- CBRE data from the end of 2019 alludes to curbed growth in the flexible workspace market, but the reality is much more complex.
- Various flexible workspace operators such as Industrious have been growing through alternative business models, including landlord partnerships and franchise agreements.
- Jamie Hodari, CEO of Industrious, talks to Allwork.Space about why they switched to the partnership model and how itโs fueling their growth in 2020.
CBRE recently published the findings of its 2019 Q4 data, which revealed a precipitous drop in Q4 2019 office leasing. According to CBRE preliminary data, โleasing by flex operators declined to 1 million sq. ft. in Q4 from 4 million sq ft in Q3.โ
CBRE found that โSpaces, WeWork, Industrious and Knotel remained the largest lessees of new space in Q4, but all except Spaces leased significantly less space than their quarterly totals over the past year.โ
WeWork leased 90% less in Q4 than the previous year.
Curtailed Leasing Activity Does Not Mean Less Growth
Though CBRE data alludes to curbed growth, the reality is much more complex.
Over the past couple of years, various flexible workspace operators have been growing through alternative business models, including landlord partnerships and franchise agreements.
Jamie Hodari, CEO of Industrious, stated that โit was really surprising when we saw the report, because Q4 was our biggest quarter ever by a huge margin.โ
Industrious began to focus on the partnership model about two years ago, however it quickly realized that it wasnโt sustainable to continue growing through the traditional lease model and partnership agreements at the same time.
Six months after balancing both models, the company made the executive decision to focus solely on partnership agreements.
โI think we had a good amount of traction very early on, but closing partnership deals is harder than leasing. It takes more time to negotiate with landlords and then youโre integrating with the entire operation of a building, rather than just setting up shop. This means that the operation of the space, the reporting, and the coordinating is much more complex.โ
Though Industriousโ growth slowed down initially after shifting to landlord partnerships, it wasnโt that significant.
โWe were signing about 250,000 – 350,000 square feet of partnership agreements every quarter.
โAnd then Q4 came.โ
Industriousโ Growth in Q4
According to Hodari, Industrious signed around 700,000 square feet in over 20 deals with 13 partners, more than tripling the amount of square footage secured for partnership deals in Q3.
โThis increase in square footage took us by surprise. We thought we would do 300,000 – 350,000. Itโs rare to end up at double the number you predict.โ
Hodari believes that what happened with WeWork definitely influenced this increase in partnership deals, as it helped landlords become more aware of the downsides and risks associated with the traditional leasing model.
โLandlords are now realizing they canโt just sign a lease agreement and be done with it; flexible workspaces are a building amenity and they are a key part of a buildingโs operation.โ
In the months after WeWorkโs fall from grace, Industrious was able to close deals with landlords it had been talking with for a long time.
โThere were various landlords weโd been talking to for years and it finally hit in Q4.โ
The vast majority of the deals Industrious signed in Q4 were with landlords with whom they already had an existing location.
Hodari takes this as a clear indication that it has delivered on its value promise.
โThe way this works is you can sign a lease with whomever; with a partnership agreement, you have to do one or two, deliver on your promises, and then you start adding more and then do a larger deal for over 5 locations.โ
Is the Leasing Model Drying Up?
The shift to landlord partnerships has caught fire, and is expected to become the dominant business model for coworking operators.
โMy sense is that this [Industriousโ Q4 growth rate] is the new normal now. This is more likely to reflect our new quarterly numbers.
โWe now have hundreds of management contracts in the pipeline, versus 20 that we used to have before.โ
The WeWork issue served as a wake up call for landlords, and Hodari believes they will increasingly seek to partner with operators rather than just lease to them.
โIndustrious has been at it for years now, and this helped us. It isnโt that easy to go to a landlord say โhey you should rip out the old way of doing things and partner with us.โ It takes time to get to that level of trust with the landlord.โ
But landlords are becoming more receptive to alternative approaches. Space-as-a-service is increasingly becoming popular, and landlords are starting to respond to this new market need.
Another reason the leasing model will continue to decline within the industry is that it poses several risks.
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โThink of partnership deals as cycle-agnostic,โ Hodari said. โThe day on which you sign the agreement is sort of a meaningless data point, itโs not relevant to the success or failure of a unit, whereas with leases the opposite is true.
โWhen you sign, a lease could be the single most determinant data point for success; if you signed at the top of the market, at the 11th hour and the cycle turns, then youโre putting yourself in a scenario where the vintage of your unit is a bigger determinant to your success than the quality of your operations.โ
Towards Profitability
In late 2019, Industrious announced that it was on the path to profitability in 2020.
Hodari believes the company will reach that point around the Summer.
โWe have a consistent trend that our revenue is growing faster than we anticipated, and weโve really been able to be disciplined in our spend our overhead growth is growing so much slower than our revenue growth.โ
