1. An Office is not a Coffeeshop. On Wednesday, Antony Slumbers and I joined The Real Deal's Hiten Samtani to discuss the future of offices. Hiten brought up a suggestion made by Steven Roth, the Chairman of one of the world's largest office REITs, in his annual shareholders letter:
It seems that several of the large New York landlords feel the need to be in the coworking business, each in a small way under their own brand. We ourselves are doing so as a service to our tenants... Here’s an idea – wouldn’t it make more sense for the largest New York landlords to get together and co-own and operate one coworking brand with one management team.
Steven Roth is a legend and I have immense respect for him. But the comment shows a failure to appreciate the scale and scope of the challenge that landlords now face.
Space-as-a-service is not some sort of side business. It's not some new amenity — like a coffee shop that tenants suddenly expect to see. Creating a consumer-focused brand that provides flexible, furnished, serviced space is becoming the core business of office buildings. This is true regardless of whether the customer has one employee or one thousand; whether they plan to use the space for an hour, a month, or an indenfinite period of time; and whether they need it to be fully furnished, partly furnished, or not furnished at all.
It's a new game. Treating it like a sideshow that you and your competitors can partner on is a failure to understand what game you're playing and what is required to win. It also shows a reluctance to even try to win. We need to do something new? Let's all agree not to compete on it and go back to whatever it is that we were doing before. It's not going to work.
That said, I am not arguing that Vornado should necessarily build a flexible office brand on their own. Quite the opposite: I think they shouldn't even try. If office space is becoming a hospitality business, then landlords should look at how hospitality buildings are operated. Hotels have an owner that supplies the building and is in charge of developing or renovating it within a certain budget and schedule (a worthy challenge in itself). Hotels also have a branded operator that brings in customers and makes sure they get what they paid for and want to come back.
Most landlords should start partnering with operators that know how to handle the new aspects of the business of office. Some landlords can try to launch their own brand, and even then they should probably partner with other operators on some locations.
Most landlords don't need to do more. They need to do less. At the moment, they are (happily) dealing with the asset-facing side of the business and (reluctantly) dealing with the customer-facing side of it. Let someone else handle the customers. Share the revenue. Everyone will be better off for it.
And if you want to become a real space-as-service company, do so in earnest.
2. But Coffeeshops can be Offices. The above discussion brings to mind an article I wrote a couple of years ago about the opportunity for Starbucks to monetize its tables, its WiFi, and its bathrooms. Back then, I recommended Starbucks to have a chat with Spacious and figure out how to start taking bookings from people who only want to sit and work.
Since then, Spacious was acquired by WeWork, and then shut down by WeWork following the unicorn's IPO-pocalypse. But the idea behind spacious is more relevant than ever. Retail and restaurants in great locations are emptier than ever. And employees need somewhere to work, away from the office but also away from home — more than ever.
3. WeWork drops the C-word. Community? What community? Our business is flexibility! Sandeep Mathrani, WeWork's new CEO spoke to CNBC and insisted that social-distancing-at-the-office should not detract from the company's value proposition. Apparently, people don't come to WeWork to mingle with other people; they go there to work and avoid a long lease.
In October last year, I wrote about what WeWork needs to do in order to move on from the Adam Neumann era.
Time to say goodbye to “We”, the company that aims to encompass its members' whole lives. Instead, back to WeWORK, a company that provides office space-as-a-service, at a competitive price, in great locations, with streamlined processes and great customer service.
Ironically, community might be more important now. People who want to work can stay at home, but they still need to go to an office to meet new people and absorb their company's culture. And flexibility is something that traditional landlords are going to be much more, er, flexible about from now on —either mostly because they'll have more empty space to "experiment" with.
⚠️ And while we're on the topic of office: Next week, Antony and I will kick off our new online course focused on the future of office. The first cohort is diverse in every possible way and includes managers and executives from around the world, working in companies such as JLL, IBM, Morgan Stanley, CBRE, Splacer, Yardi, to name a few. If you are building / designing / operating / marketing office or meeting space, please consider joining us. More details here.
4. Hard lessons. California State University System (CSU), the U.S.'s largest 4-year college system, announced that classes for Fall Semester (Sep - Dec, 2020) will be conducted online. This is bad news for the university and bad news for its nearly 500,000 students. It is also bad news for student housing developers. Beyond the domestic damage of Covid-19, many universities will also suffer from the drop in students from China over the next few years.
Student housing has been one of the hottest real estate categories of the last decade. Its growth was driven by institutional investors who moved beyond traditional offices and multifamily to more exotic niches in search for higher yields. Higher yield generally means higher risk.
Source: CBRE (if you don't see the chart, make sure your email reader is allowed to download images)
The U.S. currently has only one publicly-listed REIT focused exclusively on student housing. The share price of American Campus Communities is down 40% over the last 3 months. At the same time, SL Green, NYC's largest office landlord, is down 50%. Perhaps student housing was not as risky after all. Or maybe it's time for brave investors to buy some office REITs and short student housing. (either way, this newsletter does not provide investment advice!)
5. Outsourcing the city. The CEO of Common had an interesting tweet about the salary prospects for remote workers in a post-covid world:
Everyone crowing about a permanent remote future where they live in Boise but earn their current NYC/SF salaries is gonna be real pissed when they discover they'll live in Boise but earn Manila/Bucharest salaries.
— Brad Hargreaves (@bhargreaves) May 14, 2020
To rephrase, Brad is pointing out that remote work is a double-edged sword. It allows employees to avoid the office and live wherever they like. And it also allows employers to hire anywhere, which will likely put pressure on jobs that can be performed by those living in developing countries.
He's right. But there are two caveats:
Jobs and tasks that can be outsourced to a cheaper country will be outsourced regardless of whether residents of expensive cities choose to work from home.
If you're not in NYC, you don't need an NYC salary. Many people will realize that making, say, $120k/year and living anywhere on earth is more attractive than making $240k and living in NYC.
To expand on that second point, I don't think many smart and creative people will leave NYC becuase of Covid-19. I think Covid-19 made many smart and creative people realize that NYC is just not worth it.
Something in the cost-benefit analysis no longer makes sense. And not only because many people can work remotely. But also because the city itself no longer maintains its own side of the bargain.
Crime is going up. Public transport is deteriorating. Housing costs are skyrocketing due to lack of new supply, especially around existing public transport stations. The streets are less pleasant and less safe to walk in — notwithstanding a few cool experiments that are pedestrian-friendly. And that’s before Covid-19.
I am using NYC as an example but the same is true for many other cities in developed countries.
What I am trying ot say is: Cities can still be great and attractive, especially for smart and creative people who can live anywhere they like. But they have to step up their game. Saying that they're too old, or too big, or need more money is a poor excuse. If Tokyo can be clean, be safe, walkable, have reasonably-priced housing, and have incredible public transport — so can New York. More on this, soon.
6. Bonus Content
📺 "Landlords: Don't eat before watching this!" A video and article in The Real Deal in which Antony Slumber and I chat with Hiten Samtani about the state of present and future of office market.
👓 Who needs rent? 2.5 years ago, I wrote a piece about how new sensors and cameras will make it possible to monetize the data collected in homes and offices and, sometimes, even subsidize rent. If you haven't read it, it's now more relevant than ever.
🖥 The Office is Dead! That's the title of a well-written Marker piece which includes views from various people in the space, including yours truly.
🎧 I was on the GCUC Podcast to talk about the evolution of coworking as well as the evolution of my own career in real estate and beyond.
🎤 On July 1st, I'll be giving a virtual keynote at Relevation, a (virtual) conference focused on connecting European Proptech startups and international investors. If you're a startup or investor — you should register.
If you are building a new city, a new building, a new planet, or a new startup focused on cities or buildings — please consider reading this book.
If you're investing in real estate or urban technology, definitely read it.
If you already read it, please take a moment to leave a review on Amazon.