial for member
satisfaction. It’s the first thing to be reported by critics; that a co-
working space ‘can’t even supply xyz’.
3 Operational Upon launch of the first building the team should seek to develop
Procedures a Standard Operational Procedure booklet to be used by
covering staff and to also be used as a template for future
locations. There should also be a standardized instruction pack
for members to accompany this.
4 Desk Allocations This is a project management task. It involves tracking the
availability of remaining desks and managing offices moves when
competitors want to be on opposite ends of the corridor or when
one member prefers a certain room or members simply have to
be shifted to allow room for a new company.

AREA 3: SALES & BUSINESS DEVELOPMENT

1 Tours Best practice during tours includes:
 Sit down to interview potential member before the tour
 Team members to be confident in pricing
 Be open to negotiating prices; find out the potential
member’s budget first
 Offer advice on costs of running own office v co-working
 Highlight advantages over local competitors
 Follow up no later than the same day
 Always tailor follow up email specifically to the individual,
including information pack
 Utilize free trial as the bestselling tactic
 Effectively record outcome of the tour / allocate place on
waitlist
2 Outreach Work to attract and entice local influencers into space and most
importantly, work with brokers where appropriate. (Here is an
article I wrote about how to do this successfully.)
3 Member Formal exit interviews should be arranged when a member
Retention leaves with standardised questions. This data can be stored for
review and presents the opportunity to communicate openly and
negotiate in a final retention attempt.

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 AREA 4: FRONT HOUSE MANAGEMENT
1 Meet & Greet Offer a personalized meet & greet service for each company
when their guests arrive, based on their communication
preferences. For example, a phone call, text or email. Texts can
be automated through co-working specific software platforms.
2 Meeting Rooms Ensure all membership types can book meeting rooms
seamlessly and track credit allowances. Meeting room bookings
are often displayed electronically on the outside of the room.
3 Security All team members must be trained on security systems, which is
often not the case and causes issued when Senior Management
is absent.
4 Building Effective relationships to be built with the building manager if
Management leasing a few floors within a block. Relationships also need to be
built with neighbours due to event noise and move-in day
disruptions.

Sources

Allwork: Top UK Coworking Spaces

CoStar: Regional Office Occupation Renaissance
Cushman & Wakefield: Coworking Report 2018
DeskMag: Profitability of Coworking Spaces 2018
DeskMag: How Why and When are People Coworking
Essensys: Workspace Market Stats
Global Workspace: Private Office Memberships
Knight Frank: The Success of Coworking 2018
Office Vibes: Coworking Stats

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