Karen Condi – Founder of Workspace Strategies | How Property Owners Can Tap into the Coworking Boom.

Frank Cottle [00:00:30]: Hey, Karen, good to meet you. Good to see you today. I’m really excited to have you here on the future of work podcast. And I’m particularly excited because you’re such an industry professional. You’ve got such an incredible background in the flexible workspace industry. I have a couple questions for you. I know there’s some huge changes going on in the industry, one of which is the blending of commercial office ownership with service office ownership. So tell me, why do you think of the primary drivers? Why are traditional property companies really entering the shared space industry?

Karen Condi [00:01:14]: Sure. Well, first, let me say thank you so much for having me today. I’m so excited to be on your podcast. We’ve known each other for, gosh, couple decades I think, at least. So it’s such an honor to be here.

Frank Cottle [00:01:26 ]: I think you were like at high school or something when I met you.

Karen Condi [00:01:32]: I like to think that. Yeah, but absolutely, we are seeing so many property companies enter the shared space industry, and I think there’s a variety of reasons why. But obviously, I think the number one reason is they make more money, more money per square foot. In the coworking and shared space business, it all really comes down to the higher higher rents per square foot, the higher rental yields. And typically in the coworking business, you’re going to yield a higher rent per square foot than a traditional long term lease. So we took a look at our portfolio and what we’re managing today, and what we’re seeing is on the low end, our investors and owners are receiving 130% of market rents up to on the high end, 165 to even 170% in some locations.

Frank Cottle [00:02:32]: So obviously those numbers are interesting. And I won’t say it doesn’t surprise me. I entered the industry back in 79, 80 as a property company, and I looked around and decided I was doing land banking. And I thought, well, what’s the highest revenue per square foot I can earn as a commercial operator? As a commercial space operator? And I decided it was these fun little things called executive suites. So I couldn’t agree more. If you look at the changes too, that property companies are going through right now. The service office or the flexible space sector industry has now become one of the largest individual customer types within the conventional space. So it’s quite attractive for them to do that. And you look further and say, if I own a building and Regus comes to me, WeWork comes to me, an african wework, but Regus comes to me, okay, and they say, well, I’ll pay you market rate for your space. And then I said, what are you going to do? They said, oh, we’re going to re rent your space to our smaller customers. And then I look at them, I say, well, they’re a big public company. How are they making all that money? Wait, they’re making all that money off of my space? Of course I’m going to want to, to challenge whether I should be doing what they do or renting to them or be a partnership with them, which is now a new thing. So many of those companies, properties, companies say, well, we’re not in that business.

Karen Condi [00:04:19 ]: It’s interesting because one of my number one calls today are people that have Regus has either reached out to them or somehow they’ve had conversations with Regus and they’re first learning about the shared space industry and they’re saying, hey, why should I go with Regus? You know, could I do this on my own? And what they’re also seeing is that obviously getting that, finding that 10,000 square foot tenant or that 20,000 3000 square foot tenant is very difficult today.

Frank Cottle [00:04:51 ]: Yes.

Karen Condi [00:04:51 ]: So this is a way they can really diversify their income streams and quite Frankly just keep up with the evolving trends of working today.

Frank Cottle [00:05:01 ]: Well, I think that’s right. The other thing, I think they’ve recognized that those larger tenants aren’t necessarily any more stable or as stable as the operation of a distributed workspace is overall. You know, one other interesting point, you talk about profitability or percentage lift over conventional rents. A question on that when you make that statement, let’s use 130%. Your first statement as an example, is that over the day the agreement is signed or is that the average over a ten year period, which would be comparable to a rent a long term lease?

Karen Condi [00:05:53]: So good question. That’s obviously once the space is ramped up, you know, in our, in our experience, once we get a space ramped up which can take one to two years depending on the size of the space.

Frank Cottle [00:06:07 ]: Actually, IWG Regus in their old model, at least, I don’t know what it is today, allow a two year period between a startup center and a mature center. And they actually did the accounting structure differently for the two types of centers. So that’s pretty.

Karen Condi [00:06:23]: Yeah, so once we get a space ramped up, they stay full, you know, so, so there’s that stable income stream and that’s where I’m, I’m getting the numbers of 130 to 165% to 70%. But Frank, something else we’re seeing just kind of that shift from traditional real estate is we have so many companies coming to us today saying, I need a hybrid work model for my team. I’ve got 30 people or I’ve got 40 people, but I need a team space that’ll hold eight or ten people. And they’re rotating those people in and out so they’re no longer needing that 5000 square foot, 10,000 square foot whatever it is. Coworking is the perfect solution for them. And on top of that, quite Frankly, they’re wanting flexible terms and we can offer that where, you know, traditional commercial real estate, they’re not going to want to do a one year term. They need that longer term tenant.

Frank Cottle [00:07:20]: Well, that’s a major trending issue. I think of all the larger companies in the world right now, they’re looking at their own corporate space and saying, hey, this is only 30, 40% used, and yet I’m carrying the long term liability of the leases on my balance sheet. The CFO wants to get rid of those long term leases, that wants to get rid of that debt off the balance sheet. The CEO wants to take that money and drive it into business growth. So exchanging long term obligations for short term flexibility isn’t just a convenience thing. It’s a major impact in the valuation, the stock valuation of a lot of companies.

Karen Condi [00:08:07]: Yeah, sure is.

Frank Cottle [00:08:08]: So there’s massive change, I think, going on there that certainly, you know, we would see. You know what, I was at a meeting when I was really young. I was the punk in the room. I was like in my early mid thirties or so, I was in a meeting with luminaries from the property industry. Jerry Hines was there, Trammell Crow was there, Sam Zell was there. And I stuffed me at the back of a wall. But I remember, I forget who it was. Asked Sam Zell, who had equity office properties at the time. He also had some flexible workspace that he ran himself. He had 58 centers that he ran in his own buildings called smart suite. And one of the other fellows said, well, Sam, you’re crazy. What are you doing this for? Why are you doing this little short term lease thing and this and that. He made a very interesting answer that I’ve not heard anybody answer with sense. He said, it’s because I want to service the entire lifecycle of my prospective customer. He wanted to help them grow rather than just sign a large lease.

Karen Condi [00:09:31]: Sure.

Frank Cottle [00:09:32]: Subsequently, when he sold the company for how many multiple billions of dollars to Blackstone, their incubation factor in their own buildings was still higher than anyone else’s I’d ever seen. And it was all based on that understanding of the full lifecycle of the customer started when they had a single office.

Karen Condi [00:09:58 ]: Yeah, and I mean, we’re seeing today a lot of real estate companies and owners putting a coworking space inside of their larger building for that exact reason. And additionally, it just kind of adds, it’s the overall value of position for the project itself. Having the coworking space in provides a different level of amenities and a sense of community and just brings more life to the building in general, which makes their overall project more attractive to users.

Frank Cottle [00:10:31]: If you look at, let’s use your 130% number as an example. If I were to take a ten floor building and say to the building owner, I can give you an 11th floor for free, because that building owner is probably with their financial partner, looking at getting about a 13% yield across the lease portfolios in average. So if you look at 130%, you’ve given them a 30% yield on an additional layer equal to an additional floor of space. And that additional 30% against a ten floor building takes their entire building up about two and a half to 3% yield wise, across the entire building average. So they go from a 13% or a 12% yield to a 15 or 16 yield, makes that entire building quite a bit more. And so that’s, to me, that’s where the multiple of that money is. And so that’s really where the big money is for the property company. It’s not just the cash flow, it’s in the increased yield terminated into capital value of the building.

Karen Condi [00:11:56 ]: Yeah, absolutely. We do have to remember it is a different business model, though. So there’s a lot of things they need to be prepared, you know, when entering into this.

Frank Cottle [00:12:08]: Well, what do they need to do to be prepared? What, what’s your, your view?

Karen Condi [00:12:12]: You know, I liken this business more to running a hotel than a real estate play. Sure, there’s space involved or square feet involved, but it’s more of a hospitality business, which is much more like a hotel. So the operational complexities, it’s much more hands on, requires more day to day management, hands on, a higher customer service level and hospitality level compared to traditional real estate, you know, traditional real estate, they’re engaging with a broker, of course they’re involved in the negotiations and the fit up, but then they sort of step away unless there’s an issue with the building where the coworking business is really running the day to day, the hospitality aspect, the community, the staffing and the marketing, there’s just so many. And that technology, gosh, I could go on and on. There’s so much more involved with it, but, you know, it yields a higher, higher rents per square foot.

Frank Cottle [00:13:20]: Well, you know, you don’t get anything for no effort, so you do have to put some extra effort in. But the return on that effort sounds like it’s well worth it. How do you assess, or how does one assess, and you in particular, whether a building is well suited for a conversion? Because there’s lots of space out there. But if you look at ten buildings, how do you say, ah, this is the one.

Karen Condi [00:13:53 ]: Well, obviously the first thing we do with a potential investor is engage in a feasibility study, and there’s a lot that goes into.

Frank Cottle [00:14:03]: By investor, do you mean property company that owns their own building?

Karen Condi [00:14:07 ]: Yes. Yes. Okay, absolutely. Thanks for clarifying. So, you know, there’s a lot of factors that go into that feasibility study. The first would be a thorough market analysis. So, you know, evaluating the demand for coworking space in that market. We look at factors such as, you know, how many freelancers, startup companies, remote workers, what are the industries within that, within a three to five mile range? We dive heavily into the demographics and look at income levels, the housing. We focus heavily on a three to five mile radius around a space. And that’s because we manage centers ourselves and we rely heavy on data, our organization, and we know that the majority of 85% to 90% of people that are using the coworking space live within three to 5 miles of that location. So we focus on that. We look at things like access, you know, what’s the drive by traffic, how easy is it to access the building? What are the amenities surrounding the building? The walkability factor.

Frank Cottle [00:15:30]: Stop right there for a second. What amenities around the building shape the structure of a community that the building becomes and are really critically important to a successful operation?

Karen Condi [00:15:46]: Gosh, we look at restaurants, lunch spots. Where can people walk to for lunch?

Frank Cottle [00:15:54]: So fast food is good, quick food is good. Nice food is good. You’ve really got to have a mix of all three. I would think.

Karen Condi [00:16:03]: You do, you do, but you want nicer. If it’s fast food, you want nicer fast food restaurants, you want things like a shipping store, whether it’s ups or FedEx, even though you’re going to have that set up within your coworking space, you still want that availability. Dry cleaners, fitness. Now, a lot of coworking spaces today that we’re working with, we have on site fitness centers, but if you don’t, you want something close by.

Frank Cottle [00:16:32]: Well, you know, we just did an interview with the chief people officer over at Gympass and fascinating lady, and she was indicating to us the difference in the employee turnover of employers who had a fitness program or access to a fitness program versus those that didn’t. So I would imagine the access to a facility would have a huge impact on your own customer lifecycle within a center, right, along with the restaurants and everything else. That actually has almost an outsized amount of importance.

Karen Condi [00:17:21]: I’m sure it does. That’s actually not something that we’ve measured, although we do measure the life cycle of our customers. And the life cycle of our average customer in the spaces we manage is greater than five years.

Frank Cottle [00:17:35]: Right.

Karen Condi [00:17:36]: So there’s a lot, you know, people talk about, oh, this is short term, it’s flexible and they think month to month or even, you know, one year, we’re signing one year contracts, but they’re staying many years.

Frank Cottle [00:17:46 ]: Yes. So I think that’s important.

Karen Condi [00:17:50]: Wellness is important to everyone. I can’t tell you if it really has a factor on people staying longer or not. They’re staying longer anyway.

Frank Cottle [00:17:59 ]: No, I think, and I think that life cycle, from what we’ve seen, is extending. People want the flexibility, but once they’ve established a comfort level and you’re meeting the needs, they’re happy with the quality of services. We do see a wide variety of centers, operators globally where their lifecycle is much shorter, and we attribute that to either location or not as high quality services as you predominate, because there’s a big difference in the comfort level overall there that needs to be considered.

Karen Condi [00:18:42 ]: You gotta pay attention to services and pay attention to just what’s trending in the market. I’ve been in the industry, I hate to admit, about 25 years, 25 years ago, we weren’t talking about wellness as much inside of spaces. People were going to gyms, but wellness wasn’t a thing.

Frank Cottle [00:19:01]: Wellness 25 years ago is a two martini lunch.

Karen Condi [00:19:05]: Right? Right. For some, it still might be, I don’t know. But, you know, we’re not opening a center today without wellness being one of the top factors that we’re incorporating somehow in that space.

Frank Cottle [00:19:21]: Well, how do you do that? What are some examples of things that are considered today that would not have been considered in any office space in the past. But if you don’t have it, you know, you’re not meeting the demand curve that’s out there.

Karen Condi [00:19:41 ]: Yeah, good question. And there’s a variety of amenities. It’s not just wellness, but we’ll start there. So whether it’s space to put in a gym, which is kind of the top, you know, if you have that great, do it, it’s going to attract more customers, they’re going to pay higher rates, they’re going to stay longer, they’re going to love it. We also have a lot of spaces that have outdoor patios or rooftop space. We’ll bring in a yoga instructor and do yoga a couple times a week on the rooftop or the patio. People love that. Some will sign up for the space. They may never take the yoga class, but they love the idea of it. We bring in a masseuse chair massage a couple times a month.

Frank Cottle [00:20:31]: Can you send them over to my place right now?

Karen Condi [00:20:33]: Sure, sure. Right after this podcast, I’ll make sure I do that. But in addition to that, you know, outdoor space, people love natural light. They love being able to get fresh air. More people are biking to work than they used to. So we make sure we have bike storage everywhere. Electric cars have become increasingly popular, so, you know, having electric car chargers, if that’s possible, is important. In addition to that, the same things we’ve been talking about for over a decade, community space, lounge space, ample space in the cafes to do things like themed luncheons. You know, you have some people in your space that will be very outgoing and kind of more social than others, and you have others that are a little more timid and have a hard time connecting with others. But if you do things like themed lunches, they might sign up for that because it’s easier for them to interact. So it’s important in coworking spaces today to just always be forward thinking about what’s happening in the market, what’s happening the world today with workspace, because that’s what people are going to be looking for. You know, we’re seeing one of the biggest competitors for us are people in their home offices.

Frank Cottle [00:22:01]: Absolutely.

Karen Condi [00:22:02]: Much greater. We know we can compete with the person down the street that has a coworking space, but getting someone to come out of their home office is and pay for space is something you’re going to be up against. So you’ve got to create spaces that people want to be part of and they see the value.

Frank Cottle [00:22:23]: I think that’s important, I think, in your favor that a lot of people through the pandemic got used to working at their home space, and a lot of people now are tired of it. Also, a lot of corporations do want that hybrid environment because they recognize that there’s some liability to having everybody work from home or forcing them to work from home. We heard of a recent action against a major corporation where the employee had been terminated, and they ended up creating an action against the employer for back rental on the home office that they had never been forced to provide, but in fact had never been compensated for. So there’s all sorts of goofy things that are going on right now, and I think we’ll continue to see. And many employers really want their people in a professional environment where they don’t have distractions. So especially if they can trade a ten year lease at the corporate headquarters, that allocable space, for a flexible service agreement without the liability that comes along for the lease. Liability. That’s a good exchange.

Karen Condi [00:23:53 ]: Absolutely.

Frank Cottle [00:23:54 ]: Even if the cost is exactly the same. That’s a very good exchange. You got rid of, of up to nine years worth of debt on your balance sheet by making that change. And that’s big drivers.

Karen Condi [00:24:05]: We see employees want that flexibility, too. They want to be able to work from home a couple of days a week, but then they want to be able to go into an office where they can see coworkers and be more social. So sort of the best of both worlds. But certainly the pandemic changed a lot of things for all of us. Right? A lot of us are just tired of talking about the pandemic. But one thing that definitely happened, people were remodeling their houses. They were moving into bigger houses. They were creating home offices. So while we’ve always competed with the home office, doing it more today.

Frank Cottle [00:24:41]: Yeah. The one thing I don’t think they created was meeting rooms.

Karen Condi [00:24:46 ]: Right.

Frank Cottle [00:24:46 ]: You know, I work out of my home office. I’m working out of my home office today. I also though, whenever I meet people, I meet them at my professional office, which is downtown Fort Worth. So I think people need both, especially if they’re going to be working with others. You do need both. And I know in a flexible workspace sector that you’re talking about, you can have access to meeting rooms through virtual offices and through any number of programs and services that are provided by centers such as you manage without any material, fixed cost. But it really expands your capacity to be effective in business and perhaps need to be customers as well.

Karen Condi [00:25:41]: Right, right, absolutely. And I think people quickly got tired of all the Zoom meetings and the teams meetings and they want to meet in person. So, you know, I would say our meeting rooms are busier than they’ve ever been. I felt like 2019. Things were crazy right before the pandemic. I felt like we were busting at the seams then with our meeting rooms. But now we’re, you know, in a lot of spaces, we’re having to take on more space to create more meeting rooms. People are using them.

Frank Cottle [00:26:13 ]: Yeah, no, I think that that’s going to be a. An ongoing demand that’s going to continue to grow. Everything that we’re seeing is, leads us to believe that, at least on an ongoing basis. When you do a project, it takes a year or so from ground zero to stabilize. That’s normal in any office building, too. Certainly amongst the larger operators such as IWG, the yield is very high on the space. You’re servicing a full lifecycle of a customer. You’re introducing new customers, a lot of new customers, through meetings and things to the space for free. Why would every property company be just fighting to do this?

Karen Condi [00:27:05]: Very good question. I find it astonishing that I think a lot of property owners still don’t understand what coworking and flexible workspace really is. And I know that because they call me and they say, I’ve heard a little bit about this, what can you tell me? And I educated them about it and they’re like, well, why didn’t I think about this before? However, I will say there are financial considerations they have to make. Generally, getting into the coworking business may have higher upfront costs than a traditional lease deal. And that’s not only the space set up. You know, the space is usually very high tech, so there’s higher technology costs where in a traditional lease that may be passed on to the tenant and then the staffing, they’re going to have to cover the staffing cost, you know, for their first six to twelve months of operational losses. So certainly there’s higher upfront costs, but, you know, if they have the temperature to weather that storm of that, you know, first one to two years, they’re going to reap the rewards on the back end.

Frank Cottle [ 00:28:21]: Yeah, I’m going to, I guess, shoot that argument down, not from your point of view, but shoot their argument down is that if you’re a property company, you have capital costs to begin with and you have to buy the dirt, you have to buy the steel, you have to put the building up. It takes a couple years to get it going. You have to do that anyway. And you’re doing that as a property company to get a specific yield. So if you can get that yield by reinvesting a new increased yield, by reinvesting in your structure, which you’ve already built, that’s no different than the original risk that you took. It’s probably much lower or the original capital you put up to build the building in the first place. To me, that argument, if someone were to present me with that argument and say, you’ve got to be kidding me, you know, I don’t think it’s valid at all, but I think it’s lack of education, a lack of exposure more than anything else, because it is a not for 100% of all space, certainly nothing’s right for 100%. But for anybody wanting flexibility, which is elemental to business today, I mean, you can have capital, you can have all the customers and all the capital in the world, but if you’re not flexible, you’re going to think somebody’s going to beat you in business. You’ve got to be flexible.

Karen Condi [00:30:02 ]: You’re right. And those that are recognizing that are jumping in to this exciting industry.

Frank Cottle [00:30:08]: Well, I know that you have been presented with more opportunities than you can literally handle. There are all sorts of property companies coming to you all the time and that you do a great job with them and have for a decade and a half now, overall, if people care and wanted to reach you and to find you to discuss this further on a one on one basis with you, how would they do?

Karen Condi [00:30:34 ]: So they can go to my [email protected], dot, and connect with me there. There’s a page, you can just submit your information and love to talk to anybody.

Frank Cottle [00:30:46]: Okay. So it’s workplacestrat.com, workspace strat.com. Okay. And then they can reach you directly through the, through that medium.

Karen Condi [00:30:59]: Yes.

Frank Cottle [00:31:00]: Okay, perfect. Perfect. Well, really appreciated the time we spent today. Hope it’s been helpful to everybody out there, and particularly the property companies that are thinking of entering the flexible workspace sector. That here’s an avenue that’s pretty well proven and a lot easier than you might think. Thank you, Karen.

Karen Condi [00:31:21]: Absolutely. Thank you, Frank. Appreciate being on.