Is coworking the right financial move for your business?
This article originally appeared in the Portland Business Journal, see it here.
When it comes to financing a growing business, workspace is typically only second to that of salary expenses.
Over the past five years, rents in the Portland office market have risen 32 percent, with increases nearing 50 percent since 2009 according to CoStar’s 2019 Q3 report. That’s a significant shock to occupiers. Fully understanding the options available, can be the difference between using real estate as a tool to help your business reach its long-term goals and letting the overhead slow the growth trajectory.
One option that has become increasingly more prevalent to companies of all sizes is coworking space. While it is not the right fit for every company, it provides some advantages when it comes to flexible lease terms and capacity, as well as financial commitments and risk aversion.
When exploring the real estate landscape, we advise our clients to consider all factors, including cost, cash flow, risk tolerance, growth trajectory and culture, among countless other variables.
CostOffice space in downtown Portland averages just under $36 per square foot, with new construction/rehab projects seeking low-mid $40’s per square foot. What that does not account for is design, construction, furniture, IT and moving expenses, among several other expenses. While coworking may not be the cheapest option – averaging $500-$600 per desk (or $75-$90 per square foot) – it does significantly alleviate many of the up-front expenses.
Another option to consider is sublease space, of which there is currently +150,000 square feet available in downtown Portland. Subleases often provide a “plug & play” option for companies who want an alternative to coworking or long-term direct space.
Cash flowFollowing the new financial accounting standards that took effect in 2019, leases longer than one year must be reported as both assets and liabilities on the balance sheet. This categorizes a lease as a debt rather than as an expense. Meaning your business’s ability to borrow money for equipment and expansion could be impacted.
The short-term leases made available by coworking spaces help companies avoid this new practice and allow themselves more flexibility to borrow.
Risk toleranceWith the recent decline in federal interest rates, there has been an increase in perceived risk. Coworking allows companies to take that risk off their balance sheet by giving it to a third party. They now have the option to exit quickly if needed.
Growth trajectoryIn a traditional five to seven-year lease, rapid growth typically means paying for unused square footage for a fraction of time, with the goal or “hope” that growth ensues. Depending on the company size, coworking allows for various term options, from 30 – 90 – 365 days, with the ability to add or subtract square footage as companies grow or contract operations.
This evolved option also provides occupiers with the option to test out new markets prior to making the decision to invest in opening a permanent location.
CultureThough intangible, company culture is an important consideration. Coworking spaces average about 60-80 square foot per person, whereas density in a traditional office space is closer to 180 per person.
The increase in density – allowing them to turn a profit – means less personal space, a lack of privacy, increased noise level and often more distractions.
Every business is unique. Coworking is only one option but depending on the business objectives some of the benefits could outweigh the higher cost per square footage.
At Cresa we always discuss business before we ever discuss real estate. We see real estate as a business tool, one that should work towards your business objectives rather than against them. Learn more about our suite of services at Cresa.com