The Work-life Insight

Emile Piters is the Vice President of IT EMEA at Medtronic, the largest medical device company in the world, which improves the lives of two patients every second globally. You’ll probably have heard of them as they are the world’s largest medical technology company. It was founded in 1949 in Minneapolis and created the first battery-powered pacemaker. Before that, cardiac patients could already be treated with electrical stimulation but needed to be connected to the power grid. During a massive power outage over Halloween in 1957, large portions of Minnesota and Wisconsin lost electricity, resulting in the death of several cardiac patients. This triggered Medtronic’s founder Earl Bakken to develop the first battery-powered, transistorized and wearable artificial pacemaker. Over the years, the company has grown massively and it is constantly looking for their ‘Day After Tomorrow’ strategy. Especially in the fast-changing world of healthcare – where big data, sensors and mobiles are transforming the name of the game – it cannot afford to keep its horizon limited to “Tomorrow”. The best example of how Medtronic is transforming its market, is the Micra, the world’s smallest pacemaker which has disrupted the traditional technology by applying leadless pacing.

I had become friends with Emile when ‘The New Normal’ came out, and we would regularly exchange ideas about the latest evolutions in healthcare. When he started applying my Day After Tomorrow concept in his own business, the challenge was to structure IT resources according to the model’s three buckets: 70% for Today, 20% for Tomorrow and 10% for the Day After Tomorrow. A significant part of his team was managing the legacy, implementing large scale IT systems like SAP to ‘run’ the business. A company like Medtronic, which has more than $30 billion in annual revenue, must ensure that these systems run like Swiss clockwork. This meant that the majority of the budget, and his people, were managing the ‘Today’ thinking, and spending a lot of effort in cleaning up the “Shit of Yesterday”. No surprise that, when they did think of Tomorrow, it was almost always by extrapolating the current strategic framework.

At the same time, Emile realized that the world of healthcare was on the verge of a set of massive disruptive changes, moving towards a highly personalized form of medicine. The world of pacemakers could transform from a world of electronics into a world where data and digital platforms would become extremely important.

Gradually Emile started to align the two parts of his strategic framework – the existing and the emerging business – and began to allocate more and more efforts, budget and resources to the Day After Tomorrow. The metaphor that slowly emerged from this was that of the Hourglass.

I’m not sure how long it’s been since you picked one up, but we all know that an hourglass has two parts. The TOP part of the hourglass is where the sand flows gradually downwards, through the middle section, slowly filling up the BOTTOM part.

If we apply this model to our strategic thinking process, the TOP part is composed of SENSE and TRY.

Sense

The SENSE element of the hourglass model is our radar screen for all things new and exciting: new ideas, technologies, models, concepts, developments, you name it. In short, a way to spot “those bits of the future that have already arrived”, to quote William Gibson.

We are experiencing the Never Normal, one of the fastest-changing times in modern history. It is fired up by the non-linear dynamics of the network and a series of permanently interacting novelties. Basically, we need a better radar screen, a wider field of vision, and a deeper sensing network to keep up. We all need to be more alert, pick up signals faster – however weak and feeble they are – and continue to develop and sharpen our sensors for the next new things. Star Trek’s The Enterprise sported a ‘long-range sensor scan’, with which it could detect incoming starships long before they would show up on the visual monitors. That’s the kind of technique that companies have to learn and develop. It’s not enough anymore to attend the annual conference in your field to keep up to date. You have to scan for developments outside of your normal field of vision, understand adjacencies, developments in other sectors, and be extremely open-minded for opportunities and serendipity.

The second element of the top part of the hourglass is the TRY segment. Once you have identified ingredients for change in your ‘Sense’ section, you need to experiment with them and create an environment where you can test ideas fast and safely. Startups have this modus operandi built in in the most natural manner. They are notoriously good at implementing lean methods of experimentation, building Minimum Viable Products, and testing those with users.

Eric Ries was a young Silicon Valley engineer, who had experienced firsthand how tight budgets forced startups to work in a certain way. They ‘naturally’ applied a method of lean development, testing alternate versions of a product with users to get early feedback, and learning from those findings how to quickly iterate to improve the product. It’s quite simple: a startup has no alternative. They are in a constant race against the clock, permanently in fear of running out of cash before they hit sustainable revenue. Large corporations, on the other hand, do have that luxury, unfortunately. I say unfortunately, because the sad result is that whatever is being developed is often too late, and off the mark.

When Ries started working in Venture Capital, and advising many startups, he decided to write up his findings into his seminal book “The Lean Startup”. It became an instant bestseller and has been widely adopted, not just in the startup world, but in many traditional organizations as well. The core element of Ries’ method is to accelerate the feedback loop.

When startups build a product, they build a Minimum Viable Product or ‘MVP’. The difference between a ‘normal’ product and an MVP is basically that the latter is just ‘good enough’ to be tested. A Viable product is the product that you would LOVE to build (and that’s probably being developed by companies that are much better financed than you). A Minimum product, on the other hand, is an underwhelming – yes, maybe even ‘crappy’ – version of the concept that you want to test. It’s in fact so bad that nobody would want to actually use it. The intersection of the two, the Minimum Viable Product, is the best possible version you can build for testing with early users: one that will bring you enough valuable input for your next iteration cycle.

According to Ries, this cycle is quite simple: Build, Measure, Learn, and then Start over. When you have built your MVP, you launch it and gather as much user feedback as you can. You then analyze these findings and deduct key learnings. That input should give you directions on how to quickly develop the next version of your product. And then you start right over.

Only once you have gone through a number of cycles of your ‘lean startup’ routine, can you start fully developing your software or products. This approach has been widely adopted since first proposed, and just as much by corporates as by startups. It’s also often used in combination with Design Thinking, which can help better understand and serve customers and help define the MVP’s initial set of requirements.

This ‘TRY’ segment of the hourglass can be an extremely powerful mechanism to experiment in a Lean fashion. With techniques borrowed from the startup world, companies can set up shop to test, decide what works, and then adapt or move forward.

Scale & Run

And so we have arrived at the lower section of the hourglass, where we can ‘SCALE’ and ‘RUN’. It’s not hard to understand why this part tends to be best developed by successful traditional companies. This is where companies decide what is REALLY worth putting their money into by narrowing the concepts, ideas, and projects of the experimentation phase through the bottle-neck between the top and lower half of the hourglass.

When a concept, a project or an idea has percolated through the top of the hourglass and is considered likely to be a success, it needs to be SCALED out throughout the organization as quickly as possible. After that, it is crucial to RUN the operations as smoothly, efficiently and reliably as possible.

One could apply the hourglass model for the very specific function of the Information Technology department, but some companies might have an appetite to use the hourglass model on their entire strategic portfolio.

Top To Bottom

When Google rebranded itself as ‘Alphabet’ in October of 2015, it seemed like a strange move for a company that had conquered the ‘search’ market so incredibly fast. They had not been the first mover in that field, though. It is relatively easy to conquer a market with a brand-new offering when you’re the first, but in the search business, companies like Yahoo and Altavista had been around for quite some time. And Google killed them almost overnight.

But that was the past. Google knew it had to keep vigilant not to fall into the same trap of ‘Kodak’ or ‘Xerox’ and maybe even General Motors or General Electric: leaders that were once synonymous with a market, only to come crashing down after failing to reinvent themselves. As Google grew, it became clear to them that it was not easy to keep on innovating from the core, and they were terrified of turning obsolete in the same way their former competitors had.

Alphabet turned out to be much more than a cosmetic name-change. It was an elaborate exercise in strategic horizon planning. The high-growth, high-profit elements of the company (including search, YouTube and Android) became part of the ‘core’ offering of Alphabet: responsible for generating the lion’s share of revenue, cash-flow and profit. In 2017, for example, 86% of Alphabet’s revenue still came from search-related advertising. But next to this ‘core’, Alphabet made quite a few ‘Bets’, including Nest for home automation, Verily for their Healthcare activities or Waymo that handles the business of autonomous cars. And let’s not forget the infamous ‘Google X’ lab, the most famous ‘Bet’-factory of all.

When you look at this from an Hourglass model perspective, Alphabet’s ‘Bets’ include daring concepts like connected contact-lenses or driverless cars. Alphabet recognized that these experimental ideas would NEVER survive if they were tried and tested inside their ‘CORE’ business.

Zero To One & One To N

One of the rawest accounts of the startup universe has to be the brilliant book ‘Zero to One’ by Peter Thiel. Thiel co-founded Paypal with Elon Musk and has evolved to become one of the most influential investors in Silicon Valley. Based on his experience of running, and investing in startups, he taught a number of classes at Stanford and eventually turned this material into ‘Zero to One’. Its premise is that creating Something from Nothing – zero to one – is the essence of a startup.

I would argue that this same dynamic is also the essence of the TOP part of the hourglass. They’re both about focusing a wide lens onto disruptions and opportunities, prioritizing, selecting, and then experimenting and testing. They perfectly match, just up to the point when a ‘golden nugget’ appears, which you then have to drop into the BOTTOM part of the hourglass. We can call this second part of the process ‘One to N’. This is where you scale and grow (going from one thing-to-many) the business in the most effective way possible.

Very often the ‘SCALE’ part tends to reside in a project mode, with scores of nervous project managers trying to roll out brand-new concepts into the organization. The ‘RUN’ part, in its turn, is the beating operational heart of the organization: it’s where we strive for bottom-line results and apply traditional management techniques and Key Performance Indicators to achieve success.

One of my favorite quotes, attributed to Nelson Mandela is this one: “I never fail, I either win or learn.” For me, that is the true essence of learning from our mistakes. We all know ‘Fail Fast, Fail often’, a common mantra in the startup scene. Of course, the whole idea behind “fail fast, fail often,” is not to fail, but to be iterative in how you learn.

A LAT Relationship

The top part of the hourglass model – the Day After Tomorrow section – consists of being open for new things, failing fast and learning, and creating more clarity about where you need to place your bets. The bottom part is about producing the scale and bottom line as the foundation of your business. That’s your Today, and your Tomorrow.

I have observed how Emile Piters gradually but very decidedly shifted his organization towards the hourglass model. First, he made sure that his IT spending was pushed significantly towards the TOP part: it evolved from 5% at the top, and 95% at the bottom, to a situation where it’s trending towards a 30/70 ratio. But he also knew that it was not just about moving funding from the bottom to the top: the two parts of the hourglass required different skills, mentalities, cultures and leadership. And they had to be organized, managed and controlled in different ways. Above all, they had to be CONNECTED. They basically needed a perfect LAT (Living Apart Together) relationship. So Emile installed a mindset throughout the organization where the TOP part of the hourglass was fully aware that they could not fulfill their potential without the Bottom part of the hourglass, which generated the necessary funds, cashflow, and scale. And the BOTTOM part of the hourglass had to be fully committed to the top part of the hourglass and convinced that it was vital for remaining relevant in the Day After Tomorrow. Both parts were (and still are) interdependent to stay essential and relevant for the future.

I have observed many companies that have a brilliant bottom part of the hourglass but were unable to create the top part that would allow them to remain future-proof. But I have equally seen many companies that did develop that latter capability, but were unable to get the top and bottom parts of the hourglass to align and create common objectives. Only if you manage to properly connect and align the zero-to-one AND the one-to-n will you have a solid formula for tackling your Day After Tomorrow.

I believe this could be the ideal recipe for the Phoenix (corporate companies that know how to reinvent themselves on a permanent level to keep up with these fast-moving times – and also the subject of my upcoming book, ‘The Phoenix and the Unicorn‘, which will be available as of March 2020): a mechanism to keep an open mind, understand new opportunities, and the possibility to bring innovations from idea to scale in a continuous process.

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As the flexible office industry sees explosive growth in New York and beyond, it’s increasingly ditching the freelancer market and targeting blue-chip clients at a rapid rate

The 11-story Beaux-Arts building at 88 University Place in Greenwich Village is the kind of property every co-working company dreams of occupying.

Sitting just south of Union Square and partly owned by fashion designer Elie Tahari and WeWork co-founder Adam Neumann, it has small floor plates that can be easily turned into cozy, communal work stations, and the nearby NYU campus promises a steady supply of young, well-heeled freelancers and aspiring entrepreneurs.

In late 2015, WeWork signed a lease for eight floors, totaling 70,000 square feet, at the building, with plans to convert it into a huge co-working hub. But it didn’t turn out that way.

By 2017 the flexible office industry had changed, and so had WeWork’s plans for the building. That April, news broke that 88 University would not house freelance graphic designers and other creative types in the East Village. Instead, computing giant IBM agreed to take over the entire property as a temporary New York office while it searched for a more permanent space.

WeWork — which is now Manhattan’s largest office tenant and occupies more than 7 million square feet throughout New York City — would still furnish the building, staff the reception desk and keep the coffee and beer flowing.

But for all intents and purposes, the property became an IBM corporate office.

“Real estate’s not IBM’s core business,” said Glenn Brill, a managing director at FTI Consulting, which advises co-working companies and landlords. “The less time they spend on it, the better.”

The booming co-working industry, which has grown its footprint in New York City by 600 percent since 2009, isn’t what it used to be.

Marketing materials often depict groups of young, attractive colleagues bonding in shared office spaces, sitting on couches with laptops and working in between pingpong matches.

But in reality, co-working — or at least that version of it — is no longer driving the bottom lines of flexible office providers. The rapid growth of firms such as WeWork, IWG, Industrious and Knotel now has almost everything to do with serving the basic office needs of established corporations like IBM and UBS. And what’s been branded as a revolutionary answer to office life in the 21st century now more closely resembles a business model that’s been around for decades: commercial property management.

While shared office space for freelancers still exists of course, industry leaders say it’s a shrinking portion of the business.

“Co-working doesn’t work,” said Marcus Moufarrige, COO of the Australian company Servcorp, which has offered flexible space services since the late 1970s. “The latest iteration of it is not that new; it was around pretty extensively during the dot-com boom. And it didn’t work then, either.”

A different tune

While some potential co-working users are still being sold on the entrepreneurial community and the freelancer economy, investors and landlords are increasingly hearing a very different proposition.

In 2012, Jamie Hodari, a former hedge funder who had just launched the co-working startup Industrious, dialed into an investor call with a group of podiatrists in Michigan who wanted a piece of the action.

The co-working concept — which started more than a decade ago with the aim of bringing lone Silicon Valley hopefuls together under one roof — had become an international phenomenon with more than 2,000 locations worldwide. Hodari was selling the latest way to curate shared space for budding entrepreneurs.

But a year later, Hodari’s pitch to another group of investors had changed: Industrious wanted to target more than just graphic designers and app developers. It would also go after traditional office tenants with short-term leasing needs — a large market that was neither new nor deserving of a neologism.

“We had a very boring observation: This is an outsourcing industry,” Hodari told The Real Deal in a recent interview.

In the five years since, the top co-working companies have made the same observation. Rather than catering to individual freelancers and small early-stage startups, the industry is increasingly targeting much larger tenants.

Companies of at least 1,000 employees, which WeWork calls its “enterprise clients,” now make up a quarter of its memberships and revenue. Knotel, which never tried the individual-member model, claims companies with multiple offices and more than 100 employees account for 95 percent of its customers.

Manhattan’s top commercial brokerages — some of which now compete with co-working companies in office services — are acutely aware of the shift. News broke late last month that CBRE is launching its own flexible office management arm, called Hana. That business will compete with WeWork, Knotel and others for partnerships with landlords.

CBRE closely tracks the industry and divided its rapid growth into three distinct phases, starting with the “executive suites market,” which predates 2009, the “birth of co-working,” which took off in 2012, and the “rise of enterprise,” which began in 2016.

Today, the biggest co-working companies vie for partnerships with landlords to manage space for blue-chip clients, while offering everything from coffee and beer to facilities maintenance and IT. Some are also expanding into brokerage, interior design and data services in pursuit of additional revenue, creating a new wave of competition for companies that specialize in those fields.

What the co-working industry has retained from its early days is its aesthetic sensibility — creative office layouts and post-industrial chic.

Insiders see the expanding business as a way to change the entire commercial real estate industry by making leases more flexible and adding more amenities to office buildings. “The change is they’re taking this idea of flexibility and pitching corporate America,” said FTI’s Brill.

“Long live co-working”

As the industry continues its shift, a handful of property owners are even launching their own hip co-working brands.

At Rockefeller Center, Tishman Speyer’s Studio — which gives its members access to Clubhouse by ZO, an exclusive lounge where they can rest in communal “nap pods” and attend meditation classes — is one example.

Thais Gallis, a senior director at the family-owned real estate firm, said one of the reasons behind launching Studio was the hope of creating an “entryway for new companies into our properties.”

Among the city’s office landlords, Tishman Speyer also has one of the highest concentrations of co-working tenants, including both WeWork and IWG, data from the commercial brokerage Avison Young shows. The firm’s two-pronged approach of bringing on co-working tenants and starting its own brand speaks to the rapidly growing demand for such services.

Scott Rechler’s RXR Realty, which has invested in several co-working funding rounds, is also getting into the members-only business. RXR recently announced an agreement with office amenities operator Convene to design and manage an exclusive penthouse club at its 75 Rockefeller Plaza office tower.

Other landlords are taking it a step further and teaming up with co-working companies on development projects.

Knotel partnered with Brooklyn-based EcoRise Development to build an office property in Gowanus that will allow Knotel to manage up to 300,000 square feet at the site, and WeWork joined Rudin Management and Boston Properties to build a 675,000-square-foot office project in the Brooklyn Navy Yard where it will occupy a third of the space.

Megan Spinos, director of strategy at the design firm Vocon, which creates social spaces for both co-working companies and large companies, described a major shift in the U.S. workforce that’s given the communal working trend legs.

“Where we used to be part of a Kiwanis Club, we don’t really do a lot of that anymore. And because we spend so much of our time forging ahead with work life, there are different ways that we’re trying to [create community] in the workplace,” she said. “Sometimes our work is really solitary and we’re looking to form relationships.”

Mark Gilbreath, who runs the online office listing platform LiquidSpace, said the promise of a shared workplace utopia with countless amenities is “intoxicating.” But as companies like WeWork hit the limits of demand from wide-eyed entrepreneurs, they’re catering to bigger firms at a fast-growing rate, he noted.

“Co-working is dead,” Gilbreath said. “Long live co-working.”

Pitching big business

WeWork’s deal with IBM was part of a broader push to distance the co-working giant from its original customer base.

Its Powered by We service line, which it launched in 2017, facilitates full offices and even corporate headquarters for major corporations. This past July, the company announced it would renovate and manage UBS’ 100,000-square-foot office in Weehawken, New Jersey.

The co-working giant is also zeroing in on midsized firms. This August, it launched HQ by WeWork, a service that allows midsized firms to rent out their own floors, implement their own designs and keep interactions with other companies to a minimum while still tapping into perks like regular cleaning and flexible lease terms.

WeWork’s chief growth officer, David Fano, acknowledged that it’s “difficult” to build a global flexible office brand by focusing only on small tenants. “There’s definitely a ceiling on the demand for that stuff,” he told TRD. “And as companies grow, unless you can serve the full life cycle of an organization, it’s inevitable they’re going to leave.”

Fano insisted that WeWork never saw itself as just a service for freelancers and small-business owners, but said it underestimated the potential demand from larger clients in its early years.

“In the first half of [WeWork’s life], I don’t think we had such clarity on the enterprise potential,” he said.

Other flexible office providers like Industrious, Bond Collective and IWG also say bigger companies make up the bulk of their revenues. Industrious’ rapid shift from freelancer hubs to Fortune 500 office suites was prompted by an unexpected demand from a single customer.

In 2012, as Hodari made his first rounds of investor calls, his company provided a small space for then-two-year-old social media startup Pinterest. A year later, Pinterest expanded. And then it expanded again. Soon enough it had ballooned to the point that its executives said they needed a proper headquarters.

Today, Pinterest is valued at $12 billion and occupies 100,000 square feet at 651 Brannan Street in San Francisco. “They said, ‘We actually will get a better outcome if you do this,'” Hodari recalled, after Pinterest executives asked his company to manage the new headquarters.

The Pinterest deal made him rethink Industrious’ business model, and the firm’s marketing materials dropped any reference to freelancers and pivoted toward medium to large companies.

“That’s where the dogfight is right now — pitching to Johnson & Johnson, Exxon, Airbnb, Spotify that you are better than anyone else at providing a workspace their employees will be happy with,” Hodari said.

Industrious now has partnerships with General Motors, Lyft, Pandora, Freddie Mac and Chipotle. “We started to shift the balance of our customer set quite quickly,” Hodari added.

The freelance spillover

Knotel, one of WeWork’s biggest and youngest competitors, rejected the co-working label from the start.

Its CEO, Amol Sarva, who co-founded Knotel in 2016, said it’s not just that co-working companies underestimated demand from big firms — they also overestimated demand from small ones.

“A really superficial analysis of the labor market would be ‘Oh, half the market is freelancers’,” he said, pointing to statistics on how many people file tax returns as freelancers and contractors. “But do freelancers work alone? Do freelancers have their own offices?”

Most who do use offices work for larger companies and are often embedded in their spaces on a part-time basis, Sarva said. The industry shift was inevitable, he argued, but it’s having a spillover effect.

“This huge supply of freelancers who work in ever-shifting teams but together at companies — they need an office,” Sarva added.

The transition to bigger clients and a greater focus on property management impacts how firms like Industrious and WeWork design their spaces. “The large enterprise doesn’t want to live in a glass box side by side with a bunch of other startup companies with 47 square feet per person,” LiquidSpace’s Gilbreath said.

It’s not just about open floor plans, either, Vocon’s Spinos noted. “It really is a science based on how clients are going to use that space,” she said. “It’s not just open — it’s enclosed, it’s private, it’s semiprivate. It’s a bigger variety.”

Beth Moore, a managing director at CBRE who leads the brokerage’s flexible space business nationally, said major corporate clients are in the “dating” phase with co-working companies, trying out a variety of them for different office needs.

She said clients now expect much more than an edgy look or hip mission statement; when they tour new locations, they want to see a proven track record with larger companies.
“The worst-case scenario is you leave a space and say, ‘That was a cool furniture showroom,'” she said. “It’s not as easy as desks and comfy furniture and bad posture.”

“Asset-light”

As the co-working industry targets big corporate clients, the power dynamic with landlords is also changing.

Until last year, all but one of Industrious’ agreements with building owners were long-term leases that allowed it to sublet the space to other companies.

Behind the scenes, though, Hodari was pitching landlords to instead enter management contracts — revenue-sharing partnerships between the building owner and office operator.

While commercial leases often carry terms of 10 or more years, management deals allow third-party companies to occupy the space on a more flexible basis.

It took a while for landlords, who were cautious about doing away with long-term guarantees, to warm up to the idea, Hodari said. But the fact that they get a piece of the profits was a key selling point.

In the past 12 months, Industrious’ business model has flipped. Now, 75 percent of its new contracts are management agreements, which allow the firm to take on the office market’s version of a hotel franchise.

Knotel and Convene have also largely followed that model. And while WeWork still relies mostly on leases, the co-working giant has signed management agreements at a handful of locations.

In Silicon Valley’s venture capital circles, the shift into the management world — the so-called asset-light business model — is extremely popular.

Just as Uber refrains from buying its own cars and Airbnb typically refrains from buying homes, co-working companies are increasingly dodging the expensive liabilities that come with owning or leasing office space.

Silicon Valley-based Norwest Venture Partners led a $60 million funding round to Knotel last month, for instance, while the Los Angeles firm Fifth Wall Ventures led an $80 million funding round for Industrious in February.

“One of the most prevalent killers of companies is a mismatch in the duration of a company’s assets and liabilities — master leases are a long-term liability,” said Fifth Wall co-founder and managing partner Brendan Wallace.

Mindspace, an Israel-based flexible office startup that has 28 locations in Israel and Europe and recently expanded into the U.S., is also moving toward partnership agreements, said Itay Banayan, the company’s head of real estate. These deals make it “easier to weather the cycle,” he said, arguing that long-term lease obligations can become a burden to both co-working companies and landlords during a downturn.

Managing expectations

Landlords say their preferences are based on other factors, such as bank financing and prospective buyers.

Bob Savitt, founder of the New York-based office owner Savitt Partners, which operates a co-working spot at its 530 Seventh Avenue office building, said the decision between a long-term lease and a management deal largely boils down to a landlord’s investment strategy.

“If I want to sell a building, and I have a 10-year lease with a decent creditor and a security deposit, I can monetize that,” Savitt said. Long-term commitments can increase a building’s value in the eyes of potential buyers, he added, though “there’s not one preferred structure.”

Some landlords have taken to management agreements for the profit-sharing part of it, but many banks are hesitant to lend on buildings with such arrangements in place. Most traditional lenders still prefer the perceived stability of long-term leases, sources say.

At the same time, banks have greenlighted one of co-working’s riskier business practices. Many of WeWork’s leases have come without corporate credit guarantees, an extreme outlier in the generally conservative office leasing market, said Colliers International investment sales broker Yoron Cohen.

“It was a brilliant business plan,” Cohen said. “Landlords were happy to take [co-working companies] as long as the banks were willing to consider them as [creditworthy].”

He said what lenders see as WeWork’s “bankability” could lead to “spot spots” during a downturn — leaving landlords with co-working tenants that can’t pay rent.

“We all pray that it will end well,” Cohen added.

Inn, the future

While co-working is largely evolving from open floors to corporate suites, many in the industry say its next phase will be most akin to hotel flags.

A growing number of co-working companies will have their own distinct brands and different tiers of service similar to the budget, boutique and ultraluxury models that hospitality firms use. And as with big hotel corporations, it’s not inconceivable that a small number of firms could dominate the market.

WeWork’s executive hires in recent years show the industry is taking more than just a page from the hospitality sector. Michael Gross, its vice chair, used to run Morgans Hotel Group; Richard Gomel, its head of co-working, is a former Starwood Hotels & Resorts executive; and Pato Fuks, its regional manager for Latin America, founded the Argentinian hotel operator Fën Hoteles.

“WeWork is fundamentally trying to create a lifestyle brand,” said FTI’s Brill. “And that’s what hotels do to a large extent. That’s how they market themselves.”

In addition to its gym line and co-living division WeLive, the co-working giant now has half a dozen other lines of business including Off the Shelf, Powered by We and custom build outs.

IWG has also broadened its portfolio with Regus (its predecessor), Spaces, Number 18 and others. For most co-working firms in 2018, the goal is to capture all tiers of the office market — from ground-floor freelancer hubs to executive corner offices.

“Like within Hilton or Starwood, there are a lot of different brands,” CBRE’s Moore said. “We’re already seeing that take shape.”

Credit:
Post Author: Konrad Putzier, Will Parker and David Jeans
Website: www.therealdeal.com

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