Jacob Bates of CommonGrounds | How CommonGrounds is Redefining Space-as-a-Service and Building a New Workplace Ecosystem

ABOUT THIS EPISODE

CEO Jacob Bates discusses CommonGrounds’ landmark shift from a coworking provider to a complete space-as-a-service specialist for Fortune companies, and their newly funded vision for the future.

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Transcript

Frank [00:00:01] Welcome back to the Future of Work Podcast. This is Frank Cottle with Allwork.Space and I’m here with our guest, Jacob Bates, the CEO of CommonGrounds. Jacob, welcome.

Jacob [00:00:29] Thanks, Frank. It’s great to be here. Happy New Year.

Frank [00:00:31] So, you know, Jacob, your background is somewhat unique. I’ve been around this industry for more than 40 years now, and it’s very rare to find someone that has the commercial real estate and enterprise real estate background that you have. I see that you’ve really worked in more than 70 countries globally. That’s huge. That’s more than I’ve worked in. I’ve only worked in 54. So I’m very interested for you to tell us a little bit about your background and how you moved from the enterprise real estate zone over to the flexible workplace zone.

Jacob [00:01:09] That’s a great question and thanks. Well, that’s very flattering. I’ve been blessed throughout my career to have stepped foot in many countries around the planet and have a lot of different experiences of a lot of different facets and parts of the real estate industry. And that’s led me to where I believe is where we’re going, which is a complete re-strategization and innovation of the office sector of the industry. And I think it’s been on its way for a while, but it’s been something that’s been coming for a long time. But yeah, I spent over 20 years with the corporate real estate world for different enterprise companies and managing a portfolio and that took  me all over the world. It was a great blessing and I learned how people work and how they didn’t work and we found a lot of interesting ways to work. And that led me to Commonrounds where we’re not a coworking company, but we are a workplace as a service company. And where we see the industry going is quite different. And the reason I got involved in the coworking or, you know, as we were describing this workplace as a service in a flexible office industry, is because when I worked for these enterprise companies, what I found was we could lay off our people, but we could not lay off our real estate.

Frank [00:02:25] Boy, that’s the truth.

Frank [00:02:26] I’ve seen I guess, five or six economic cycles now, and the vacancy factors in the corporate world are staggering during a negative cycle. And even during a positive cycle, they don’t seem to be terribly effective.

Jacob [00:02:41] Yeah, you’re 100 percent right there. I mean, some of the enterprise companies I work for, even some of the portfolios I got into when I worked with CBRE and other service providers was the utilization of space never really got higher than 60, a high 60 percent top. In a down market or in a recessionary period, we were getting into the 40s and so the utilization and the efficiency of space just wasn’t there. And now with technology, work is becoming more ubiquitous. Everybody has a different work style and that’s being enabled by technology. It’s becoming much more inefficient. And the workplaces now tool for attracting and retaining the most viable asset on the planet for companies, which is people.

Frank [00:03:27] People. Absolutely. Did you find that within the enterprise environment that the main drivers for migration to flexible workplace when they started, when you started, was  balance sheet management or personnel management? Which was the primary driver?

Jacob [00:03:46] It’s definitely a balance sheet driver. You know, I think you look at open plan workplaces, workspaces, you know, it didn’t come to the US until maybe 10 or 20 years ago in that time span. But it was a financial exercise. It was nothing more than that. We sold it to everybody that it was going to be collaborative and it’s going to help them be more innovative and creative and help them be more productive in a workplace environment. That was, you know, a bunch of nonsense that it was just a financial exercise. And I think as you look at, you know, you can’t blame CFOs and you can’t blame CEOs of companies. They’ve got to report to Wall Street every 90 days. And, you know, they can’t go to Wall Street and say, hey, your money looks really bad, but your people are happy. But you have to find that balance between, you know, keeping people happy, which are your most valuable assets and making sure that you have a healthy balance sheet. And part of that’s going to require that you think about your real estate differently.

Frank [00:04:43] Yeah, I think that the balance sheet, really, if I look at the drivers, that to me has been the great initiator of things, and it had to do with those economic cycles as they bounced back and forth. That’s my own view at least. Finding that balance point, as you say, is critical. But I think that people’s requirement now on the H.R. side, that companies have a flexible workplace program of some sort or they’re not getting the talent — that has a big employee implication now as well.

Frank [00:05:20] You say your company wasn’t, isn’t a coworking company specifically, but you describe yourself as a workplace as a service company. How do you define the differences?

Jacob [00:05:32] Well, I would describe coworking as a space where companies come together to share certain infrastructure, to share the amenities, the conference rooms, the kitchenettes, pantries, event spaces. And you have multiple companies that are sharing that space and that environment. And that’s been around for a long time. 

Frank: Oh, yeah, yeah. We used to call it networking. 

Jacob: Exactly. It’s called networking and executive suites. It’s been around for a long time. It’s been around for 50 years. And so I think that as we look at CommonGrounds, well, we started out as a coworking company. It’s not where we’re headed or where we’re going, and we see huge opportunity as we look at the workplace as a service role, as an expansion of the next generation of the property services industry. And so I think one of the things that coworking did really well was to take networking and make it more about community and do it pretty effectively. The other thing about coworking is it began to solve for slightly bigger small businesses and startups versus what the executive suite area was solving for, which was much smaller companies — a couple of people, one single person, they did have some enterprises too, but nothing like what you’re seeing today and a big driver is companies utilizing space differently. And so as we look at coworking, I look at coworking as a piece of workplace as a service. It’s a single workplace product sitting inside a workplace as a service. But there’s other workplace in place products that fit inside there as well, including traditional office.

Frank [00:07:08] Well, you know, I would agree with that. Historically, we’ve said that our industry was comprised of those companies that provide the combination of people, place and technology into a single bundled product and delivered it with a highly flexible service agreement. That’s what differentiated this from conventional real estate. We didn’t focus on community, it doesn’t seem, until coworking started emerging and even maturing a little bit. And I think community now is one of the big four. It’s not the big three — people place technology — it’s community now as well. But I’ll also add — I’d be interested in your comment on this — as companies mature, as we started coworking 10 years ago, let’s say, keeping it simple, it was mostly individuals. And as those individuals aged, matured, started building companies, our industry started having to deliver a different style of space to meet the needs of those companies. So I would say that individuals cowork, they share, they work together in compatibility. But companies actually need privacy so they can develop their own communities, their own cultures. And it seems to me that you’re focusing more on the latter than the former.

Jacob [00:08:35] That’s definitely right, I think that’s well said Frank. Individuals cowork. And if you look at the true definition of cowork back then, that’s what it was:  individuals coworking. Companies, especially large companies — look at the Fortune 50, 100 companies — they’re not going to cowork. They’re going to want their own proprietary spaces where they can bring their own brand, their own culture. They have their own brand and culture. They don’t need CommonGround’s brand and culture. They need a place where it’s activated and enabled by technology that can bring all of those modern things that coworking has embraced and perhaps solved or modernized and bring it into a place where they can have flexibility. But they don’t need any of those other things, what they need is a space that’s as a service, that’s on demand, that looks and feels and acts like an extension of something they built for themselves. But they need that flexibility to be able to say in, even growth or even recessionary times, they have optionality.

Frank [00:09:34] You know, historically, the thousand pound gorilla that dealt with the enterprise client has been Regus. They focused on that client base for decades now and are obviously very successful if you look at their mass and their value as a company. How do you position CommonGrounds differently to service that same customer base than someone as large as Regus with 3500 locations?

Jacob [00:10:05] What we’re doing is a much more targeted focus on those enterprise companies. So one of the things that I mean, I struggled with Regus in the past where we’re working for some of these Fortune 100 companies, the technology actually isn’t there to be able to come in and plug and play at true enterprise level, for, especially a healthcare company who has, you know, HIPAA issues and all of those things. A technology company that is concerned about data security — they need to be able to plug and play. We’ve had Fortune 100 companies come to us and literally come in and plug and play because the security system is there. Or the ability to adapt the existing system with limited time and cost; this is available to them to create the secure functionality that they need in a space. And so where we’re going… but that’s just one piece of it. What we’re talking about, the demand side piece of it. The other piece of it is the supply side. And I think as you look at the next generation of the property services industry, it’s going to become the ability to connect those relationships between supply and demand through partnerships at both levels to create these spaces that have the optionality and the flexibility that the demand side needs for their people and their talent.

Frank [00:11:20] Well, do you think in the old days, we were really impressed when we got our first digital switch, a fax machine, the ability to transfer phone calls, take messages, if you will. Today, it seems like the technology that we’re going to be seeing in the next generation or maybe your generation of centers is the physical space that’s highly flexible with a short term service agreement. But we’re really probably going to start looking at managed network services as opposed to anything else, because anybody can provide bandwidth, that’s easy, but it’s a network service that you talk about for privacy, for security. That seems to be the next level. What’s your thought on that?

Jacob [00:12:09] Oh, I think you’re a hundred percent right. Data security is critical. I mean, physical security, data security, visual security is massively, incredibly important to all of these companies. we’ve had a company that has come to us at one of our locations and we’re not only the operator that’s able to solve it, but they actually want to put a data center in our space.

Frank [00:12:32] So that concept is definitely coming along. But I think it’ll be more of a managed service, though, by the operator than an individual rack it up and run your own NOC.

Jacob [00:12:48] Yes, I agree. It’ll be, we get back to our workplace as a service, so that encompasses everything. The workplace and it’s as-a-service, as a managed service, whether that’s physical space, that’s, you know, managed networks and data security, whether that’s hospitality, whatever that might be, it’s going to be as-a-service. I think — you made another good point, too, which is, it’s not about Wi-Fi anymore — 5G, is about to completely change that world entirely. Wi-Fi is almost going to become obsolete with 5G and who knows what they’re gonna do after 5G? And so it has to become about these other things. And, you know, another thing that you mentioned is a physical space. Can the space — that was another reason why I got into workplaces and services — the built environments couldn’t change in the past. I’m working for a tech company in the Bay Area, we needed the built environment to adapt and evolve to our business. We were growing so fast, we were tearing down walls every six months. That just doesn’t make sense.

Frank [00:13:45] I know I get that, very, very definitely. Where do you think the drivers will be that will grow the sector over the next five years? What do you think the… where’s the next generation of customers coming from that’s going to keep the industry growing? Or do you think that corporations will start building more and more of their own space?

Jacob [00:14:07] I see the growth with enterprise companies. So I think what we saw the last, I would say 2016, they started to adopt. When I say enterprise companies, I’m defining those as usually companies with 100 people or more, or the best definition is the Fortune 1500 or the Global 2000, whichever one you want to use. Those companies began to really adopt this space as a service environment in 2016. We saw last year a huge ramp-up in those companies looking at this model rather than traditional leases. And so they’ve got a number of drivers pushing them towards this. You’ve got the war for talent, which is not going to go away in a recession. Everybody’s thinking, let’s get a recession, it’s going to reset the war for talentthen all the tables will turn and the company will now be in control again, the talent will have all this leverage over the company… I don’t think that’s going to change.

Frank [00:15:01] I agree with you. Yeah, I think it’s going to accelerate. Personally.

Jacob [00:15:05] 100 percent. It’s going to accelerate. Everybody wants to talk about technology. The robots are coming, A.I., 5G. That’s all coming. It’s all true. And as it comes and it automates work, people are now going to do the things that they are best at, which is use our superhuman powers, which means we need to humanize the workplace to solve that. And as people begin to have to use their superhuman powers that robots don’t have, that’s going to create an even bigger war for talent.

Frank [00:15:35] No, I agree with that. You know, it’s funny because I reference people, place and technology. Well, we know the people aren’t going to go away. I don’t care what the views are on A.I. We’re always going to have people. And I think what’s going to go away, or what we’re going to find depreciating more and more, is the place, is the value of location, because you can work anywhere on anything, anytime. Borders are not going to matter materially when it comes to technology and the transfer of knowledge back and forth. So I think if we’re going to have a next disruptive process, it’s going to be in the depreciation of commercial office space that’s not serviced and then possibly an oversupply as people rush to create more and more serviced space. What are your views in that regard?

Jacob [00:16:32] I think you’re right. As you look at a commercial office, it is at a place where it has to change, it never really innovated itself. Everything on the face of the planet has been innovated except for these buildings that have, you know, the lifespan of a building is basically 73 years. The question I ask owners today is, are you ready for your building to last ‘til 2093? Or are you going to become obsolete in 2023? Because you need to think about your space as a workplace ecosystem and not just sign a long term financial instrument with a Fortune 100 company and call it a day for 10 years.

Frank [00:17:08] I think we’ll see a lot of commercial real estate just completely repurposed. Your company has been growing and has been growing very nicely, obviously, and appears to be doing very, very well. You have a different, little bit different, profile of your locations, it looks like, to me at least, than some of the other companies. But also, you have been very successful in bringing capital to your company, in particular from Emaar, who we both know is probably the biggest powerhouse in commercial real estate today as an investor. How did you specifically get tied up with Emaar and do you have plans for markets outside the U.S. and specifically in the Middle East?

Jacob [00:17:52] We’ve been focused much more on locations where we believe there’s enterprise demand and that’s been proven where in this past month we actually signed up a single occupier enterprise company for three of our locations in one month. And so we kind of saw that demand saw a different market and industry sectors and saw them take it up and then they sign anywhere from one to three-year commitments for those locations. So I’ve been much more focused on where is the demand from an enterprise perspective and where we’re going as we go forward, especially as we dive deeper. One of the things we do have to thank WeWork for in the last couple of months is a massive 180 pivot towards joint venture agreements with asset owners, which we always saw was coming. And as we go that route now, full speed, we are definitely much more targeted and doing less spec workplace environments and doing much more things based upon demand-driven environments where we’re working with an enterprise customer for a space in a location. So, but your next question was Emaar. So for those folks who may not know, Emaar is the world’s largest real estate developer based out of the Middle East. Their founder chairman is Mohamed Alabbar who is very connected. He’s connected personally to CommonGrounds. And so Mohamed has you know, he’s a very visionary man and he definitely sees the future of real estate evolving and changing and sees that the future of office needs to get to a place where it’s an activated workplace ecosystem that is solving for all of the things that there’s a lot of friction between supply and demand today, in office, and being able to bridge that gap to align both supply and demand’s interest in a way that can create profitable asset ownership, actually probably more profitable asset ownership than what they have today, the space will be worth more than it is traditionally as we go forward in the future. But aligning with what supply actually needs going forward, there’s a lot of flexibility, optionality, modern workplace alarms that are safe and secure for their people. And so our vision really aligned with Mohamed in how he looks at real estate, he’s way more visionary than myself. But he definitely sees that changing, as everything else is changing, around the world.

Frank [00:20:17] Well, you know, I’m curious, as I look at your company and I know, Emaar, as you’re aware, because of our own operations in the Middle East and in the Emirates. I look at your company and I wonder, have they invested in your company because they see you as becoming the future operating infrastructure for all of their larger commercial buildings in some way, or because they see you as a great independent company servicing a different market than they serve?

Jacob [00:20:53] There’s definitely a lot of vision in the plan there. And I think there are opportunities in both perspectives from what you said. Opportunities both in their own portfolio. You know, they’re a big believer in hospitality. And hospitality is a big part of the culture of office, mixed with things as a service, and how do you provide that for opportunities for growth for companies to grow, for people to grow and have those opportunities, as well as just looking at the way to completely disrupt the property services industry. I think everybody’s focus on coworking, coworking, coworking, and that’s disrupting office, really what we’re disrupting is the property services industry, which has been around forever. But it’s all about fixing the ceiling tile, it’s been about maintenance and repair and accounting has been a big piece of that. There’s never been really this hospitality and, you know, the workplace as a service piece, managing networks, and you’re thinking about different place products inside of that, thinking about events and programming throughout the building, thinking about the workplace ecosystem and how do people get to and from work. You’re thinking about their work-life in their day and what do they need to balance the work and life components of people’s lives. It’s been much more focused on the office. As you know, Frank, their customer for the last 50 years has been the capital markets and today — it always has been — but today they’re finally realizing their customer are people. And now that that’s come to light fruition, it’s still coming to light fruition for some owners, that’s changing how they have to think about their buildings.

Frank [00:22:26] Well, I think the current war for talent and the requirement for flexible work release programs that the human resources departments of the enterprise companies are demanding to be available, it’s really changing the whole way that the real estate departments and corporations are not necessarily making the decisions anymore. It’s the human resources departments that are demanding what type of product they want more than anything else. So I think you’re right, it’s the people. Which takes me towards the last question or two here. What strategic planning do you think you should do, and the industry at large should consider, for when the market goes flat? Or even retreats as it historically has? We’re on the longest bull run we’ve had that I can remember. Usually after six or seven years, we start to go the other direction. We haven’t, right now. When we do, it could be pretty extreme. What are your thoughts on that and what recommendations would you make?

Jacob [00:23:35] A couple of things, I think that’s why we need to have a massive pivot away from signing leases and it needs to become much more asset light in partnership with owners. And the owners, they’ve owned the assets forever and they have a lot more flexibility and agility when the markets do turn. And then we’ll turn and there will be bumps ahead for everyone, including CommonGrounds. But I think also, as we look at the industry, not only is it going to require a joint venture and managed partnership with asset owners, it’s going to require a focus on companies that are a little more anti cyclical or have anti cyclical dynamics happening to them today in a growth market…

Frank [00:24:19] And who do you think, who would typify that?

Jacob [00:24:23] So as we look at the different constituent groups who utilize flexible office, you can look at the independents, the individuals, they’re not going to withstand the recessionary period. You look at startups, a lot of them may not survive or they’ll go back to mom’s garage or Starbucks. It’s going to be the enterprise companies because they have a lot of other drivers. They’re driving them to think about real estate differently, that even in a bear market, it’s going to require them to think, to retain talent. They may not be hiring. They’re not going to lose the people that they have. They’re going to want to limit their upfront costs. There’s a lot of corporate debt out there that’s been rising. They’re not going to want to spend a lot of CapEx (Capital Expenditure) and sign long term leases when there is even more uncertainty. So they’ve been adopting flexible office and workplace as a service because the uncertainty has been, well, ‘we don’t know how fast we’re going to grow’. Well, the uncertainty going the other way is going to be, well, ‘we don’t know when this is going to change or correct. Why would I sign a 10 to 15 year lease and pour a couple hundred dollars of CapEx into the space when I have no idea what’s going to happen?’ And so there is going to be I think as you balance your portfolio, you’ve got to think about the constituent groups that are going to have a lot more longevity. And you look at the S&P 500, you know, those companies are not only surviving, but for 15 years now. So you have to also think about those customers who are going to continue to survive, not only this recession that we’ve been waiting for, like you said, for a very long time and we’ve been in this incredible bull market, but the next one after that and the one after that.

Frank [00:25:58] You know, if you were to advise a Fortune 100 company today on the future use of their office space, helping them to redesign the way they were doing all of their portfolio management, what would that advice look like, and how would you back up your advice? How would you give them data points, if you will, to say I’m right and here’s why?

Jacob [00:26:24] Well, it’s interesting. I actually had one of those conversations today…

Frank [00:26:31] Your secretary told me about that.

Jacob [00:26:34] So, you know, the conversation we’re having is about doing an HQ build type of product for them where we are going to design… we’re going to source, design, build, operate and manage the location for them.

Jacob [00:26:49] They’re a Fortune 100 company, very big company, and they’re looking for space for a couple of hundred people and they don’t want to sign a long term lease. And I actually began to pitch on this a couple months ago. They called me today to continue that conversation in a much deeper sense. And it was, you know, back as we looked at the pitch a couple months ago, it was, why would you sign a long term lease in this city at this peak in a market when you’re… this is a new department for you because your business is evolving, you’re getting ahead of that and you’re looking to have a few hundred people, but you don’t know how big or how fast you’re going to have a couple hundred people, and you might end up with a thousand people. And so how do you go about signing… a landlord wants a twelve year lease in this building and then you’re gonna end up putting about two hundred bucks a foot because that’s your programming requirement. How do you justify that to your board of directors?

Frank [00:27:49] No, it certainly makes sense. There’s no question about that overall. You know, we’ve always thought that a corporate enterprise group’s liability on their balance sheet in terms of years from real estate should match the life cycle of their employment base. So if their average employee base was five and a half years or six and a half years of their life, their balance sheet shouldn’t ever extend beyond that. And that kind of keeps things working.

Jacob [00:28:28] I think that’s exactly right. And you look at some of the companies that I’ve advised in the past, and we looked at different studies, you know, real estate, like I said at the beginning, you couldn’t lay off your real estate. We need to reverse that opportunity and trend where you can actually lay off your real estate before you layoff your people, because right now, if you sign long term leases, you’re going to lag about 36 months before you can actually restructure the real estate, sublease it, do something, get it off your balance sheet or the lease just simply ends. The average over portfolio is going to be about thirty six months lag.

Frank [00:29:05] No, I think that makes a lot of sense. Is there anything that you want to leave us with? Leave the group with, who’ll be listening to this? It’s kind of your opportunity for a little micro infomercial about CommonGrounds or anything that you want to close with yourself?

Jacob [00:29:24] I think it’s been a fantastic discussion. We’ve talked a lot about a lot of very interesting topics. And I’m interested to see how they play out and how CommonGrounds is a part of that over, not just over 2020, but the next decade. And I think that listeners who are listening to this, if you’d love to learn more, reach out to us. We’re definitely looking to innovate and continue to think about the workplace as a service model differently. And we’re always open to feedback and input on how we can improve upon it. Even asset owners, I think asset owners reach out to us if you’re thinking about how you should think about your building going forward in the future. It’s more than just, you know, coworking or workplace products. There’s events and programming that should be happening in your building, there’s a connection with technology to activate the building. There’s a connection to food and beverage and all of those different things to really create a true ecosystem for people to come and work every day.

Frank [00:30:16] Jacob, I really appreciate your time very much. And I look forward to exploring some other topics in the future.

Jacob [00:30:22] That sounds like a blast. Frank, I appreciate the opportunity and look forward to connecting again.