The Rise of Shared Spaces: Is Co-working the Future of Small Business Rental Space?

Key Takeaways:

• Understanding the small business rental space in today's market

• The difference between coworking spaces and traditional rental spaces and why coworking is gaining popularity

• The common types of leases and how is traditional leasing still relevant

• Benefits and limitations of coworking spaces

In the last few years, small business owners' attitude toward leasing commercial property have shifted due to global economic changes. Recently introduced increased availability of commercial space, hybrid work styles, and global approaches to teamwork using technology have all affected how small business owners consider leasing. As small businesses change with evolving trends, shared or co-working spaces have become much more common in comparison to conventional, longer-term lease options.

Across major US cities like New York, Los Angeles, Dallas, Atlanta, and San Francisco, coworking spaces are reshaping how commercial space is leased and used. At the same time, conventional office space, retail space, and mixed-use commercial property still play an essential role in the real estate market. This raises an important question for today's entrepreneurs: is coworking truly the future of small business rental space, or simply one of many evolving options?

This article explores both sides of that question. It compares traditional and shared rental models from a financial and operational perspective, while offering guidance to help small business owners make informed decisions.

Small Business Rental Space in Today's Market

When we talk about small business rental space, we mean a physical location that is leased to a company for its operational needs. Depending on the type of business, small businesses will generally need the following:

• An office building where the company's administrative/professional work is done

• A storefront where customers can buy products

• A medical office for providing some kind of health care

• A shopping center unit that allows local businesses to support each other

• A mixed-use property that has retail, residential, and office space within it

Rental units are typically measured in square feet (sq ft), which is one of the largest recurring expenses incurred by most companies. Generally, a small company's biggest recurring expense is typically rent and other occupancy-related costs like utilities.

As the residential and commercial real estate markets continue to evolve, small businesses are recognizing the advantages/disadvantages of flexibility vs stability when choosing small business rental space.

Why Coworking Spaces Are Gaining Popularity

The rise of coworking space reflects how commercial office spaces have changed. With coworking spaces, businesses can reserve shared office spaces without committing to very long-term contracts (more than a year). Coworking spaces have evolved rapidly across many different cities like Seattle, San Diego, Las Vegas, Nashville, Tampa, Salt Lake City, and Minneapolis.

According to NIH, there are many examples of how flexible workspace models have increased due to COVID-19 and hybrid work models (after COVID-19).

Many coworking locations come equipped with:

• Pre-furnished offices

• Shared meeting and conference facilities

• High speed internet access, utilities

• Delivery service/reception service and phone number

• Maintenance and cleaning.

For startups and individual business owners, coworking provides an easy way to access a professional small business rental space with little or no long-term risk.

Traditional Commercial Leasing: Still Relevant for Many Businesses

Coworking spaces are good for some businesses. However, many businesses still prefer traditional leased commercial real estate because of their requirements.

Common Lease Types in the US

Most small businesses see the following types of commercial leases:

• Gross leases, where rent includes most expenses

• Net leases, where tenants cover taxes and maintenance

• Modified gross leases, which split responsibilities

• Percentage leases, often used in retail space

These types of commercial leases can be found in cities throughout the United States, including Houston, Fort Worth, San Antonio, Kansas City, Oklahoma City, and Colorado Springs.

Advantages of Traditional Small Business Rental Space

Traditional small business rental space has several benefits toward the operation of your small business that coworking may not provide.

• You can fully control the layout of your business and create an image that represents your brand.

• You will have complete privacy when meeting with clients.

• You will know what you're paying for your rental space for the entire time you are in business

• You'll have the ability to store inventory and/or work on your specialized equipment without worries.

For example, a retail business that operates in an established location or an established storefront in LA or NY would benefit from the continual foot traffic and the visibility of their sign. In addition, medical offices are generally located in dedicated space, which supports their specific design. Coworking environments are often not designed specifically for a medical office.

Limitations of Traditional Commercial Space

However, there are several disadvantages with traditional leasing.

• Long leases make it hard to change as needed.

• High build-out costs on the front end.

• You are responsible for utilities and maintenance.

• The inability to rapidly adjust size.

Small businesses often find it difficult to navigate long-term leases with changing revenue streams. This is one of the driving factors behind the growth of coworking in the small business rental space market.

Coworking as a Small Business Rental Space Alternative

Coworking spaces provide convenience and reduction of risk for businesses. They are very successful for service companies, consultants, and remote working teams.

Benefits of Coworking Spaces

Coworking spaces provide:

• Short-term commitments

• Lower initial expenses

• Immediate operational readiness

• Built-in professional environments

Heavy urban environments such as San Francisco, Seattle and Austin are benefitting from coworking as they can easily find access to prime locations without committing to very long-term leases. As the usage of flexible work arrangements continue to rise, the demand for shared space may also continue to grow.

Limitations of Coworking Spaces

While coworking can be convenient, it also has limitations and drawbacks.

• Limited customization

• Potential noise and privacy issues

• Costs may rise over time

• Not suitable for all property types

Examples of industries that typically require dedicated commercial space rather than coworking spaces include retail, manufacturing, and health care.

Comparing Costs: Coworking vs Traditional Rental Space

The cost of renting a coworking space versus either leasing a traditional small business rental space will depend on where you are located, how much you will be occupying the space.

Traditional lease agreements generally require the following payments:

• Monthly base rent per square foot of space occupied

• Utilities and maintenance charges

• Insurance premiums and property taxes

Coworking spaces roll all three of these expenses into one total, known as a "flat monthly fee." By bundling costs, new companies that are just starting out can better control their cash flow while operating in a metropolitan area that has a high cost of living, such as San Diego, New York and Los Angeles.

Commercial rental rates can vary by metro area. Therefore, evaluating your if local market will be of utmost importance.

Financing Considerations for Rental Space Decisions

When exploring renting options, the costs associated with renting space are part of the overall costs of doing business and accessing small business rental space.

Small Business Loan for Coworking

When small businesses work out of coworking space, a working capital loan may be an appropriate option. With a working capital loan, a business can access capital to cover initial membership dues, first month's rent, or start-up expenses while remaining flexible in terms of lease commitment.

Business Loan for Rental Property

If a business plans to lease real estate, a commercial loan is an option to help make leasehold improvements and purchase furniture for a new space, in addition to covering relocation expenses. This type of loan can help business owners secure long-term leases that will provide flexibility when moving to another location.

Commercial Loan for Rental Property

A commercial loan for rental property is typically associated with more established operations occupying larger office buildings, retail space, or mixed-use developments. These loans are usually part of long-term growth strategies.

Geographic Trends in Small Business Rental Space

The location of businesses has a major impact on where they choose to rent their office.

• New York and San Francisco have higher costs of rental space, making them more attractive to businesses looking for flexible solutions.

• Dallas, Houston and Atlanta are generally considered less expensive than traditional rent leases.

• Emerging cities such as Las Vegas, Nashville, and Tampa have seen an increase in demand for hybrid types of office leases.

Is Coworking the Future of Small Business Rental Space?

It's unlikely that coworking will replace the traditional model of small business rental space. Coworking is an alternate option for small businesses that have limited resources. Coworking often serves as the first office for many businesses until they scale and switch to a permanent office space.

Hybrid strategies are becoming increasingly common. A small business might have a small, permanent office in one location, then use coworking facilities for their meetings in other cities. This type of flexibility is indicative of the evolution of commercial real estate in the modern era.

Conclusion

Choosing the right small business rental space is a strategic decision. Coworking spaces offer flexibility and convenience. Traditional leases offer stability and control. Neither option is universally better.

By understanding costs, location dynamics, and financing considerations, small business owners can select a small business rental space that aligns with both current needs and long-term goals. In today's evolving commercial real estate environment, informed choices matter more than ever.