Commercial Real Estate

Co-Working Isn’t Dead: How We Created $500K in Equity in 1 Year

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Handsome businessman working and using laptop in the office

WeWork’s failed IPO created a lot of negative chatter about the co-working industry over the last few months. But alas, there is still a ton of potential for the co-working model to create real value for investors.

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A year ago, we decided to take on our first co-working project, and it really opened our eyes to co-working potential. Here is how co-working added real equity and profit to an office building and why I still believe it’s the future of office space.

Co-Working Is Alive and Well—Here’s Proof

The project, which is owned by Matt and Liz Faircloth, started as a 12,000-square-foot traditional office building in Trenton, N.J.  The office was roughly 80 percent occupied and averaging about $7K per month in rent a year ago. It wasn’t a bad investment for the owners, but we all believed there was upside in the building.

First, it’s a good location. The office is just off the main highway coming into Trenton. It is within walking distance to downtown Trenton, an improving urban eco-system. The core building is a good size and unique space. And there is even a great pizza place half a block away for a quick lunch.

Young specialists in coworking office.

Finally—this is actually a really big deal—there’s a huge parking lot across the street. The parking lot is owned by a church, which means it is fairly vacant Monday through Friday. The church agreed to let anyone park in the lot who also volunteers with the church.

After putting our creative problem solving hats on, here are the steps we took to turn the building into a co-working space. Co-working is more about creating a culture and less about expensive granite counter-tops. In fact, I want to highlight that the entire budget for this project was ONLY $15,000!

Related: Owning Your Own Office Is Easier Than You Think

How to Turn an Office Building Into a Co-Working Space

  1. First, we moved our property manager receptionist to the front of the building, as opposed to inside an office. This gave the office building a presence at the front of the building. It also decreased the amount of chaos in the office.
  2. We thought the building needed a new name. So, we changed the name to “The Hive.” I personally am a big fan of giving buildings and projects a name to make it feel like a living, breathing thing.
  3. We wanted the office to have some fun things for tenants to do but also wanted to keep it under the budget for the project. So, we added an old school arcade game player, a couple flat screen TVs, and a ping pong table in the central open area.
  4. We typically use Appfolio to manage properties, but the tech is missing a few features that are important for co-working. So, we changed technology from Appfolio to Nexudus to better handle co-working tasks. The most interesting example is an easy-to-book conference room for all members. We also added a tablet next to the conference rooms to make it easy to book and see the schedule for each room.
  5. We re-painted a couple of the walls, adding a gray and yellow tone and some “Hive” logo signs to give it a more professional feel.
  6. We created a real estate investing meetup held monthly in the central area to give the space more exposure. We followed that by encouraging other events to be hosted there, often at little to no cost.
  7. In the central open area, we wanted more options for people to work. We added countertops to the sides of the central open space to create additional high top seating. We added a couple desks for temporary or full-time work. And we added a couple comfy sofas for more relaxed working.
  8. When a tenant moved out of an office, we turned that into a sweet multi-media room. The space includes podcast recording tech to make it easy to record podcasts and video taping for Facebook Live video creation.
  9. There was a lot of requests for coffee, so we added a Keurig machine in the central area. But we also wanted the space to be fun, so we added a beer keg. It’s amazing how many smiles you get from adding a keg and coffee to a room!

The results were slow and steady but have transformed the economics of the building. The offices are now 96 percent occupied, with additional demand coming from the improved culture of the building. Five desks are rented, and we now have 10 new “members” of the building.

Related: Investing in Office Buildings: A Beginner’s Guide

All-in, we now have $12K in monthly rent coming in each month. This equates to about $50K in positive cash flow, taking into account some additional costs. At a conservative cap rate, the extra cash flow will create $500K in additional equity. The long-term vision is to create a network of spaces like this across the Mid-Atlantic.

We fundamentally think that open, innovative co-working spaces will continue to dramatically increase in the coming years to supplement traditional office rent income.

What’s your take on co-working spaces? Have you had any success with them? Do you have ideas that weren’t mentioned above?

If so, please add them to the comments below!

Chad Gallagher is the co-founder and co-owner of SlateHouse Property Management. SlateHouse, founded in 2014, manages over 3,500 units across Maryland, ...
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    Nicholas Wilkinson from North Platte, Nebraska
    Replied about 1 month ago
    I believe that places like this can be a good way to turn around struggling office assets when times are good. With that being said, the economy is doing really well right now and I'm curious how co-working spaces will perform when the inevitable correction occurs. Some think they will do well but my intuition tells me that when the economy is bad start-ups and other small businesses that usually occupy co-working spaces will no longer be able to afford these spaces. I believe they will save money and go back to working from home or out of someone's garage. Although co-working is a fun and intriguing business model, I question the fundamentals when times get tough. Just my thoughts though, I'm glad The Hive is having success.
    Joseph Taub Homeowner from La Mirada, CA
    Replied about 1 month ago
    I would think co-working spaces would be better poised to weather a major downturn than traditional office spaces, given their greater flexibility. If you're a traditional office space and your largest tenant goes bankrupt, now you have to fill a huge vacancy when no one is looking for more office space. If you're a co-working space you can chop up the available space however you want, even according to amounts of time per month or week. Maybe the cash-strapped start-up entrepreneur who just got laid off can't afford unlimited access, but maybe he can pay for a couple days a week to get some focused time away from the kids. I get the sense that more people tend to go into business for themselves in a downturn, as opposed to seeking traditional employment. Moreover, if established businesses are struggling, they may scale back and downsize, and a segment of co-working space could provide a more affordable way to get the "bare necessities" of some office space without renting a whole traditional suite. So it seems like there's a case to me made that co-working could have a comparative advantage over traditional office space during a downturn. Much like how it's often said that rental property performs quite well when the owner-occupied housing market suffers. People can't afford the big financial commitment so they opt for the smaller, cheaper alternative.
    Chad Gallagher Property Manager from Mid Atlantic
    Replied about 1 month ago
    Nicholas - I agree that a major economic downturn could have a negative impact on co-working income, depending on the scale of the downturn. That being said -- I'd argue economic downturns have a negative impact on all office space as businesses slow down expansions, businesses go out of business, etc. The good part is that it's not an all or nothing proposition in co-working. So if you have 40 different "tenants" -- and 10% leave - you still have a nice business.
    David Short Wholesaler from Fishers, Indiana
    Replied about 1 month ago
    Great comments.. I’m opening a space in Indianapolis in the next 45 days. We took an approach that has many areas to create income. Our local REIA which is CIREIA has come into the space as a Tennant for there headquarters. It will also be an event center for weddings, corporate events. Our plans is to have a commercial kitchen for food trucks, catering , coffee shop. It includes outdoor space, podcast room. 6000 Sq ft for co-working.. At peak we hope to be gross revenue at 35k per month. Will keep BP members updated on our progress. Our position is when the market goes down co-working will gain traction because of downsizing from traditional office buildings.. month to month, furnished no long term commitments
    Chad Gallagher Property Manager from Mid Atlantic
    Replied about 1 month ago
    David - sounds like a great approach. Reach out if you want to share any advice.
    Sean Tagge from Memphis, TN
    Replied about 1 month ago
    Hey Chad thanks for sharing this awesome project you did! I think the keys here were the rebranding, the free meet ups you do, the receptionist in the front and most of all you listened to your "clients" and put in a coffee machine and went above and threw in the beer. Congrats on the NOI increase and value add best of luck!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied about 1 month ago
    i dont think there is anything inherently wrong with the coworking business model. there is a lot inherently wrong with with wework model. wework signs a master lease agreement for space using a single purpose entity that has no assets. income is transferred to the parent company wework which is transferred to the parentholding company weco. in a recession when subtenants break and lease and skip the building owner has no recourse against the SPE as there are no assets. this could create some massive deflationary pressure on lease rates. wework has a huge cash burn rate essentially making it a giant pyramid scheme.
    Chad Gallagher Property Manager from Mid Atlantic
    Replied about 1 month ago
    I actually agree with you Michael - I dont love the master lease concept --- I think the real play is equity in the building.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied about 1 month ago
    i forgot to mention banks and appraisers are downgrading the value of buildings leased up under a coworkish model. they see it as more risky collateral and more difficult to collect assigned rents. i agree.