You visit a coworking space, and it looks like the business is working. People are at the flex desks, in the meeting rooms, and in the offices. You like the design, the staff treats you well, the technology works, and maybe they do something with food and beverage that you particularly like. So you do the back-of-the-envelope P&L. The website says part-time flex desks are $250, and there are probably 150 members, so that is one line of revenue. There are 15 offices at around $1,000 a month, so that is another. You subtract what you guess the rent and the payroll come to; maybe you hand the math to ChatGPT or Claude to check it, and you reach the conclusion I hear often.
They are killing it.
If you are an enthusiastic entrepreneur, you probably also think you’ll do it better and make it more profitable. Running profitability analysis for operators is one of my favorite projects these days, and the reality is that most coworking spaces are not killing it. This is a really challenging business to do well. Most operators struggle with their profit margin, and that is either a revenue problem, an expense problem, or some combination of both. You cannot tell whether a space is profitable because you like the aesthetic and the vibes and there are people in it.
That is the subject of this episode of the Everything Coworking podcast, and this article is the written companion to it. It applies whether you came to the idea as a member of someone else’s space, as someone who discovered coworking and started touring to see what the model looks like, or as an asset owner with space to fill. The aesthetic and the vibe of the space you love are worth keeping. What I want is for you to stop treating another operator’s space as evidence that a model works, and to build yours from your own numbers instead: the profit margin you need, the rent and staffing and revenue per square foot that get you there, payroll as a percentage of revenue, and the lead-to-tour and tour-to-close ratios that fill the building in the first place.
You cannot see rates, occupancy, or expenses from a tour
A space can look great from the outside, and it’s especially easy to do in this industry because our spaces are Instagrammable. The aesthetic matches what you like, there is real human connection in the room, and all of that gives you the sense that the place is doing well. What you may not be thinking through is what doing well even means: what the occupancy is, what rates members are actually paying, and, above all of it, what the profit margin is.
The rates on the website are list prices, and the people in that room might be paying well under them. You know even less about expenses, and you have no idea whether that team is understaffed or overstaffed, or what their rent and CAM come to. Every market is different, every customer base is different, and pricing models are different, which makes it hard to know what their expense structure looks like or whether any of it is working. So don’t reverse-engineer someone else’s space unless the owner has downloaded their QuickBooks files, handed them to you, and let you look at the ratios yourself.
A revenue problem is much harder to fix than an expense problem
In these profitability projects, I see owners who are producing very high revenue and still cannot get to their profitability number because their expenses are through the roof, and frankly that is the easier of the two problems to solve. When revenue isn’t where it should be, the fix is harder, because revenue requires you to get everything right on the front end. That is why reverse engineering a model you think is doing really well can become a big problem for you.
Start with your why, then build the model from the metrics
If you are opening a new coworking space, start with what you want:
- What do I want the vibe to be? What do I want the aesthetic to be?
- What is my why? Why am I creating this?
- What are my goals, and what do I want this business to look like?
- How much involvement do I want to have in it?
- What profit does it need to produce to fit into those goals?
There is more than one right answer to that last one. This might be extra income, or a way to cover the rent because you have another business sharing the space, or the thing you quit the day job for, with more locations to follow eventually. Or you are an asset owner and want to optimize the net income you can pull out of the project. You have to know which one you are in it for, because the decisions you make are different in each case.
Not every why is profit-motivated, either: I am working with an organization in Pennsylvania whose mission is growing businesses on Main Street, and coworking is becoming part of that model, possibly as a way to be sustainable rather than reliant on grants. I am not having deep conversations with them about growing their mail business, because they have a very different why.
Know the numbers well enough to see your own trade-offs
Once you know what you want, get deep into how the numbers work, which ratios you are working toward, and how to build a model that reaches them. These are the ones to know cold:
- Rent per square foot
- Staffing expense per square foot
- Revenue per square foot
- Rent as a percentage of revenue
- Payroll as a percentage of revenue
- Lead-to-tour ratio
- Tour-to-close ratio
Revenue per square foot is the one that comes out of everything else you build: your culture, your team, your marketing, your customer experience, and your community building, which is to say your sales on the front end and your retention and experience after that. These might sound like the numbers a sophisticated multi-site operator manages against, but if what you want is your own individual profitable space, these benchmarks are for you as well.
Go in fully aware of the metrics that produce a 20 to 30% profit margin, and you will know when you are making a trade-off. Maybe it is very important to you to serve free lattes, and that affects your margin. Maybe you put in a gym that nobody ever uses because you want to offer it as part of a wellness package, and that hits your margin too. Both are fine, as long as you know going in what they pull out of your revenue per square foot and what is left to get you to the margin you are aiming at.
Falling in love with the real estate works the same way. You take a space that costs more than you can reasonably recover in the pricing you can charge, so your expenses run higher and your rent lands as a higher percentage of revenue than is ideal for that 20 to 30% profit margin.
Know which levers in your pro forma break the model
Your pro forma should align with the actual space you are looking at and drive the profit margin you need. Get really clear on the choices you are making inside it, stick to them, and understand which levers will cause problems if you change them.
Everyone has a plan going into a launch, and then something unexpected comes up, or you turn out to be less confident in your sales process than you expected, and the assumptions in the pro forma start to move. You start discounting, and your occupancy goes up, but your rates land below what you had in the pro forma. Or you hire more people than you planned for, because you feel like you cannot do it all yourself, and payroll as a percentage of revenue runs much higher than the model can support.
The model itself is simple: you have your revenue, you have your rent, you have everything else you have to pay for, and what is left is your profit. Getting it right is far more complicated, because we are humans and humans do irrational and emotional things. Revenue is where the opportunity is, and the work there is deciding what to optimize to push revenue per square foot as high as it will go. On expenses, you do not have much room at all, and you have to get them right. Sometimes getting them right means restricting yourself: I see operators who are attached to the staffing model they want and the amenities they want, and holding on to both breaks the math, so the model does not deliver a profit margin.
Use the space you love as inspiration, and let the benchmarks drive the model
Operators work in a silo, and that is part of what makes this hard. You know what your own business is doing, and you have a sense of whether that is good or bad measured against your own profit goals. What you may not know is whether those goals are too low or too high compared to what is happening in the rest of the industry. The more we share these numbers with each other, the better an operator you become and the more profitable you get.
So go visit the spaces you love, put them on your Pinterest board, and use them as inspiration for the space you want. Then get to know the benchmarks well enough that you are thinking about benchmarks over inspiration by the time you build your model.
Things will not go according to plan, whether you are about to open or already operating. If you are opening, know the benchmarks and the levers before you sign a lease, build a model that produces the margin you need, and understand how those numbers interact well enough to know how to course-correct. If you are already operating, the question is which levers you can pull to get closer to that 20 to 30% margin.
Love the vibes. This industry is really about vibes, aesthetics, community, and feel. Just don’t reverse-engineer someone else’s model, because you have no way of knowing whether it works.
You can listen to the full episode of the Everything Coworking podcast.
