With massive debt and inability to turn a profit, WeWork’s failed initial public offering last year provided a jarring insight into the pitfalls of the coworking industry. But one company says it has hacked the coworking model.
Novel Coworking turned a profit less than a year after it was founded in 2013. The company’s key to success is ownership. Novel Coworking owns its buildings, meaning the Chicago-based company does not have to pay rent and can offer lower rates to its tenants or members.
“Every coworking company that has majorly competed in the U.S. rents their space. Then they break it up into smaller chunks and re-rent it. That left affordable out of the equation,” said Novel Coworking founder and CEO Bill Bennett, “My core idea was that someone should reinvent coworking.”
Novel pays for properties in cash. The ambitious endeavor is financed by more than 63 investors. Today, the company has raised $637 million in funding, according to Pitchbook, a Seattle-based financial data and software company. A Novel Coworking representative declined to disclose the company’s financials but said Novel’s net income is in the tens of millions annually.
“Investors like that it’s profitable, which is the whole question about our industry — whether coworking can be profitable. I am unaware of another sizable national competitor that’s extremely profitable," said Bennett, who got inspiration for the model by traveling to small, individually-owned coworking spaces in Europe.
The company grew rapidly, now spanning 3.1 million square feet of space in the U.S. — roughly a third of WeWork’s footprint. With 36 locations in 27 cities, including Chicago and San Jose, Novel plans to open 14 more locations by the end of the year. A Milwaukee location opens this week, followed by Washington, D.C. and Miami locations. Each new building acquired takes only one year to become profitable under Novel’s model, said Bennett. The company has also snagged some high-profile clients, including Accenture, Charles Schwab, Expedia, Monster, Mozilla, Aflac and State Farm, according to Novel’s website.
Novel is less expensive than competitors, charging only $129 per month for the standard access package — competitors charge $350-$400, said Bennett. And the company is not trimming amenities to make up for the loss. Espresso bars, high speed internet, local beer on tap, and phone booths are expected, but some Novel locations also offer secure biometric keypad entry, recording studios, movie theaters and event space.
Thin profit margins
For a building owner to make money, rent has to be more expensive than a mortgage payment. If the tenant is a coworking company, they split up that lease into mini-leases, which they can’t offer at wholesale. For coworking spaces to make money with their memberships, they also need to add a layer of profit on the space. This all makes for an inefficient business model, said Bennett, who likes to warn venture capitalists not to lose money on status-quo rent-based business models.
“You build and develop the space, and by the time you sublease to coworkers, the profit margin is very thin,” said Kris Elliot, chief operating officer of Novel Coworking.
But in such a new industry, ownership was a risky commitment that few businesses were willing to make, said Ashley Davis, managing editor of CoworkingResources, a New York-based publication that is part of a larger coworking services company called Kisi.
“I’m not sure if 10 to 15 years ago people knew coworking would take off so well. I see a lot of coworking owners kicking themselves because they didn’t buy into the property five to 10 years ago… a lot of people were hesitant to do that while figuring out how to build revenue,” said Davis.
A few locally-based coworking companies have also tried the ownership model, including NewLab in Brooklyn, N.Y.; Worksuites in Dallas; and The Shop at CAC in New Orleans. But no national or international coworking companies have taken on property ownership — and the lack of example could be part of the problem, said Bennett.
“Everyone thought that’s how you should do it,” said Bennett, referring to Regus, a Belgium-based international coworking company based on a rental model, that set the stage for a rent-based business model.
Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter
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