I was on a call recently with a potential client who runs a coworking space for the owner of the building. As we walked through her business model, she told me the owner was glad they hadn’t taken a larger space because he felt they’d kept risk low by staying at 3,000 square feet. My first thought was that staying at 3,000 square feet was the riskier choice.
I think people getting into the coworking business still struggle to see how much a space’s size limits its revenue. A coworking space with less revenue has less money to pay staff or share profits with partners. Building owners who’ve been approached by an operator who wants to run their space often don’t see how much a small space limits revenue either.
If you’re opening a coworking space in a building you lease instead of own, your biggest risk is the rent. Rent is the biggest bill the space pays, and you owe it every month whether the offices are full or not, so if the space doesn’t reach full occupancy, you have to write a check to cover part of the rent yourself. Rents are rising in many markets, and a bigger space means a bigger rent bill, so a smaller space can look like the safer choice.
But a 3,000-square-foot space is hard to make work under the typical coworking model, where you lease the space, pay full market rent on all of it, hire a full-time staff person, and sell offices and memberships. In my comparison, full market rent is $30 per rentable square foot per year, fully serviced. A 3,000-square-foot space run that way has two problems:
- After paying $90,000 a year in rent, a 3,000-square-foot space has $25,200 of its $115,200 in annual revenue left, which doesn’t even cover one community manager at $62,000 a year.
- Only 11 offices fit in a 3,000-square-foot space, so a space that size loses money even when every office is rented all the time and can’t afford a single empty office.
The right size for a space depends on your goals, the real estate you can get, and what that real estate costs you. An operator can care a great deal about community and the member experience, and still want a business that pays its staff and partners and leaves profit. If you’re that operator, the way to build a sustainable, profitable business is to go bigger, up to a point.
In my experience, very few markets are saturated, and most can support a 15,000- or 30,000-square-foot space, the two larger sizes in my comparison below.
Comparing a 3,000-, a 15,000-, and a 30,000-square-foot space
To show how profit changes with size, I compared a 3,000-, 15,000-, and 30,000-square-foot space using rough, back-of-the-envelope numbers. These are the assumptions behind the comparison:
- Each space’s size is its rentable square footage, which is what you pay rent on. Rentable square feet include your share of the building’s common areas, such as the main lobby, the public hallways, and the shared building restrooms. Usable square feet are the floor inside your own walls, including your offices, your kitchen, your own hallways, and any private restrooms. In my comparison, 80% of the space you pay rent on is inside your walls, and the other 20% is your share of the building’s common areas, so the three spaces have 2,400, 12,000, and 24,000 usable square feet.
- The two larger spaces bring in $64 per rentable square foot. In my benchmarking work, $70 per square foot per year is a strong result for most operators. The 3,000-square-foot space fits only 11 offices, and its office rents plus virtual mail bring in $38.40 per rentable square foot.
- Rent is $30 per rentable square foot a year, full service, in all three spaces.
- Operating expenses, including staff and marketing, come to $20 per rentable square foot in the two larger spaces. In the 3,000-square-foot space, one community manager and marketing alone cost $74,000 a year, more than $20 per square foot.
The 3,000-square-foot space has one community manager and spends $1,000 a month on marketing. The 15,000-square-foot space has two full-time staff members, and the 30,000-square-foot space has four. The national average base salary for a community manager is $55,000, and each staff person in my comparison costs $62,000 a year, fully loaded. The two larger spaces spend $3,000 a month on marketing. Like the 3,000-square-foot space’s $1,000 a month, the larger spaces’ $3,000 a month is a back-of-the-envelope marketing budget.
| 3,000 sq ft | 15,000 sq ft | 30,000 sq ft | |
|---|---|---|---|
| Revenue | $115,200 | $960,000 | $1,920,000 |
| Rent ($30 a sq ft) | ($90,000) | ($450,000) | ($900,000) |
| Operating expenses, including staff and marketing | ($74,000) | ($300,000) | ($600,000) |
| Profit | ($48,800) | $210,000 | $420,000 |
| Margin | -42% | 22% | 22% |
With those assumptions, the 15,000- and 30,000-square-foot spaces both earn a 22% profit margin. The 3,000-square-foot space loses at least $48,800 a year, even though the table assumes all 11 private offices are rented. The $48,800 loss is a minimum because the 3,000-square-foot space’s $74,000 in operating expenses covers only its community manager and marketing, not its other operating costs.
Why a 3,000-square-foot space can’t pay for a staff person
The 3,000-square-foot space loses money mostly because its revenue can’t cover one community manager. The 3,000-square-foot space brings in $115,200 a year in revenue. After $90,000 a year in rent, the 3,000-square-foot space has $25,200 left for operating expenses, including staff and marketing, and one community manager costs $62,000 a year.
In the two larger spaces, operating expenses, including staff and marketing, total $20 per square foot. At 15,000 square feet, $20 per square foot equals $300,000 in operating expenses, covering $124,000 in staff and leaving $176,000 for marketing and other operating expenses. At 30,000 square feet, $20 per square foot equals $600,000 in operating expenses, covering $248,000 in staff and leaving $352,000 for marketing and other operating expenses.
Staff costs 54% of revenue in the 3,000 square foot space and 13% in both the 15,000 and the 30,000 square foot spaces. The benchmark for profitable operators is 13% to 15%, so the two larger spaces are in line with that benchmark.
A 3,000-square-foot space can’t hire half a community manager, so it needs one full staff person. Somebody still has to give tours, answer email, and open the doors in a 3,000 square foot space. The 15,000 square foot space pays for two people out of $960,000 of revenue, and the 30,000 square foot space pays for four out of $1,920,000 of revenue.
You could try to run the 3,000 square foot space with no staff at all, but the unstaffed model isn’t really proven. A few coworking locations run without staff, but I don’t think every operator can pull that off, or that an unstaffed space gives members a good experience. An unstaffed model might work in a small space that’s mostly private offices, where members come for an affordable office on flexible terms and don’t need a full-time staff person.
What fits in 3,000 square feet?
The second problem with a 3,000-square-foot space is that it loses money even with every office rented because so few offices fit. The space’s 3,000 square feet are rentable, but only 2,400 of them, or 80%, are usable space inside its walls. Inside those walls, the space includes a small reception area and a small meeting room; the rest is offices, hallways, and a kitchen. This table shows how the 3,000 square feet turns into 11 offices:
| Square feet | |
|---|---|
| Rentable space (what you pay rent on) | 3,000 |
| Your share of the building’s lobby, hallways, and restrooms (20%) | (600) |
| Usable space inside your walls (80%) | 2,400 |
| Hallways and circulation inside the space (30% of usable space) | (720) |
| Kitchen | (150) |
| Reception area | (200) |
| Meeting room | (150) |
| Left for offices | 1,180 |
| Offices at 100 square feet each | 11 |
After the hallways, kitchen, reception area, and meeting room, the remaining 1,180 square feet fit 11 offices of 100 square feet each. Beyond the 200-square-foot reception area and the 150-square-foot meeting room, the 3,000-square-foot space has little shared space and no event space. At $800 a month, the 11 offices bring in $105,600 a year when every one of them is rented, and on office revenue alone, the space would lose at least $58,400 a year.
The 3,000-square-foot space’s only other revenue is virtual mail. In my experience, almost any location can bring in $800 a month from virtual mail, adding $9,600 a year and bringing the space’s revenue to $115,200 a year, or $38.40 per rentable square foot. Even with that mail revenue, the space loses at least $48,800 a year, and its $90,000 of rent is 78% of its revenue, compared with 47% in each of the two larger spaces.
Selling open desks instead of offices wouldn’t fix the 3,000-square-foot space’s losses, because a 3,000-square-foot space that sells only open desks will struggle to bring in as much revenue as offices do. In a space that size, everybody can hear everybody else, and there isn’t enough floor area to give people a variety of comfortable places to work. A small space needs at least some private offices. The 3,000-square-foot space in my comparison is mostly offices, which makes it a small executive suite.
Eleven 100-square-foot offices make for an expensive build-out, and once they’re built, each one has to stay rented every month on a $1,000 marketing budget. In a market where good competitors run bigger spaces, those competitors probably offer more meeting rooms, more flex space, more hospitality, and maybe a better coffee bar.
The 3,000-square-foot space is looking for the smaller group of people who don’t want to be in those bigger spaces. The 3,000-square-foot space only needs to fill 11 offices, and if you’ve built a good product, filling them should be doable. Once the 11 offices are full, though, the 3,000-square-foot space can’t afford to lose even one, because each empty office adds to the money it’s already losing.
What happens to each space in a bad year
When a member leaves, most of the costs in this comparison stay the same. Rent, staff, and most other expenses don’t go down, so every dollar of revenue a space loses is a dollar less profit.
The 15,000-square-foot space can lose $210,000 in revenue, or 22% of what it brings in, before it starts losing money. A 30,000-square-foot space can lose $420,000, or 22% of its revenue. If a big team moves out, if the 15,000 or 30,000 square foot space doesn’t reach full occupancy, or if the year is just bad, either space can still make money.
The 3,000-square-foot space can’t lose any revenue without losing more money, because it’s already at least $48,800 a year short of breaking even. One office at $800 a month is 8% of the small space’s $115,200 in revenue and 0.5% of the 30,000-square-foot space’s $1,920,000.
The 15,000- and 30,000-square-foot spaces do pay much bigger rent bills, $450,000 and $900,000 a year, compared with $90,000 for the 3,000-square-foot space. If the 3,000-square-foot space has a bad year and you have to cover part of its $90,000 rent yourself, you can recover from that, but recovering from part of the 30,000-square-foot space’s $900,000 rent is much harder. A 30,000-square-foot space also costs ten times as much to build out as a 3,000-square-foot one. A 30,000 square foot space also takes longer to fill, and the profit table assumes every space is already full, so the 30,000 square foot space will take longer to start making the $420,000 a year in the table.
A small space has the same tasks as a big one
A 3,000-square-foot space has the same tasks as a 30,000-square-foot one, and its P&L has the same line items. You still market the space, keep up a website, onboard and offboard members, and keep the space clean. Beyond a cheaper build-out and a shorter time to fill, a small space only protects you from a bigger rent bill. A 3,000-square-foot space doesn’t give you enough revenue to pay a full-time staff person and make a profit.
When a 3,000-square-foot space can work
A 3,000-square-foot space can work in three situations:
- The space is part of another business. I recently worked with a client who bought a building to run a different business and put offices and a little flex space into the extra square footage. I believe their coworking space is under 3,000 square feet, and the space works for them because they aren’t adding a full-time person to run it. We were clear from the start that the space wouldn’t support a full-time person.
- You own the building and don’t charge the coworking space rent. Another client of mine has a little over 3,000 square feet and is doing very well with virtual mail. Her costs are very low, and the building belongs to another business of hers, so she doesn’t pay rent for the coworking space. Her coworking space pays her a salary and still makes a nice profit margin.
- The space is built to sell blocks of hours to more members than it has rooms. In a therapy space, for example, members such as therapists buy blocks of hours in a room, and because those members don’t all use the space at the same time, the space can sell more memberships than it has rooms.
In the first two situations, the coworking space either doesn’t pay a full-time staff person or doesn’t pay rent. In the third, the space works because each room brings in money from several members. Running a 3,000-square-foot space yourself doesn’t fix its losses in my comparison. After $90,000 a year in rent, the 3,000 square foot space has $25,200 a year left for operating expenses, including your pay and the marketing, so you’d be working there full time for well under $25,200 a year.
Running the numbers for your own space
If you’re deciding how big a space to open, or an owner is deciding whether to let an operator run a floor of their building, you can put your own numbers into the same lines: revenue per rentable square foot, rent, and operating expenses, including staff and marketing. Then check whether your space’s revenue pays for the staff you’ll actually need at your market’s wages, and how much revenue your space can lose before it starts losing money. If your numbers show that a 3,000-square-foot space loses money even with every office rented, a 3,000-square-foot lease is riskier than a lease on a bigger space, even with lower rent.
If you’re new to the coworking business and already see the case for a bigger space, you probably expect it to earn a higher profit margin. A bigger space doesn’t necessarily earn more margin, but it does earn more profit. In my comparison, the profit margin is 22% at both 15,000 and 30,000 square feet, while the profit doubles from $210,000 to $420,000. A bigger space can also lose far more revenue before it stops making money, and it can probably offer members more meeting rooms, more flex space, and more hospitality than a 3,000-square-foot space can.
This article is the written companion to this episode of the Everything Coworking podcast. For my full walkthrough of the numbers for all three spaces, listen to the full episode.
