229. The New Rules of Engagement for Coworking Spaces - Your Real Estate Structure

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229. The New Rules of Engagement for Coworking Spaces - Your Real Estate Structure

00:00:01 Welcome to the Everything Coworking podcast, where you learn what you need to know about how the world wants to work. And now your host co-working space owner and trend expert. Jamie Russo. Welcome to the Everything Coworking podcast. This is your host. Jamie Russo. Thank you for joining me. You are joining us for an episode that is part of the series,

00:00:38 the new rules of engagement for co-working spaces. This episode's topic is about questioning your real estate structure and considering what's possible. So my guest on this episode is Michael Abrams. Michael's been on the podcast a couple of times talking about management agreements. So Michael has a long history in real estate and Coworking and works with folks who are trying to create some creative partnerships with their landlord.

00:01:09 So he always has some good case studies to share and a good pulse on the market. And so we're talking today about your real estate structure and how you might think about it differently. Going forward into 2022 and some creative ideas you might work through with your landlord to share the risk and share the reward of the model. As the environment starts to shift and landlords have more space that's open.

00:01:37 So I hope you enjoy my conversation with Michael. As we mentioned in the podcast, Michael and I host a course called creative Coworking partnerships, and we open it in a cohort model. You can register it for it anytime, but we like to run Q and a sessions in cohorts because we think the group calls are a way more fun. And B you learn a lot from what other folks on the call are pursuing what they're experiencing both good and bad.

00:02:08 So the next cohort will open January 13th, which is right around the corner. So the link is in the show notes. If you're looking to register, it should be at Everything Coworking dot com forward slash management agreements. And speaking of show notes, we added a podcast index to the website. So if you're ever listening to a website and sorry to a podcast,

00:02:34 and we say something about the show notes, and you're like, well, how do I find those? They're generally labeled with the podcast number. Also the show notes. We I've started putting links. If you open your podcast player, particularly apple podcasts, hopefully the links are in all the players, but you can open the episode details and find the links right on your phone while you're listening.

00:02:59 So if you ever hear us reference something or you want to know more about the guest on the podcast, all those links most recently should be in your podcast player. But back to the website, if you're ever looking for a particular episode or details or transcriptions, there's a big link on the website that says podcast. And if you hover over that, there's an episode index.

00:03:21 And that is the easiest way to find back episodes that are more than a few weeks old. The ones that are a few weeks old show up right on the homepage. But if you're looking for something older, use that index that you can find right on the homepage. So hope you are all doing well and rolling into the end of the year and without further ado.

00:03:41 Here's my discussion with Michael Michael. Thank you for joining me today. Thank you, Jamie. Although we buried a Pleasure, we've been catching up for like an hour because it's so fun to talk about everything that's happening in the industry. It is. So we're going to talk about management agreements as I like to do with you. So you and I both were guests on the Office,

00:04:08 RnD flex world, the conference, which was a few weeks ago now. Yep. Yeah. So you talked about management agreements and I got to kick off and talked about how everything's changing the new rules of engagement. And one of the sort of things you should question is your real estate structure. So there are, and I'm curious, I have so many questions for you.

00:04:32 We're going to talk about what's happening out there in terms of creative partnerships, creative agreements, they might be a management agreement, might be a rev, share how to get them, how to identify them, kind of an update cause you and I chat about this. You've been on before. We'll put the links to our other episodes in the show notes.

00:04:50 And we should mention, we have done a course together called the creative Coworking partnerships and we're kicking off our next cohort January 13th. And we like to do cohorts. Cause we like, we like the groups you can learn from what other folks are going through. We have folks in the cohort now who are working through deals and asking great questions, but we'll put the link in the show notes because you can join any time.

00:05:13 But our next live cohort will kick off January 13th, 2022. We're getting there. Totally. Okay. So one question that I had for you, which is maybe starting in the middle, is it a good time to be thinking about a management agreement or is it a good time to get a deal on a lease? Good question, Jamie. So there's, there's no simple answer to that.

00:05:43 It obviously has to do with the operator, what their experience is, but look, let's face it. There's more landlords that are now intrigued about Coworking and flex office. There are operators out there that are doing extremely well and they want to expand. And the third component, probably the most important component that's driving this demand. It's, it's the companies and if the occupiers of the space.

00:06:15 And so that's, what's forcing landlords to think twice, three times about the value of that long-term lease. So there's so much activity now, but as you and I both know, when we discuss this all the time, it's finding the landlords, that number one are willing to engage. Whether it's an operator, whether it's a broker, whether it's just,

00:06:49 they want embrace it, they want to learn about it. And then, you know, we have the other conversation, which I've heard on your other podcasts about the brokerage community, because initially the brokerage community, like they felt alienated. Like they weren't invited to the party, but in reality, we know that they're working hard to bring in deals, especially enterprise clients.

00:07:15 Look, we know that recently we work engaged JLL to do their leasing, to help them on leasing. So it's clear that, you know, there is an opportunity for the brokerage community, but like everything else going on, it's new. So people have to understand, you know, while you, and I know it because we live it 24 7, not everybody else knows flex and what it offers.

00:07:45 And that's, you know, to me, that's the challenge. It's, it's getting out there and getting noticed whether it's about a brand, it's really about education, more than anything. And I see this, this transition is going to happen between now and 20, 22. And most recently somebody asked me, so where are we in the process? I said,

00:08:10 you know, I'd say we're in the top of the second inning. We're already at flex 3.0, it's evolving. But at the same time, there is so much more growth and opportunity out there. We literally have just skim the surface. Like Jamie, what would you say? Maybe 2% of the office market is flex? No, it is. That is the national or north America.

00:08:41 It might include Canada average. It's higher in some major markets. It's 2%. Yeah. I mentioned the ULI group that I spoke to recently and Jim Hyde, we're gonna have Jim height on the podcast in the next few weeks, but I gave them that stat. It's so small still, but the, in the awareness, and I mentioned to you in our pre chat that I was talking to Sam Rosen from desk pass,

00:09:07 and he said, they're getting leads from occupiers who are just Googling. And he's like exactly, to your point. They don't know all the things that we know. Like they just, you know, they're sort of finding solutions on Google and they're investigating, there's still so much education to be done. So wait, so back to my question about the lease before we go,

00:09:30 do you think, and it relates to your comment about the inning that we're in. I wonder, are we still very early stages around good lease deals? Because there are so many occupiers that are still in leases that maybe they'd like to give up, but the lease isn't up for three years. So commercial occupancy is sort of inflated or sort of not reflecting what it might look like as Lisa start to come up and folks look for alternatives.

00:10:03 Yeah. You know, and it's interesting because it's not only the vacancy, there's a sublet market out there. Yeah. And sublets can be tricky if I'm trying to open a coworking space. I don't know if I want sublets space. It'd have to be like move in, move in ready? Because the economics are tricky unless that's an, do you think a landlord with sublet space is a good opportunity to convert to a management degree?

00:10:30 It is a lot of it will depend on how long is the term left on the sublease agreement. And if you can work out a deal with the landlord, knowing that when it comes up, you can continue to operate in that space. Yeah. You know, look at the end of the day, landlords do what they feel comfortable doing. And that is long-term leases.

00:10:58 And, you know, during the pandemic, we, we were exposed to the vulnerability, flex operators, signing long-term leases. But at the same time, landlords were dealing with the, that these traditional leases from occupiers. And it was not flex operators, but typical tenants. And they were defaulting as well. Right. So, you know, don't just blame it on the flex operators.

00:11:28 It's really, the office sector is going through a transition right now. And it's clear, you can't make broad statements about any given market because you know, I can go into whether it's downtown Washington, DC, Philadelphia, New York, San Francisco, Chicago keep naming the major cities. And while everyone who got into flex from the beginning, they all focused on the urban cores for obvious reasons.

00:12:01 And now with remote work and a lot of companies embracing hybrid work schedules. Now all of a sudden people don't want to take that long commute into the city. Now everyone wants to be closer to home. As we, as we now labeled it, 15 minutes city, everybody wants to be in the suburbs or better yet. We have, we have great small towns.

00:12:26 It doesn't matter whether you're in Columbus, Ohio or Richmond, Virginia, the commute time is, is nominal. And people will go down there because it's, it's easy and it's accessible. And you know, these, these, these areas are now booming throughout the country. I mean, look at what's transpired in and out of all, places, Bozeman,

00:12:49 Montana and people, you know, now that people are working remotely, they want that. They love that quality of life. And in the suburbs, people are, you know, they're signing up deals left and right. Private offices, open desks. I'm seeing this, I'm a coworking operator looking to expand and I want, and I'm interested in doing a creative partnership with a landlord.

00:13:16 Are the landlords in the suburbs open to deals or is there so little, I mean there, are they struggling to fill their space or is there like, I mean, we're still so close to the pandemic. We're not, you know, we're not really Out from it. We are at My, my initial thought. I think about the students in our course.

00:13:43 And it feels like we're getting folks who are doing deals, who are in smaller markets, more entrepreneurial landlords. And yet I think we're all more optimistic about smaller markets than CBDs, but the CBD is where there's there's vacancy. So, so if I'm an operator looking to expand, am I w where am I going? Is it easier for me to get a creative deal outside of a CBD because there's more entrepreneurial landlords or are they doing okay on their own and not looking for opportunities?

00:14:15 So if you happen to be an operator and you know, you have one location and you're doing rather well, you can clearly parlay that success in that same geographical region with, with a landlord. But, you know, to your point, just because you're in the suburbs, does that mean that that landlord is going to be more open to it? I,

00:14:45 you know, right off the bat, I would say the answer's no. However, I think with what has transpired landlords and their internal teams, clearly now they get it. They understand it. They're asking questions. They haven't embraced it yet. Not, you know, not everyone's embraced it Early in the change management process. It is Like, you know,

00:15:12 it's, it's, it's not the landlord or the operator that's driving the demand. And I think everyone needs to understand that it's, it's the occupier. And now the occupiers one flexibility. And not only do they want flexibility, they, they want a better workplace experience. And, you know, I've always told you having been a developer and a landlord in the retail world,

00:15:40 you know, we saw this change occur over a 15 year period on how consumers buy products. So now, you know, fast forward to today and the pandemic has clearly accelerated this process. Now we're looking at how we will work in the future and you know, you and I spoke beforehand, we had almost 6% of our workforce leave their current jobs.

00:16:07 They vacated their jobs in September and October. And people don't want to make that long commute. They're shifting jobs where their new employers will embrace a hybrid work schedule. They, they, they are willing to work longer hours, but under their terms. So I saw it, maybe it was a LinkedIn post. It was there. It was about LinkedIn saying that if you,

00:16:35 I think if you're looking for a job on LinkedIn, you can set a preference in your profile about right. Whether you're willing to maybe you posted it work remotely, or yeah. So just that mindset is shifting. So, which sort of leads us to your point about landlords being open to creative partnerships. You started to say, before we hit record your conversation with a landlord,

00:17:01 their preferences, a 10 year lease. Yup. Yup. They, they, they, because that's what they know about value. Whether their, their exit strategy is to sell it or whether they're to refinance it. They're thinking about how do I establish value? What a lot of landlords don't know. And I don't know why they don't know this, but many,

00:17:28 many landlords have refinanced with flex office. They've sold buildings with flex office, underwriters and lenders today are so much up to speed on from the technology to the business platform. And they're not discounting flex because of its short-term nature. It's similar to hotels and apartments they're giving. I think that's more the case, but still challenging. I still have operators who say they can't get an SBA loan because they think it's passive income.

00:18:09 There's still it's. And, and, and to a certain extent, it's, it's only passive income to the landlord. It's not passive income today. No, everybody listening is like it. You know, no, it's not. There's nothing passive about this business. And, and, and part of the issue with landlords is understanding that it is a business and that,

00:18:37 you know, that business has people that work there there's events there. I mean, I mean, think about it As opposed to doing it on their own or partnering and everything. I had this conversation recently with another landlord and most of their buildings, they don't have enterprise groups. They have small tenants, whether it's accounting lawyers, media consulting, real estate companies.

00:19:07 And I said, imagine a floor. This guy had his group had 30,000 square foot floor plates. I said, when you accommodate each one, if there are 20 companies on this floor, that means you're doing 20 different kitchenettes. You have demising walls. I said, think about it. And the meeting rooms and the right take down the wall and efficient.

00:19:33 Yeah. I mean, yeah. Like, like you, like, if it was built today, you could fill those spaces up. Like you could create a community and, and you know what occupiers love the engagement with other groups, you know? And on top of that, the way the pricing model is landlords benefits significantly with greater value. And you can get those same tenants in,

00:20:02 at less cost Cause even a spec suite, to your point, every, you know, it's just like repeating kitchenette meeting room, workspace, kitchen. It's so inefficient, So inefficient. And when you centralize it, I mean, think about it. Like you have the central cafe, it's almost like you, you, you have a small restaurant within the space,

00:20:26 you know, and you have events there and you know, you, you can satisfy catering events and things like that. And it just, you know, so many landlords, they, they just, they don't get it yet. And they will, I think it takes time. And, you know, I have to say this because we went through this and we are still through this in our country.

00:20:48 There's a lot of misinformation about the flex industry and how it works and how landlords can benefit how brokers can get involved and how operators can expand. And, you know, this is the downside of social media and the various platforms. But I do, I do believe there's gotta be a platform where, whether you're an operator, whether you're a broker, whether you're a landlord,

00:21:21 so they can go to whether it's through the industry associations, but there needs to be a reliable source of information. Because I think that's part of the problem right now is there's just, there's too much content. Some of it good, some of it not so good, you know, we discuss about, there's so many different software management programs out there.

00:21:46 You know, look, the great thing that we we know is, so few buildings, such a small percentage has flex in it. And landlords, you know, they haven't figured out that flex, it doesn't compete with traditional leases. It compliments traditional leases and it literally reactivates a building. I mean, you talk about bringing people in people are, it's the source of income.

00:22:17 You know, they need to eat, they need to work. They need to sleep. They need to congregate. And they love, they love events. Then they love engagement. We're, we're, we're creature in that. Yes and no. Anybody listening will say, wait, only 20% of my members actually come to my events. So there they love access to,

00:22:38 and they love the optionality of what's happening in a space. And you're right. Not, not every, you know, not every member once that engagement, they just want to do their work and leave. But that's the great thing about flex office. And it's also, it's like it's aspirational. I mentioned there was a woman that I met at the ULI event and she has a space in a larger commercial setting that has a bar.

00:23:09 And she said, she always tours prospective tenants through the space and they see the bar and they picture themselves in it. I think it opens onto a rooftop deck. They picture themselves having great happy hours with their teams and she's like, they may never do it. They love the idea of it. And it's so compelling. And she said, it makes such a huge difference on her tour for other tenants in the building.

00:23:32 So I'm wondering if, what you're saying is landlords are understanding that the world is changing. They still prefer a 10 year lease, but you said, your question to them is how likely is that to happen? And so they had to get real about that, but they still don't necessarily understand the model and how to actually execute or how to partner, which is yes,

00:23:56 we're trying to help with that. We have some landlords that have enrolled in our course. So they're, you know, we help them get kind of really into the weeds on what it looks like to partner, what it looks like to run the model, but there's still a lot of education to be done. And one thing I see in our course is that folks who are getting things done pretty quickly are doing it with a landlord that they already have a relationship with.

00:24:19 Yep. Yeah. Yep. Yep. But you're working on other deals. So you mentioned one, we won't mention names. Is it a landlord that they had a relationship with or was it sort of a cold? It was cold because the existing operator has a lease that's expiring. And one thing that we are seeing that a lot of operators are aware of is there's a lot of former flex spaces that are sitting vacant,

00:24:53 former Regis spaces I'm working on are where we're taking a Regis space over and, you know, converting a Regis space to a modern day workplace experience. It's not the easiest task. However, the caveat is we can transform a space into, you know, the 20, 22 version of flex 3.0, it's got existing demising walls. So we can re we can reduce the cap X expenditure and transform that space.

00:25:28 So to me, that's the most exciting thing out there, but look in, in Washington DC, there's one landlord who lost. We work as a tenant and they decided, you know, after, after, you know, they realized the risk and the loss, they picked up the pieces and they created their own brand. You know, they, they get to start a brand with three spaces already fitted out.

00:25:58 So, you know, you know, they could have gone the other way and brought in another operator, but they decided to do it themselves. And they, and they, they created a team to do it internally, which to me is great. And as long as you understand the business model, the lead generation to the it component to all the other various factors,

00:26:24 you know, that's, to me, that's great, but not every, not every landlord gets, gets to, you know, gets to take over a vacant we workspace. Yeah, No, not very many. So the deal you mentioned with the group that with the lease they're shifting into a management agreement is that space and existing flex space, are they doing a fresh build out?

00:26:52 We're doing it's, it's an existing, what's a former Regis location. So yes, there will be a new fit-out new cafe area, quite large, and really, you know, bringing in a new design team and a totally new workplace experience that provides all flexibility from small users to teams, the conference facility, the whole nine yards. Hey, I just wanted to jump in really quickly before we continue with our discussion.

00:27:27 If you're working on opening a co-working space, I want to invite you to join me for my free masterclass three behind the scenes secrets to opening a coworking space. If you're working on opening a coworking space, I want to share the three decisions that I've seen successful operators make when they're creating their Coworking business. The masterclass is totally free. It's about an hour and include some Q and a.

00:27:52 If you'd like to join me, you can register at Everything Coworking dot com forward slash masterclass. If you already have a coworking space, I want to make sure you know, about Community Manager, University, Community Manager, University is a training and development platform for community managers. And it can be for owner operators. It has content training resources, templates from day one to general manager.

00:28:18 The platform includes mini courses that cover the major buckets of the Community Manager role from community management, operations, sales, and marketing, finance, and leadership. The content is laid out in a graduated learning path. So the Community Manager can identify what content is most relevant to them, depending on their experience and kind of jump in from there. We provide a live brand new training every single month for the Community Manager group.

00:28:47 We also host a live Q and a call every single month so that the community managers can work through any challenges that they're having or opportunities get ideas from other community managers build their own peer network. We also have a private slack group for the group. So if you're interested in learning more, you can go to Everything, Coworking dot com forward slash Community Manager.

00:29:11 So in terms of identifying that landlord where they kind of on the lookout for, oh, that Regis is going out, I'm going to go find the landlord and have a conversation. What did that process look like? So Redis had already left. They, they had several locations in the city. They, they left a few of the locations, this one,

00:29:32 they happened to be there. And this, this is great news for everybody out there, Redis operated that space for over years. Yeah. So, so, you know, so to me, obviously having Regis in almost any market, it's like, it, it, it justified It validates. I know we talked in our pre-chat about somebody who had opened in a market with no Regis.

00:30:00 And I said, that sounds like a bad idea, But look, look at the end of the day, I mean, a Bigger market, right? I mean, Regis is not in every market, but they've, they do a significant site selection process. So they validated demand. Yeah. Yep. They do. And, and they do it well.

00:30:16 And like we chatted earlier, you know, depending on what market you're in, it's possible that at the end of the day, a long-term lease might provide that arbitrage. But you know, the risk is different. And operators need to understand that risk and landlords clearly understand the risks because they always want for the most part skin in the game. And you know,

00:30:45 that skin in the game comes from a variety of different levels. But at the end of the day, you still have to overachieve market market rents, Curious the Regis takeover, the operator, I'm assuming it was an underperforming Regis. And that's why it closed. I would say I would suspect. Yes. So this operator with the lease expiring, and it's going to take over the Regis location,

00:31:11 they think they can outperform. So one of the reasons why this operator wanted to relocate is because the space that they've been in and by the way, they were, they were operating in our current location for 20 years. So their lease was expiring the spaces, small, the spaces, their space doesn't have the community space or the collaboration spaces that we are accustomed to seeing in today's flex office locations.

00:31:41 So for them it's an upgrade, but it's, it enables them to take their business model to another level. And because this building that we're relocating to, it's a better location, larger floor plates, ironically, it has significantly greater vacancy. So I see the opportunity if they are successful, they can potentially expand to, to, to another floor. So why did it not work for Regis?

00:32:16 I'm guessing it was old and tired. And they probably did because of what transpired during the pandemic, they probably saw other locations within the market that were stronger from a longterm standpoint. So they're optimizing, but this new operators going to take advantage. So the landlords supporting some update, correct? Yeah. Okay. I mean, I think that's the interesting opportunity here.

00:32:42 It's like, there was so much baggage for one operator that they sort of said, we're going to let this go, but another operator could come in and sort of start fresh with the landlord and say, okay, let's put an investment in. Here's what we think we can achieve and sort of start over and have access to that TBI. Whereas the tenant that was in there before for better or worse,

00:33:06 just can't get that out of the existing landlord and they have to leave. And so we may have operators who are, unfortunately in the, we have to leave camp and somebody else is going to come in and sort of start over, you know, the new girlfriend or then you know, the attention and the investment and all those things, which, yeah.

00:33:27 So there are some winners and losers. So that's, that's an interesting, but we always talk about like, how do you identify landlords that are open-minded and it's right. Okay. We'll look around who's, who's going out of business and where their where's their space. Because for that landlord to convert that location is a major investment. If they wanted to create it for another use case,

00:33:49 and they may just not have the taker 20, you said 20,000 plus square feet. Who's taking that right now. Not a lot of demand for that. So here's the interesting phenomenon, even for all independent operators out there, their first location, for the most part, I'd say 95%. Tell me if I'm wrong, probably have signed a lease in our first location.

00:34:10 Yeah. And you know, the first thing I ask is how many conversations have you had with your landlord? And they all say little or none. Exactly. So, you know, and I say, have you reached out to your landlord? They said, they're scared to death of the landlord because the landlord like this big, bad bullet, A hundred percent,

00:34:35 and the landlord's got the piece of paper with the personal guarantee on it. They're very intimidating. Yeah. I said, look, but you know, you need, you need to have that conversation. Like you need to reach out with the landlord and say, Hey, this is what I'm doing. Cause if, if every, every independent operator, at least that I have,

00:34:56 that I've worked with recently over the last six months have all told me, we're now profitable. We're making money. We are growing. Our leads are coming in. We're completely filled up. We need more space. I said, so what are you doing to accommodate that, that demand? Well, we're looking for another location I said, but maybe that location is under your nose.

00:35:21 Maybe it's in the building. And like, oh, I didn't think about that. I go, you have a landlord. I go, imagine if you could provide additional income to the landlord, why wouldn't he consider that? Like, what if you had members that wanted to grow and you can accommodate them, but oh, maybe somewhere they could be accommodated somewhere else in the building.

00:35:46 Like everybody wins at that game. Yeah. I mean, you and I talked about this too. There I have members who are doing this. They're, they're getting leads for larger requirements and they can't accommodate that in the space that they have. And it's riskier to go take on a lease, you know, to, to do team suites or to take,

00:36:09 do 20 person requirements. Right. What if it doesn't fill up, but if you have the lead in hand yep. You own it. You own that lead. And so you can go do the deal with the landlord and do a rep, share it for X number of years. You need the, the occupier to commit. Right. But they,

00:36:27 they might commit for a year or two and the landlord can do that. And we talked about the fact that oftentimes those larger requirements don't need 30 offices. They need team space with some meeting rooms, with some private space, with some phone rooms and you can do that. And you can give them the meeting rooms, the events, space, the whatever,

00:36:46 with your existing space in the building, which is a huge advantage. Yeah. You take advantage. And, and so many people just, you know, they don't even, they don't even think about that. It doesn't even come in their thought process. I think because operators think of low of expansion as like, I need a new footprint elsewhere. Right.

00:37:05 And, and you know, so here's the other dilemma that, you know, people don't necessarily talk about. It's, it's the timing issue. Like when a member comes to you, like they need it now. Well guess what, there's nothing available now. And in order to engage from the landlord to the operator, to the occupier, it takes time.

00:37:28 So it's really about landlords with vacant space. Like w instead of the, the space just sitting vacant, like create that flex right away. Like totally, Really, really bad. Again, there are buildings cause you and I there's, you know, there are operators whose buildings are at a hundred percent. There's no space to expand, but if you're in a building that's not there,

00:37:55 your landlord is probably not getting leads, but you are. And if you were a little scrappy about it, you could write, talk to the landlord. Is he open minded? She is, she open-minded. And then go after some of these larger requirements that you would never have thought to go after, because you don't have room for 20 people. That's right.

00:38:15 And you could do it on a, on a rev share basis. So there's no risk to you. You just handle the contracting it's as if you're sort of broker operator. Yep. Yeah. Yeah. I mean, you and I are seeing this, you know, all over the country, as a matter of fact, you take it to the next level and it's like,

00:38:35 operate our, excuse me, landlords are now dealing with this increased operating expenses on every line item, you know, because of supply chain and inflation, like everyone's trying to get ahead of it. And the answer for the landlord is right under their nose. And they just they're, they don't say it. And the operators don't see it. And, and it's up to us to make that connection for them and try to find that,

00:39:06 that, that language, that middle ground, that everyone understands where you're creating value for the landlord. And you're accommodating flexibility for all the occupiers. It's great, but, but not a lot of people are doing it. And you know, it's really about, it's the education. It's about the understanding of the elements and the business model. And, you know,

00:39:35 I think we're going to see more happening in 2022. I think we're going to see this huge surge and demand my only caveat to everything that we're saying. It's, I think it's the obvious that nobody's talking about, but it's happening in Europe is there's another surge going on and I hate to be the bearer of bad news, but yeah. Yeah. You know,

00:40:06 I mean, so the irony of that is what that would do. It would only increase the need for future hybrid work schedule and increase the demand for flex. And so that's why I think there is such a high demand because time and time again, we are able to in, in every single one of our locations, as long as it's the right size,

00:40:39 we, we can overachieve market rents through flex office. It's that it's, you know, it's not as simple as it sounds, but the platform just makes it make, it makes so much sense. Look, I have to, you know, I got to compliment the guys that are out there that are leaders of the industry, you know, from expansive,

00:41:05 who started as, you know, God, what w what was their next level level? Yeah. Yeah. I mean, you know, they've, they've, you know, they own the asset and they have the flex and they can accommodate enterprise groups. And, you know, I mean, it's, it's not easy to do. It's a different capital structure,

00:41:30 but it's about controlling destiny of the occupants. When you, when we, you know, we talk about the grade of partnerships, it's a true partnership. It's, you know, every landlord's like, I wanna, I wanna convert the management to Elise. And I said, why? And it's like, well, I want to be able to finance the building,

00:41:52 or I want to sell the building. I love when you mentioned that you were like, well, it's kind of weird thing. They think they want to convert it to the lease, which it's like hard wiring for them. Right. Because you look at the numbers to your point, there's a formula. And when it works, it works. Yup.

00:42:09 And you can achieve above market returns. And if the landlord looking at that rationally, you think why on earth would you want to convert it to a lease and reduce your cashflow? But it's so hard wired that like, it must have lease must have leads to F you know, the banks and the, so yeah, that'll be an, that will shift over time,

00:42:32 but it's still, Yeah, it will end and slowly the institutional clientele, you know, from the publicly held companies to, you know, major insurance companies that own a lot of real estate throughout the country, they're slowly getting it and they understand it. And it will be a transformation for the office industry, because the clear need for this whole workplace experience,

00:43:05 it's about hospitality. It's about the community. It's, you know, it's all the buzzwords that we talk about. But, you know, when you look at this synergy of all the components, it's greater than a traditional lease and that, you know, that's the word that's got to get out there. The traditional lease it's it's flat line, and it works until it's not working.

00:43:30 We saw what transpired with the pandemic. You know, clearly the flex operators were vulnerable to, but if you have a management deal, you don't have to deal with that unwinding. It's still there. If you're in a, if you're in the suburbs and you, you have, you know, we have another surge, you know, we've gotten used to this,

00:43:53 to the point where, you know, land landlords and operators are becoming more and more accustomed of security, safety, health concerns. And, you know, we're getting, you know, it's been a tough road, but we've learned we've learned a great deal. And having private offices will, oh, well, it helps the whole equation, even better,

00:44:16 The whole equation. And the easiest way to do that as to partnership with the landlord where they're putting the, the capital investment, because that's the, always the trade-off, the model looks really good with more private space, but it's expensive to build. Look, I mean, there, there's so many different investment objectives that landlords are considering, but when we look at large deals specifically that require a cap ex in the millions,

00:44:49 whether it's a million, 2 million, we, you know, under a traditional lease, they're not getting repaid on that cap. Ex the only repayment they're getting is based on that lease, it's covering operating expenses for the building, and then there's extra cash. When we structure the partnership deal. The first out priority is the cap ex I know, I feel like we can't say that too many times,

00:45:21 because I even forget that sometimes about how important it is. It is the Mindset of the landlord. It's like, look, the whole goal is we're paying you back first for that build out. And the landlord is financing. It, the landlord is the bank, but they get paid back. So for the operator, again, there are trade offs,

00:45:38 which we talk a lot about in the course, but yeah, exactly. Whereas in a traditional lease, it might be five years before they, or more before that's even paid back in their cash flowing Right now. Now, granted, you also have to remember it, that's all predicated on the revenues that are being generated within a flight soppy space, Right?

00:45:58 It has to work. Yes, yes. So, so it has to work, but look, if, if you can accommodate that financial risk that the landlord is willing because when we do a management deal, we're basically budding a hundred percent of the financial risk on the landlord. Yep. So there's gotta be some give and take and, you know,

00:46:22 that's, that's, what does it, that's what wins them over. I mean, you got to show, you want to show that premium above and beyond the market rents, whatever that is, but look your, your, your lease up time period, you know, that's, that's a situation where the landlord doesn't have to give up free rent, you know,

00:46:45 in a lot of cases today in these urban core markets, you know, you're, we're reading about how the leasing activity has increased. Well, if you're a tenant and you have all the leverage, why wouldn't the increase activity occur, it should occur. I mean, w you know, the pendulum swung, you know, in 2018 and 2019, when flex off operators were signing leases at unprecedented levels,

00:47:14 they're not doing that now. You know, so the pendulum has shifted back to the tenant. So, you know, this is where we said, sometimes it might be beneficial for the operator to sign a lease, but you know, that lease comes with a lot of risk to it. But if you can demonstrate with the landlord that you can overachieve rents,

00:47:39 it makes perfect sense for operators to consider that just because of the risk and what has transpired over the last 18 months, Or again, the, the hybrid of I'm going to lease some space. And then I'm going to get creative and go partner with the landlord to expand in the building, which I think maybe is kind of one of the fun things is happening.

00:48:00 You know what I wonder, too, we talk about, you mentioned Bozeman, Montana, how much commercial real estate is in Bozeman? Like, can you take down 20,000 square feet or would you even want to, I feel like that's a challenge in smaller markets is like, people want to live there and they want to be a part of the community and they want to go work downtown in Bozeman,

00:48:24 but what's, you know, can I find commercial real estate in Bozeman? It's all about, it's all about the demographics. You know, it's looking at what's the income levels, what's the, the daytime population and the needs, you know, who's there, if people left New York city and they moved to Bozeman, look, we've seen the surge for flex up in the upstate New York area,

00:48:54 whether it's in Troy or Albany. I mean, who would have thought that years ago, but yeah, So I have a new member of the startup school who she sent me pictures. He bought this 1890 mansion, like on the water, it must be the Hudson river. I didn't think maybe I'd have to look again, but stunning, not huge,

00:49:18 but it was like, and this is the other thing that I think is interesting about landlords, because I think sometimes we talked about, and I was this way, like, I didn't want to talk to my landlord because I just want to pay the rent. I'm going to put all my focus in to be able to pay the rent. And I found him to be intimidating.

00:49:36 But the thing about landlords is there's a lot of them who have the same wise that we do. I mentioned this small developer group that I presented to, and I was just so blown away. They're all real estate developers, smaller real estate developers. They're not building the targets and the, and the things that, you know, you did in the day,

00:49:59 but they want to do flex because they think it's an important part of the neighborhood. It's like, they w they want it to be there. And, and I think the trick there is like, okay, for a management agreement, I don't know if you can get enough space to make the management agreement model work, but there's something there. And those landlords want the community piece of it.

00:50:22 Like they, they, it's bigger than, than just fill, you know, getting long-term lease for them. And I think there's more of those people than we think. And it's a matter of how do we find them to partner with them? I, I totally agree, because you know, like the, the group up in Albany like that this is almost like their way to give back to the community.

00:50:46 It's great. It's great. It's awesome. Yeah. I mean, they're not doing it, like they're not losing money on it, but it's, there gets like a legacy it's like this, It is. Yeah. I Was kind of like really blown away, like, oh, there's a lot of people who, and I would, I'll Jim Hyde to get,

00:51:06 be beyond the podcast, but I would put a pre-pitch in for go to your local ULI chapter and see what those people are up to, because there are some of the folks that really care about and ULI has urban land Institute, like creating the 15 minute city. Like that's their ethos. Yep. No, I mean, there's a lot of it out there on a very small and limited scale.

00:51:31 And I think when people want to take the time and effort to educate themselves and understand the business model, I think the opera more opportunities will open up. You know, it's really about taking the time to understand the business model, because this is when operators make that decision. Do I want to do it, or do I feel more comfortable engaging an operator to do it?

00:52:01 You know, and you know, we're seeing this, you know, this whole picture, you know, landlords want to do it. They're not sure how to do it. There's a lot of different aspects that they might not have the resources in-house. And so, you know, sometimes they'll start off with an operator that operator will educate them, and then they find a way to exit out of,

00:52:26 out of them so they can create their own brand. Okay. Michael, anything else happening in the market that we need to talk about before we wrap up? No, I think that's it. We're set up. We set a lot. We did say a lot. Okay. Well, thank you for sharing your, you have a lot of eyes and ears on the market and what's happening.

00:52:50 So I always love to hear your insight and perspectives. Thank you for coming on again and sharing what's going on out there. Thank you, Jamie. Always a pleasure. Hey there, thanks for sticking with us through the end of the episode, don't forget to subscribe on your favorite podcast player. And if you were enjoying the podcast, please go leave us a review.

00:53:13 It helps other folks find the podcast who are thinking about starting a coworking space or already operating a coworking space and are looking to stay up to speed on tips and trends. And we started a YouTube channel. We'd love to have you catch us on video. You can join us for podcast, videos, and Q and a videos and other things that we post to the channel.

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