Co-Working Spaces for Startups and Small Businesses

If you’re a startup or small business, finding the right office space for your business can be challenging. In addition, depending on where you are located, commercial office leases can be quite expensive. For commercial leases, landlords will typically require at least three years of financial information (ex: balance sheets, P&Ls, tax returns) from your business as part of the review process. A security deposit will be required at the time of signing (typically two to three months of rent). Landlords will also require the business to show proof of commercial liability insurance coverage and will want the building owner, landlord and management company named on the policy as Additional Insured.

Let’s not forget about the additional costs that may come with leasing an office space including utilities, cleaning, common area maintenance, a HVAC maintenance agreement, property taxes and escalations, and so forth. Many landlords will also require a lease term commitment. While some landlords may allow for short-term leases (1-3 years), many will seek long-term leases (5-10 years). 

As a startup or small business, you may consider running your business out of your home. While that may be suitable for some businesses, it certainly won’t be suitable for all. In addition, if your business requires frequent meetings with clients and vendors, having access to a professional office space and conference rooms become a necessity.

Co-working spaces have been growing quickly over the past several years. Companies like Regus, WeWork, Industrious, and The Yard, just to name a few, have swept up commercial real estate spaces and converted these spaces into turnkey co-working office spaces. Offerings may include virtual office space (access to a physical mailing address, phone number, voice mail, call answering service), day passes (day access to the facility, general meeting area, high-speed Internet), dedicated desk or office space of varying sizes (typically requires a monthly fee and commitment terms vary from month-to-month to 3, 6, 9 or 12 month increments) and flexible access to their other facilities and locations.

For startups and small businesses, turnkey co-working space agreements may provide greater flexibility than typical commercial lease agreements, which help business owners manage tight operating costs. Co-working spaces may require a security deposit; however, they typically won’t require three years of financial information from the business. The monthly costs will generally be lower than a typical commercial office lease since you are only paying for what you need. Some co-working spaces may require that you carry commercial liability insurance coverage; however, the costs are generally more affordable since the office space will be significantly smaller. Utilities and cleaning services are usually included in the monthly fee and some conference room access (hours) may be included in the monthly fee. Some spaces may also include complimentary coffee, tea and water. Additional services may be available a la carte.

All-in-all, co-working spaces don’t sound too bad at all … so why even consider leasing a commercial office space?

While co-working spaces can be beneficial in the short-term, there are plenty of reasons why you’ll eventually need to find a suitable commercial office space.

First … SIGNAGE! You’ve worked hard to make a name for yourself and your business, so you’ll want your business name prominently displayed at the entry way to your office space. Unfortunately, the first name you’ll see with most co-working spaces will be the name of the company that provides the co-working space. While you may place signage for your business on the door to your individual space, you typically won’t be able to place any signage in the Reception area for the co-working space. This can be a major drawback for new business and potential business prospects.

Second … Costs can add up quickly! The two major areas where your costs can quickly add up even if your office space needs don’t change will be conference room hours and Internet bandwidth. If you have a monthly agreement in place, it will typically include a fixed number of conference room hours as well as Internet bandwidth. If your business requires meeting with clients or vendors frequently, your conference room hours can add up very quickly. Likewise, if your business requires a lot of Internet bandwidth for uploads, downloads, streaming, etc., you could be faced with a ridiculously high overage bill for your Internet bandwidth usage.

Third … PRIVACY! Co-working space means there will be plenty of other businesses sharing the overall office space. Some co-working spaces don’t have fully enclosed offices. This means you can hear the activities of your neighbors. If you are able to find a fully enclosed office space within the co-working space, this might not be as big of a deal. However, if you happen to be in one of the spaces that are not fully enclosed, you might feel quite uncomfortable discussing business plans, strategies, financials and so forth where nearby neighbors can hear those discussions. Granted, most co-working spaces may include privacy spaces (ex: phone booth-style privacy space); however, if you’re paying a monthly fee for an office space, you shouldn’t have to pop into a phone booth-style privacy space to have a conversation.

One other reason for eventually needing commercial office space is if your business grows, you will outgrow your co-working space. Sure, you may be able to find a larger office space within the co-working space; however, if that happens, you could be paying just as much (probably more) for the co-working space as you would for commercial office space. If that’s the case, finding suitable commercial office space will make much more sense.

Lastly, let’s not ignore the fact that there are alternatives to co-working spaces. For instance, you could sublease part of an office space from another tenant (Sublandlord). While similar to a co-working space, the number of other businesses that operate within the office space will be limited, you may be able to work out signage at Reception, there could be more privacy and you can split/share the costs of overhead which will be mutually beneficial to both the Sublandlord and SubTenant.

Co-working Spaces and the COVID-19 Pandemic

The COVID-19 pandemic has changed the commercial real estate landscape. With some businesses continuing to offer work from home and/or hybrid options, the needs for traditional commercial real estate continue to evolve. Co-working spaces may serve as an interim bridge while businesses re-evaluate their long-term commercial real estate needs. However, it’s important to keep in mind longer term co-working space commitments share similarities with traditional commercial real estate. While you can often get a better rate with a longer term commitment, getting out of that longer term commitment won’t be easy if at all possible leaving you to pay for space you might not need or utilize. Exercise proper due care and diligence when considering co-working spaces as an alternative to traditional commercial real estate.