Steve Todd: Data, Finance & Workplace

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How does capital investment in real estate improve profitability?Coming from a background in finance, Todd challenges the audience to think about presenting business cases for workplace change to a CFO or COO. What are the inputs and outputs? What is the present value? How do we present information that allows you to make decisions about workplace productivity and drive the bottom line. Can we tangibly track and display results to make that business case?

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Steve Todd, AVP, Global Head of Workplace, NASDAQ

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VIDEO TRANSCRIPT:

My name is Steven Todd,  I'm Global Head of Workplace at NASDAQ and I'm also the founder of Open Sourced Workplace. So what I want to talk to you about today is I want to challenge you. I want you to think about workplace in a different way. I want you to think about workplace and how you would present a business case to a CFO or CEO. So in essence think about what you would need and how you would present that information and then we're going to get to optimize and productivity.

So the way I sort of position is that I'm a finance background, I spent 15 years working in finance, everything we did we did an investment appraisal every time we did a business case. That was what were the inputs and what's the output of a CEO or CFO or interested in is what is that profitability? Is it gone back to what was said before what is a net present value? Is a positive as a negative? If it's a positive okay let's go and do it. So how would you then position that if you wanted to think about workplace. What are the attributes. what are the inputs that drive the outputs? When we consider workplace and how do we sort of position how do we think about that? 

So in 2014 when I got into real estate these are the questions that were going through my head. How do we actually get together. How do we present information that allows people to be able to make those decisions? And these are some of the questions that sort of were flowing through my head. What makes employees productive. What features of an office actually drive the bottom line? We all have a perception that given everyone great coffee drives productivity but actually can we tangibly track that to actually display that actually helps the profitability of an organization.

Do employee engagement scores actually move the bottom line. We aspire to improve them every year but actually does it really materially make a difference. Anecdotally we think it does but we don't have any scientific proof behind it. How does capital investment in real estate improve profitability. So whenever we're presenting a business case how do we actually know that we're going to drive profitability. Real estate is an expense sucker right you have to pay for that through layers letter. You hope you gain benefits from it so how do we put that narrative ahead of time and how do we work that idea and does an employee compute impact profitability and this is just the way my brain works.

I just think along those different lines is it actually a benefit or is it does actually hurt if employees have to travel further. So that's sort of where some of this where this lays. So as I thought about this how do you even start to think about getting the data to answer some of these questions. And so again go through that concept inputs and outputs right. So what are the inputs that we could collect that actually would help us address some of that information. So yes we've got the usual suspects of real estate and human resources but again bringing in that corporate financial information where's the sales revenue coming from per location. 

What is the expense associated with every single office across the organization. What is the product profitability of every product that we produce as an organization on what location are they associated with. Whenever you marry that with real estate with employee turnover with other aspects of some of the other data points then you can sort of start to see pictures evolving and actually the conclusions may be able to get to. 

So what are the marketing KPI is what are the seals KPI is how can we bring that together into one data set to help funnel some outputs and some conversations and external data. So where is the access to talent in all the locations that we operate in right. How many if you've got sales associate. Does it actually impact them for the actual amount of people they're connected to on LinkedIn. Is there a direct correlation. I don't know but again these are some of the ways that our brains are sort of working and obviously the whole point of this is to drive outputs.

So to try and picture this a little bit more I put together a little scenario. So you know you're a sales manager you've just got given this initiative we've built these new widgets you got to go and sell it. So how do we sort of package these datasets to help the sales manager one pick the right location where he wants to put all these people and how does he present that business case again thinking about the CFO and the CEO or he wants to present or she wants to present that information. So what if we were able to pull all this information together? What is the average cost of employees of every word that we operate.

What is the occupancy cost associated with all those various locations? What are employee engagement scores? What is the real estate score for all those various locations, what are the utilization rates the staff turnover, the commute time, access to local talent, what actually is the cost of that local talent that we want to grow? What is the sales revenue by office? As I said are the distance to direct supervisor so how many time zones away is your direct supervisor how does that impact the sales potential of whatever office.

So can you imagine a sales manager sitting down with their eight hour business partner and this is all the information they have at hand. How much smarter and how much better decisions can their sales manager actually make when he then goes to take or she goes to take the business case to the CEO or the CFO. It's a lot more substantial that there's a lot of data behind it. Year two whenever they come back to evaluate they think back and track an index against okay these are the reasons why we made the decision was the outcome as expected. 

So when we go through when we collect this data we always aspire to get more data and part of that. One of the things we have to do is always ask ourselves what is the ROI of this data. What is the cost to actually get it and if we get the information will it actually make a difference to the decision. So today you know we talk about how we can actually look at security badge data and we get utilization rates. Well then if you have that and utilization rates and we all know is usually around 60 percent. If the management isn't going to make a decision or change the decision on that information why pay for it.

Asking for a Desk Utilization Study because they are  hardly gonna change their mind later. Is this how you evaluate what actually should be taken?

So part of this is we go back to the last question are there sort of one of those questions we had up on the board, how do we actually engage with the CEO and CFO to actually allow them to make decisions and how do we present information to them to make decisions. And one of the things we did at Nasdaq was we try to tackle the question up there, what is workplace productivity what is employees productivity and what does that look like. We actually went out to our employees and we asked them. 

We provided 35 attributes of an office and asked them which of these attributes makes you productive. And over half our employees responded and this is what we ended up with. So this is our true north in everything that we do and how we look at and evaluate what we have to do in real estate.  When we're designing a new office, this is where we go. This information, we can look at it by every location. 

The actual productivity factors change by location, so whenever we actually assess what we need to do we go back to this, the attributes, and we look and those are what we benchmark against and we put that forward.

So we have these attributes, each year we ask the employees how do we rate against each of these attributes and what is the opportunity we have to improve an employee experience at every single office. It also helps us whenever we come to make those capital investment decisions we're able to display this information we're able to display the feedback we get from employees. And here's the investment we want to make. And we're now in a cycle where actually we are able to go back and validate actually here's where we invested the money and this is the impact it actually had on the employee experience and how they're rated their real estate portfolio.

So as I said my background finance I come at this at a slightly different way and my brain's a little complicated. Yes it is. But in essence that's how I try to look at this stuff and I sort of want to challenge the team and I sort of hope you've taken a little bit away from what we've said and how you sort of present data and information to the CEOs and CFO. So thank you

Michael Davidson: Curating the Employee Experience

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Through a truly unique perspective, Davidson takes us back through time to examine the fundamentals of human need and the earliest human disruptions.

Disruption is nothing new, it is as old as we are. As soon as human beings evolved from primates to homosapiens, and realized they needed shelter from the elements, to eat, to breathe, to protect each other, they have been disrupting themselves ever since.

Disruption was based on the needs of the humans at that time but today, humans are the same….how do we measure ourselves? By what we’re building. 

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Michael Davidson, Head of Global Corporate Real Estate, Managing Director, J.P. Morgan

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VIDEO TRANSCRIPT:

It's a pleasure to be here. My name is Michael Davidson, I am with JP Morgan Chase and have been for nine years and I lead JP Morgan's global corporate real estate portfolio across Asia, EMEA, Latin America, and North America. So today we're going to talk about corporate real estate and disruption.  But before we get to your 2019 I want to go back in time, all the way back in time because this notion of disruption is nothing new disruption is as old as we are the universe the earth by the way was created a pretty big disruption.

As soon as human beings evolved from primates to homo sapiens and realized that they needed shelter from the elements and to eat and to breed and protect one another, they've been disrupting themselves ever since. In 2019 and going forward is just the latest incarnation in our lifetime. In the ancient world the Great Pyramid of Giza or the lighthouse and Alexandria. In the modern ancient world you had the Taj Mahal or Machu Picchu by the way if you look at the wonders of the world and one of the great benchmarks for how humans rate themselves in terms of their progress it's all stuff that we built with technology stones and architecture and thought and one of the things that makes that common to what we're doing today is that all of the great wonders of the world had a purpose and they were tethered to a culture and they were based on the needs of human beings in that society at that moment in time.

Now let's go to 2019 and we have the benefit of having experienced the 20th century and now the 21st century humans are the same. How do we measure ourselves by what we're building? Only now we have steel and glass and we build towers and we go as high as we can possibly build them. We impress ourselves with these monuments and they are monumental. If you go to any city around the world, what are you impressed by first the skyline. When you go to the souvenir shop what do they have, little statues of buildings that were built that you think of a city you think of the Eiffel Tower you think of the Space Needle in Seattle you think of the Colosseum in Rome you think about what we built.

So if you look at this your vision and architecture and engineering and technology. But is it a curated experience? Like what's it like to live inside of these structures. It's great to look at,from afar. It's great at night when they're lit up but if you're one of the three or four or five or six or seven or ten thousand people that go and work in these buildings every day. What's that experience like. Is it is nice is looking at it from afar. JP Morgan is on the cusp of doing it once again.

We are taking down to 70 Park Avenue which was in the Times last year to build a new tower one that is thoughtful one that has core and shell and look and feel and all of the pedigree that you would imagine with a 21st century office tower. We are going through this exercise now but the fundamentals are very much the same, which we'll get to.  

We've built spaces year after year after year and we've hired the best architects and the best thinkers and the best amenities experts and we've engaged H.R. and we've tracked our headcount and we've created spaces spaces that are modern that bring people together to eat to think to learn to collaborate that don't feel like a bank. It feels like a place you'd want to sit and talk to someone.

All of these are examples of spaces there's no need to call out where they're built. It's fairly ubiquitous in terms of how we approach our real estate globally also because our employees are global so that what you build in Singapore or New York or Dallas or San Francisco people travel and if you're not building like for like and you're not consistent they'll call you out on it.

We're very consistent in terms of our design palette. Now, if you're an occupant and one of our spaces or in any space anywhere and if you really add up and account for all of the things that define your experience as an occupant, coming to work every day.  What's your experience like?  all of the things we could have named more but we ran out of space on the slide but we think we made the point is it curated or confusing. One of the things that happens is that although we lead real estate we don't lead all the things that impact your experience.

We don't lead security, that's among your first experiences whether you can get into the building does your card work.  We don't run amenities, food pantries, technology, wellness centers we integrate them in real estate but we don't run these functions. So through the years occupants and different companies occupying remarkable structures probably felt like they're looking at oncoming traffic rather than like in a curated workplace experience. Because all of these things were happening if they were synchronized, it was almost luck or it was because people were really good partners within a firm.  But this is often what happens and what happens on the inside.

I can tell you that every one of these emojis in my 25 year career I have experienced every one of those emojis and many more in the occupants that I've served. You get the entire spectrum depending on what people's needs are how they feel how you're delivering it and how you're integrating the myriad of things that actually impact a person's day or a moment in the spaces you create.

One of the things that happens or is happening in the 21st century is that one of the solutions as well is just fill the space with technology to really disrupt ii and if we load the space with technology well people will love it.  They'll be connected and they can use their devices and they won't need to get together as much. So there are two problems with this. One problem is that when technology is installed people don't often know how to use it.  How many conference calls or telepresence on Cisco have I been in meetings internally and externally where you have eight smart people around a table saying how do you like dial n. It should be intuitive but it's not always intuitive. Is there a wireless signal. Oh wait. I'm from an outside company my laptop doesn't work. Sometimes the technology is not as intuitive as it should be. 

The second thing that we're learning and we're learning this much more slowly, not just at a corporate level but at a societal level is that we're more connected than ever and yet we're lonely.  Why I'm connected to my friends all over the world via social media. They can say hello to me and share pictures. Why are kids lonely.  Why do we get notices from colleges and universities that say that anxiety and depression are on the rise? because there's a fundamental human need for connection and it isn't via wires or screens it's in person, something that's never changed all the way back to the ancient times to now is that people need each other.

When our businesses come to us now to develop new spaces it's interesting that among the first things they say to us after technology is we need spaces to get together in person to innovate. Innovation Labs collaboration spaces smart rooms where we can physically come together even though we can do it with technology remotely we need a room where we can physically be present. That's where the innovation actually happens. 

So you have to be aware that you don't try to solve the previous slide all of the different inputs by saying well let's just kick it out with technology and it'll be fine, It won't be fine. So let's go all the way back in time again and let's talk about fundamentals, fundamentals that were true in the ancient times and every century sense. These are the things that within JP Morgan we are evangelizing over and over again is how we treat one another.

Is that one of the primal parts of the experience that we have no matter how nice your workplace, how beautiful building it is, how far into the sky you are sitting, because we were able to build it that high, is that if you're not treated with dignity and respect by the people you are spending time with, your experience will not be good; if it's not fair.  If these are not exercise if there is not empathy and accountability integrity and respect and diversity and trust, well no matter what space you're in wherever you are in the world you're not going to have a great experience.

So corporate real estate, we are disrupting it and it. It’s being disrupted but just like every other object in space has been built by mankind since the beginning of time, if you disrupt corporate real estate without purpose, purpose equals plan equals strategy equals thought,without values without culture without humanity and honoring and genuflecting to the inherent human needs for the people that are going to occupy your space, well then your disruption is just going to be disrupting and nothing else.

If you use these as pillars, if you build your disruption upon these pillars as a grounding well then what happens is that the disruption becomes a transformation and why is it a transformation? Because you're creating an experience that attracts and retains people. So when you attract and retain people this is arithmetic.  If you attract and retain them that means they start to build relationships and when they start to build relationships they start to trust each other and hang out more and when they do that they talk more and when they talk more they start to share ideas and open up with each other. 

Then they start to innovate and then the real disruption starts to happen. The constructive disruption the moving forward progressive disruption that impacts the person the team the organization the industry and even society itself.

Thank you very much.

Vik Aggarwal: Diversifying Your Real Estate Portfolio Strategy

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Vik Aggarwal, Global Head of Enterprise for Knotel discusses diversification of commercial real estate portfolio strategy. What you need to know about flexible office space, hybrid real estate model & more.

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Vik Aggarwal, Global Head of Enterprise, Knotel

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VIDEO TRANSCRIPT:

We are going to talk a little bit about Knotel but this is not a sales pitch. This is about how we approach portfolio strategy. So, for those that don't know me my name is Vik Agarwal, I run enterprise for Knotel.

I’ve been here for about seven months, prior to that I was number two for global real estate for AECOM out in L.A.. Prior to that I ran global real estate strategy for American Express. and prior to that I had CFO role and portfolio strategy roles at BlackRock, Morgan Stanley and J.P. Morgan Chase. So what we're going to talk about today is how you diversify your real estate portfolio.

A lot of that comes down to using flexibility. Harvard Business Review put a quote out about how important flexibility is to a portfolio. Now this is nothing new for any corporate real estate executive, we've been trying to do this forever. Take a traditional lease you know, talk to the landlord, get me my termination rights sure for our expansion rights all these different things but they will come at a cost. And  still you exercise a termination clause you're going to pay on unamortized TI’s, you're gonna pay unamortized commissions, you have asset write off. It's a huge financial pain that you take on the P&L cash flow and balance sheet. 

So yeah there are some advantages to taking a direct lease. Some of these are long term stability, you have more control of the space of a direct ownership relationship. You have the ability to advertise your assets that you own over a period of a longer period of time and you can really control your privacy your I.T. your security as you enter the space. Now flexible workspace is something that's new and it's a new tool that's in people's tool belts.

Now Knotel is not and why use flexible workspaces that we are not coworking. So a company that does enterprise grade does not want two seats, three seats sitting next to random strangers. They need to have their privacy. Some of their employees maybe we're using P.I. data, social security numbers, you know this is a lot of intangible risk and tangible risk around having a transient crowd working with your employees. 

As you think about flexible workplace there's a lot of different ways to use flexible. Your company may have gone through an M&A and maybe divesting a company, it may need swing space, a line of business may need to work differently. Your CEO may have said I need three hundred seats tomorrow and that becomes your oh shit moment right. That you need to go and solve and you've got to be the superhero. So the benefits of flexible is that you don't have to do occupancy. So U.S. gap as you a straight line your rent  as soon as you take possession of the keys which is a drag on earnings; CFO’s don't like that, that goes away. 

You don't have disposition costs in the future. So say your headcount balloons say it reduces by 50 percent, you don't have to go worry about disposition of the space and sub leasing it. You don't spend capital? you are basically converting capital to opp X so that frees up your free cash flow for a company that allows them to go buy things with their cash and use their balance sheet for some things more creative to earnings. If you can have a fully serviced office experience which has IT, design workplace strategy, you don't have to give up some of the stuff I said in the traditional lease about the IT  you get find the right provider, they can even hand you the fiber optic wire and walk away. 

Everyone's headcount fluctuates.  There is a Boston consulting analysis that says 41 percent of the companies interviewed said their headcount projections were wrong by 100 percent. This is not new to anyone right, so if you think about that that's a huge drain. Real estate is the second largest expense for a company so getting it wrong has huge financial consequences.

So why go long in space when the word future inherently means uncertainty and you have the ability to have a fully tailored office that matches your space standards and branding experience, use a certain type of stand desks across the world we can match that. You know Michael talked about whether you go to Portugal or London or D.C. or LA they want to have the same experience as people travel. You can still have that when you work with a flexible office provider that is global in scale. 

There's a mix between this now too.

So some companies are saying you know what I know what my base headcount is going to be is never gonna change but I do when projects and I do lose projects. So I need the capability to fluctuate up and down based on future needs, so that's what I call the hybrid model. The hybrid model is basically that you can add flexibility to transaction level. So a company like Knotel and this is something we've actually done in London is a company who said that they wanted space and go long, but they want to be in the whole building but they don't want to have the whole building today.

So what do you do, you reach out to a flexible service provider like ourselves. We took down the rest of the building and they took a floor day one so they can contract down. Then they also have call options,  first refusals to go long in that space is adding true flexibility at the transaction level and choose scalability. So you're not bifurcating that a second third fourth building or have future disposition risk. 

One of the concepts I want to talk about and this is a metric that every company uses which is net present value to determine what's the best way to make a decision.  Building A verse Building B, Time Value of Money.  Time Value of Money tell us your dollar today is worth more than your dollar tomorrow. But there's a flaw. It doesn't tell you whether the decision was right day2.  It doesn't tell you whether you're spending good money after bad money. So there's a reverse concept of that called the money value of time. So if there is a way to create a structure where you're spending a few percent more to not have to make a decision that's valuable.

What keeps people up at night,  I went too long in space, I went too short in space,  my CFO doesn't want to spend the capital of a fully depreciated asset, I don't want to have dual occupancy have a bubble period. All these things that show you as a real estate professionals like this a no brainer we should be doing it. These keep other people up at night as disposition risk,  asset write offs. If you have a capability to scale up your headcount or scale down the headcount because you're flexible workplace you're not spending capital we don't do occupancy that really transforms the scalability and your ability to do portfolio optimization on a real time basis.

You've heard a lot about what exposure a landlord wants to have in a building. People talk 15, 20 percent of that space should be flexible. But for a corporate real estate executive, what is the right mix. People want to have metrics. Everyone has KPI’s. Well, every business is different. So you have office vacancy rates that are different by market and by industry and most companies say you know what I want to have 10 percent vacancy so I want to restock the whole building.

But then you have on top of that not everyone comes to the office every day. Yes you solve that through heads to seats ratios. You look at badge swipe data but the truth of the matter is people travel. People take vacations, people take holidays, things happen. 

The short answer to that right is that there's really no answer to that. You really have to look at your business and say by market, by business unit what is the right metric that I want to have. And you start implementing that based off of that. Flexibility is the most important thing that company can add to the portfolio because it really allows them to have scalability upwards and downwards for their second largest expense for the company

Joe Du Bey: The Experience Era - Sweeping Major Industries in the US

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Joe Du Bey, CEO of Eden helps navigate The Experience Era and how the nature of experiences are transforming industries across the US. This talk showcases how different demographics of people value experiences and how that value is fundamentally shifting the business of entire industries. With real estate taking center stage, Du Bey brings forth examples from industries such as fitness, music, retail, coffee, enterprise offices & more.

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Joe Du Bey, CEO, Eden

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VIDEO TRANSCRIPT:

Hey my name is Joe Du Bey and I'm going to talk today about the experience era and how it's affecting commercial real estate. So what is the experience era? The main thing to take away is that the world is changing. It went from before being where it was something that you know you served any one industry and maybe sold a specific product and service. Today we're all actually in the experience business to think about commercial real estate today versus what's going to happen. It's a largely offline world. And that's it's something that is focused on the space and less on the people and the experience of them.

And that's something that's about to dramatically change. So what is causing the experience era in one word millennials today. Millennials are the biggest cohort of any population. This is a really substantial shift. And this is something that is affecting the preferences of the workforce itself. And the reason why that's so is because millennials are different. They actually value experiences over products. And this is a critical thing to understand once this is grasped. It all starts to make sense.

But the majority of one else would rather spend money on an experience than a thing. They're wired differently even when it comes to work. The majority of millennials would take less money. If they're able to have a better experience at the office if they felt the experience reflected themselves. In contrast in case you don't think that's different. Only 9 percent of baby boomers would do the same. They are wired a bit differently and we need to adjust to their preferences. So what makes something fit the experience area we've discovered there are six hallmarks to this new time.

Specifically you can see involves enabling technology. It's at least made more efficient through technology. Any one of the major experiences that consumers in enterprises are going through in the experience area users are empowered they have voice they're able to customize their experience. This is critical. It shows up in amenities. It shows up in services inexperience error people care about community and they're building community around these experiences that were previously about a service or product. It's really the community that wrap around it. Things have meaning. It's not just about the coffee for instance it's about why it's ethical inexperience era quality matters a lot especially because these millennials are investing in the experience so it makes sense that their since they're shifting money to that they'll care more about the quality of it.

And the last thing is design inexperience error. You'll notice that if it starts to feel to you like more and more things look like the inside of an Apple store it's because more more things do look like the inside of an Apple store. Millennials care a lot about design and it's showing up everywhere. So let's talk about a few industries and how they've been transformed already in the US. There's the music scene if you remember from 20 years ago when you show up to a concert there were a few people playing music and that's what a concert was. Now when you go to a music event it's really much more about the experience. You walk in and it's a crowd of people who are seeking like minded folks.

It's immersive. There are lights there's artisanal food. Yes someone's playing music somewhere but that's not actually the primary thing. You might take away from being at a music event these days and is popping up across the US. Now let's talk about retail. When you used to go to a mattress store it was a roomful of bunch of mattresses. Now you go in and it's actually limited minority might be a mattress. We're walking into is a place that's beautifully designed full of narrative really speaks to millennials. When you used to walk to a gym it was a place full of heavy weights. Now it's if you walk just like Soul Cycle what Barry's Bootcamp.

It's a group of people who are building community. They might feel even you might send something almost religious around the dedication to this specific group. This room and it's beautifully designed. If you think about consumer coffee it's again something where you know it's the kind of thing where people use to go and literally just get coffee from a diner. Now it's a beautifully designed room. Starbucks even calls itself your third place. Recognizing that there is a different kind of feeling that comes in to a coffee shop today and now you can start to see it in commercial real estate just that just starting to.

And that's something because in the past it was really a place where you got work done. If you look at this market leaders Historical Office now with Google there's a climbing wall. They care about customization choice services and they know this is critical for them to actually hire the very best talent. And what is an overheated talent war. The thing to keep in mind is that 99 percent of commercial real estate is offline. This is just starting to happen. And over the next couple of years you'll feel this in a really big way. This beginning it's experience matters because in the first couple of years whenever there's a tectonic shift those who adapt early those are the ones who get to have outsized influence and kind of pain in the future whereas we fast forward or in five years.

The folks who haven't become the laggards they're the ones who threaten the actual performance of whatever their underlying asset is. How will this change commercial real estate. What tactically do you need to do to enter the experience era. Well specifically think about your building across a bunch different dimensions. A big primary one is how do you think about lease terms. It's something where in the future people want to have duration of lease that reflects their actual needs which isn't decreasingly two to 10 years and much more let's say nimble outside of that space controls today it's something where people have almost no control almost no voice that is changing rapidly through technology email to enter from from accessing the building itself to requesting services.

You can now actually have control over almost anything. Tenant feedback historically ignored with a landlord or building and you're really thinking of it places us as a space as opposed to thinking of the people inside of it as customers in the future and experience first building. It actually solicits feedback. It cares how its customers are doing outside of that the brand of the building itself. This is something that's critical in the past people might not even know really what kind of building they're in who the owner is who's managing it. The future is a much more white labeled experience where the building itself has a brand that people care about outside of that something that's really critical is what do you provide in terms of services.

In the past nothing going forward amenity rich people should be able to get any kind of service they want from food to any sort of wellness and like yoga or whatever they might want they need to be able to access through their building. And the final one community. Right now buildings are a missed opportunity everyone in it could feel something. It could build loyalty. Instead today it's mostly a box that has no connectivity the experience era has arrived and there's no turning back at this point.

Over the next couple of years everything will change. Commercial real estate and it will no longer be about the space it's providing an experience with space attached. Eden is ushering that in for all of the commercial key stakeholders from the occupiers and the companies to the landlords and the property managers and we're enabling you to provide an experience first building for your tenants

Jamie Hodari: A Better Way to Workplace as a Service (WaaS)

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Jamie Hodari, CEO of workplace provider Industrious, describes the latest office strategy: Workplace as a Service (Waas).

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Jamie Hodari, CEO & Co-Founder, Industrious

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VIDEO TRANSCRIPT:

My name is Jamie Hodari, I run a company called Industrious. We're the largest premium workplace provider in the country so we're in about 35 cities and launching three or four units a month. Within that context I wanted to talk a little bit about what our industry actually is and then to talk about risk in our business. So when we started our business, in those initial sort of pitch meetings, all anybody wanted to talk about is coworking the real deal and how long is it going to be around for or is it just a trend? And I think at this point that's really receded but people do want to know. Okay I believe it's here to stay.

I know that adoption is growing really quickly but how risky is it? And so I wanted to focus a little bit on that and then in particular what landlords can do to take advantage of the rapid rise in adoption of this product category and in a way that mitigates risk. So what is our business? Here's the truth about workplace as a service, it is in large sense an outsourcing business. So when we started the business the premise at the time was that the white space in the coworking industry was for a more professional, more elegant product and that was true and I think that remains true to this day.

About a year in we had a customer, a large Silicon Valley firm that was growing out of one of our spaces and they approached us and said, hey we actually really need your help. Would you be willing to build out our headquarters in Chicago for us, we think that you'll deliver a better product than if we did it ourselves.

And in that moment I think my Co-Founder and I had sort of a light bulb moment where he said this is an outsourcing industry. This is basically where a large sophisticated company is taking a major cost line non-core complex out of their business and handing it off to a third party. And the observation is that in a lot of outsourcing industries, they kind of exist as niches for decades. So if you think about manufacturing outsourcing that was around in the 70s and the 80s as 1% of the market, your factories are overloaded so you use an outsourced manufacturer in data storage. You've run out of server space, so you outsource some portion of your data storage. Until someday when you see this rapid rise in adoption, and in a lot of outsourcing industries it goes from 1% to 5% to 50% in data storage. 95% adoption, and the question is what causes that rise in adoption?

For us it's clear that in most outsourcing industries it's the moment when someone can walk in your door and say I can do this better than if you did it yourself. So I can manufacture the iPhone more efficiently, more effectively, with less errors than if Apple did it. I can store your data more effectively with less downtime, fewer service interruptions than when you hosted on your own servers and we've basically spent five years trying to cross that exact threshold to be able to walk into Johnson & Johnson's Head of Workplace's office or Pinterest or Twitter or Spotify or Bank of America and say we are going to deliver a better workplace experience to your employees. You're going to have happier, more engaged, more productive employees if you let us deliver your workplace experience for you rather than if you do it yourself.

I think about a year and a half ago Industrious and a few other providers were actually able to start crossing that threshold. And that's why when you look at our business and you say what's going on here? Why is this cropping up everywhere? Why are large enterprise customers starting to really crank up their adoption? It's because like a lot of outsourcing industries it's also addictive once you started doing it and you see that you get a better outcome. It's really hard to go back to doing it yourself. So that would be kind of my framework for where we are today.

I don't want to oversell it. I think for small businesses and teams of 20 and below that ship has sailed. You're going to be in some sort of outsource setting. For larger teams from big businesses, I think we're in the experimental phase. If you look at most big Fortune 500 hundreds they're doing one or two major experiments with putting a team of 200, 300, 400 people in an outsourced setting and they're testing, how happy are my employees? How many people quit in an 18 month period. They're taking stock and a lot of those companies are coming to the end of that experimental period and I think, look I'm biased here but I think most of them are coming to the conclusion that they actually did get a better outcome and they're now starting the wave of really pushing adoption, at least outside of their headquarters, moving a lot of their workforce portfolio to a third party setting. So the question I think at hand is what does that mean for landlords?

This is, I think, very clearly becoming the most important amenity in a building. Meaning, Ernst and Young comes with a 300,000 square foot lease in a building and they're trying to decide if they're going to be in you know Columbus Circle or the building three blocks south of here. And it matters if the gym is nice, and it matters if there's a roof deck, but really if you can say look, I have four floors of the building that are dedicated to highly serviced flexible space that you can grow your team into, that really is an amenity that moves the needle on how corporate occupiers are deciding where to go. We're in the building already having whisky tasting classes and lectures and a highly serviced sort of amenity base and we're able to deliver that to the entire tenant base of the building not just to the flexible workplace customers and you find that increasingly are saying I really want this in my building but this feels risky.

What I will say is the knock on our business, which is that it is a mismatch of long-term liabilities and short-term asset, and I think if you talk to any coworking skeptic that's the first thing they will point to is a very valid criticism of our business. I think people bend over backwards in our business to try to say it's not true and here's why it's not true and you don't have to worry about that. The reality is, it is true. I think as our business becomes an increasingly large part of the commercial real estate industry more broadly, that's a problem because you're amassing a lot of risk and we think there's a better way to do this. So this would be an exhaustive sort of you know revenue of a coworking operator over various ups and downs, various cycles and it probably looks a lot like other revenue management businesses which is to say you know if you look at lodging over the last eight recessions there tends to be a 15% swing in revenue. If you look at Regus, which is comparable to the different businesses in the last recession in North America where they have twelve hundred units they saw about an 11% reduction in revenue at the unit level. That's not that risky of a business within the framework of most industries. I think that's a relatively reasonable risk profile.

The problem is when you put a lease underneath that, it's basically like putting leverage on our business. It's like if you put debt on your house and you get all of the upside from appreciation and you're underwater immediately if you go below the loan amount. What it does is creates these wild swings in profitability for coworking providers where in good years they're printing money and in bad years they're in the red. And the problem for landlords is if you look at a WeWork, Industrious or any other coworking provider and this is brutally honest, they will put money into a unit for 3-7 months perhaps if it's losing money in a recession but they're not going to forever. It means the landlord is bearing a lot of the downside risk and participating in none of the upside risk.

We believe very strongly that it's time for our industry to start shifting over to the model of the hotel industry where coworking providers and workplace service providers partner with landlords. They program the whole building, they have coworking floors of essentially custom suites for teams of 20 to 400, and you do that in a profit sharing arrangement rather than on top of a fixed lease. This is something that doesn't sound that cutting edge but it's at the very forefront of the industry right now.

This Reuters article from I think four days ago is the first time I've seen a major publication talk about the fact that providers like us are starting to move to management contracts. It's happening very quickly. So for Industrious for example, a year ago 95% of our pipeline was arm's length leases and 5% were partnerships with landlords. It's now about 75% partnerships with landlords and I really think this is not just about Industrious. This is something that's going to turn our industry into a more sustainable, safer business. That large occupiers can really use with peace of mind that it's not going anywhere and that landlords can take advantage of without taking on undue risk.

This for example is a project we just announced with Blackstone in Los Angeles to manage an entire campus of buildings for them under a profit sharing arrangement where we're managing coworking or managing custom suites and also all of the building common amenities. So let's say your the landlord and you decide, this makes sense, I do think I want to partner up with a provider under a sort of management or partnership arrangement. And then you've got to really dig in on who you're going to partner with because more so than an arm's length lease scenario, you're really shoulder to shoulder with that operator.

I'll go very quickly through some of the ways in which a landlord should approach this question.

So first what is the quality of the provider to go back to the earlier point. The name of the game in this business is to walk in the door of Pandora's Head of Workplace and say, we can deliver as good or better of a workplace experience than when you do it yourself. That's a high bar to cross and it's very important when you're working with your workplace-as-a-service provider, to be working with a quality provider that can actually make that pitch. Here's some images of industrial cities across the country. Increasingly it's a relationship business where the coworking provider, whether it's WeWork or Industrious, is working directly with the occupier. So it's important to be working with one that already has a series of existing relationships with those occupiers to start to deploy more and more of their workplace portfolio across the country.

The next is what is the profile of the actual people to walk into work everyday? Some buildings want a very young engineering-heavy sort of workplace, some want more mature, broad national businesses and there's no wrong answer to it but it's worth thinking for your building about matching the type of workplace provider you're bringing in, with the general brand tone of the building.

The next is, and I do think this is quite important, you need a national provider. So this is true for a Johnson & Johnson, they're looking for one or two providers to do 7, 8 markets with and it becomes increasingly hard for single point local providers to compete. So that's part of why you're seeing a lot of consolidation in the business.