In previous posts, we shared how Virtual Office is the fastest and most profitable line of business for Workplace-as-a-Service ™ providers. In this article we will highlight the diversification benefits brought by a healthy virtual office and meeting room business in the revenue mix of workspace providers.
Full time Office Rent: Not the Whole Story
- 67.2% of Office Business Centers’ (OBCs) revenue comes from rent to full time office clients;
- 23% of OBCs revenue comes from support services, such as data connectivity and phone related services, the majority of which also supports full time clients or members with dedicated desks.
- 13.7% of OBCs revenue comes from virtual office and meeting room reservations. This number has increased steadily the last 5 years when it was in the single digits
Shared Office Space Providers Exposure to Economic Cycles
Dedicated office rent is the revenue component most sensitive to the ups and downs of economic cycles.
The on-demand workplace business is very price elastic. This means that in a recessionary environment, operators must lower rent to fill up their space or provide additional incentives such as free rent. These incentives, however, do not typically affect the revenue generated from support services, which people need equally in good or tough economic times.
For example, the price for Internet Connectivity, telecopies, and phone answering services were rarely discounted or adjusted down by operators in the Great Recession, while rent or basic membership fees may have been significantly cut to help resorb high levels of office vacancy.
Clients are much more sensitive to office rent prices in recessionary times than to any other component of the revenue mix. The operators that provided a one-size fits all package, with no breakdown between rent and support service charges, were often affected the most.
Virtual Office Business: An Anti-Recessionary Hedge for Serviced Office Providers
On the other hand, the virtual office business has continued to grow strongly in recessionary and expansionary times, providing a welcomed shock absorber during the Great Recession years. Some operators who aggressively pursued the virtual office and meeting room business, while also beefing up their support services, were able to reduce their exposure to down cycles of the economy by half, without giving up on the upside that comes with an up cycle. For example, only 51% of Pacific Business Centers revenue came from full time client rent, compared to 67.1% for the industry average.
Value and Limits of the Benchmarks Used in This Blog
We are using Pacific Business Centers throughout this blog post series as an example of a company that has put a significant amount of focus on their virtual office and meeting room business. It has served them well. At the same time, Scott Chambers, COO or Pacific Business Centers, is eager to point out that “whereas we can be rightfully proud of the accomplishments we have made on the virtual office side of our business, we don’t think that we have achieved any unusual performance on the more traditional full time office side of the business. Other operators may show a higher percentage of revenue from full time office rent because they may have done a better job than us at maximizing that portion of their revenue, and not necessarily because they sub-optimized the other part of the business.” In other words, there are multiple paths to maximize operational revenue, but putting more emphasis on the virtual office portion is a wonderful way to not just increase profits but reduce the center’s exposure to down cycles in the economy.
The industry data used here was extracted from the 2013 Financial Survey conducted every year by the Global Workspace Association. The survey is skewed towards US office business centers that represented the vast majority of the 391 locations that responded, which also included some coworking and international operators.
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CloudVO ™ Analysis Team