- Industrious is converting a significant percent of its leased locations into management agreements.
- Allwork.Space spoke with founder and CEO, Jamie Hodari, to learn more about the company’s decision to work more closely with landlords.
- Hodari discusses the “transformative” effect of switching to management agreements, and why he believes it’s a more sustainable route for future growth.
Management agreements have been growing in popularity within the flexible workspace industry for the past 4 years. However, many flexible workspace operators hoping to work with landlords were being met with skepticism, which made finalizing management agreements a challenge for many.
This appears to be changing.
During the GCUC APAC real estate session, Annie Ricker from Hines and Ada Wong from Champion REIT claimed that there’s a shift happening in landlord attitudes towards management agreements.
According to Wong, because people and organizations are less willing at the moment to sign robust leases, the idea of management agreements is becoming increasingly appealing to landlords.
Flexible workspace operator, Industrious, can attest to the above.
Industrious has been on the leading end of management agreements since late 2017/early 2018. Jamie Hodari, Founder and CEO, stated during his 2018 GCUC presentation that progressing the company’s growth would focus on signing more management agreements.
Over the past couple of years, the company has worked on reaching that goal.
Just in Q4 of 2019, Industrious signed around 700,000 square feet in over 20 management deals with 13 partners.
This week, Hodari confirmed to Allwork.Space that the company will convert a percentage of its leased locations into management agreements. The news confirms the newly found appetite of landlords for management agreements.
Allwork.Space spoke with Jamie Hodari to learn more about the company’s management agreements, how other flexible workspace operators can approach and talk to landlords, and why management agreements are the present and future of the flexible workspace industry.
Allwork.Space: Industrious is converting some of its leases into management agreements, how did this come to happen? Can you talk us through the process and how long it has been in the works?
Jamie Hodari: The genesis of this was in late 2017, when we made the strategic decision to shift away from arms-length leases with landlords in favor of management agreements. It has been transformative in terms of the sheer product quality and experience that we’re able to deliver to tenants when we work hand-in-hand with asset owners. It’s more sustainable and less risky for everyone involved.
Unfortunately, that has produced an awkward dichotomy.
We’re evangelists for a more sustainable, better business model for our industry, and yet our legacy portfolio — our original 50 locations — still sit on leases. It’s been clear for a while now that if possible, it would be an ideal outcome for tenants if we could alter those arrangements to partnerships and work in much tighter coordination with the asset owner. We finally began the initiative in earnest this summer.
Allwork.Space: Why did Industrious decide to convert these locations? More importantly, why now?
It’s long overdue. We’ve been vocal about this for so long, but negotiations are exhausting, so it was easier to just stick with the status quo with our legacy portfolio. If the current moment has done one thing, it’s to quiet the siren’s song of inertia.
Allwork.Space: Do you think landlords are more willing to work with flexible workspace operators now vs 12-24 months ago? If so, what do you believe has driven this shift in attitude from them?
I think most people in the real estate industry, from landlords to large brokerages to REIT analysts, have concluded that COVID will accelerate the shift to more distributed, on-demand ways of working.
As a result, converting 15%-20% of an office building into a workplace-as-a-service product and using that to power the tenant experience of the entire building isn’t a quirk, or a nice to have. It’s one of the fundamental ways to modernize a building and meet evolving demand.
Landlords understand that, and a good number are using this moment to deepen their commitment to workplace-as-a-service. Some are mulling over launching their own brands, but most have concluded it’s better done in partnership with an operator. That’s a particularly easy choice if the operator is already in the building and the unit is already up and running.
Allwork.Space: Considering that landlords are more willing now than ever to jump on board with management agreements, would you recommend other flexible workspace operators evaluate the option of converting their leases into management agreements? If so, how feasible is it and what are some tips you can share for them to approach their landlords and get the conversation going?
In good times, an operator makes less money in a management agreement than under a lease. It’s better in nearly every other way, and most importantly, it aligns interests rather than putting you at odds with the supply half of your business.
But a managed unit might make 25% less EBITDA and sometimes 50% less revenue in bull years than the equivalent leased unit. I can’t really recommend whether that tradeoff is right for everyone. It’s a strategic decision and I can see valid arguments in either direction.
There isn’t a right answer, though it’s no secret which route I believe in.
If an operator does want to consider converting, prepare for a complicated conversation. While some landlords said “yes, we’ve been waiting for this call” and the entire conversion was negotiated in a few days, others are more complex, to say the least.
If I could give one piece of advice, it’s to just be open. Explain what you’re proposing, and why you’re proposing it. Explain why you think it’s in the landlord’s best interest to make the switch. But give the real reasons. It’s too easy to get twisted into knots trying to craft what you think the landlord would want to hear, versus just telling it like it is.
You’re asking them to go into business together; start with why.
Allwork.Space: Which types of operators do you believe stand to benefit the most from this type of arrangement? Which do you believe will have the most success in getting landlords to work with them?
Management contracts tend to reward a strong and consistent operating track record. I know that’s an obvious point, but that’s in contrast to a lease, where if you’re willing to obligate yourself to a certain payment you oftentimes don’t need much more than a healthy security deposit to get a deal done.
A management contract requires the landlord to trust that you’re great at what you do. Operators that engender that sort of trust should have better outcomes. That’s more important than whether they’re global, national, or local, or anything like that.
Allwork.Space: You mentioned that with some landlords, the conversation around management agreements was complicated. In your experience, what have been the biggest challenges/barriers to converting leases into management agreements and to sign management agreements in general?
All things being equal, landlords prefer fixed income to variable income. I think there’s little question that landlords make more over the life of a managed unit, so the primary reason not to do it is a strong aversion to variability in cash flows.
Allwork.Space: How did Industrious overcome this particular challenge?
Landlords typically make about 30% more income under an Industrious management agreement than a lease. That additional NOI, plus the ability to deliver services that benefit the entire building, I think make a pretty persuasive case.
Allwork.Space: During a recent event, Brad Krauskopf from Hub Australia mentioned that landlords will become the biggest competitors to flexible workspace operators as they take a more active role in flexible space. You also mentioned before that some landlords are “mulling over launching their own brands”. Why should landlords partner with flexible space operators rather than create their own flex space brand? What is a flex space operator’s main value proposition for landlords in that sense?
It depends what you think constitutes the core of our industry.
If customers just want space that’s pre-built on more flexible contract terms, I think that’s something landlords should be delivering themselves. But I think the more meaningful segment of the market is not going to be companies buying space, but companies buying their employees’ workplace experience as a service, oftentimes via a complicated interplay of private spaces integrated into a shared spine of shared additional spaces and amenities, potentially across multiple submarkets or cities.
That is closer to an outsourced HR business, and it’s not credible that landlords would do a spectacular job of that without a partner. Nor do they need to. Small differences in performance make a much bigger impact on cash flow to the landlord than the inclusion of Industrious’s management fee, in fact they dwarf it, so it’s hard to make an economic case for self-performance.
Allwork.Space: Thanks Jamie, anything else you’d like to add?
There are two things in real estate that were long overdue for change:
1) The large, benching-based open floor plan office.
2) Coercive workplace strategies that tell employees exactly what to do rather than putting the choice in their hands.
One silver lining of COVID is that it’s putting pressure on both of those things. Companies are all being very proactive about finding more private spaces for employees to work, and finding ways to give employees the choice of where and how to work. That’s good news for employees, and will benefit the most progressively-run buildings.