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How headcount could replace price per square foot

Landlords could start charging per person instead of per foot if co-working advocates have their way.
As the industry’s office space continues to evolve rapidly, executives of companies that creatively fill space office market and its valuation model needs to catch up.

“If you think about a building whether it’s a retail or office as a marketplace with a captive audience, the ways you start to think about how to monetize that audience can be tremendous,” said Ryan Simonetti, co-founder of fluid meeting space company Convene.

“The future we’re starting to see already is this idea of real estate being consumed by employee as opposed to by square foot. The way we view our platform is really as the landlord’s response to the changing requirements of today’s customers and today’s tenants.”

The new market trailblazer was speaking during the VTS’ Accelerate conference. The panel was moderated by Fifth Wall’s co-founder and managing partner, Brad Greiwe, and featured Industrious’ CEO and co-founder Jamie Hodari, and Appear Here’s CEO and co-founder Ross Bailey along with Simonetti.

The group agreed that successful new companies such as Convene and its competitors that offer customized and flexible spaces for different types of tenants are at the forefront of how real estate is being rented out.

Ryan Simonetti

“The core of what the three of us are doing is customer satisfaction. Whatever we do, we view ourselves as a customer-centric organization,” said Simonetti, arguing that landlords and property owners are realizing they need a different approach to maintaining occupancy and profitability. While Convene partners with commercial real estate landlords, Appear Here is “essentially Airbnb for retail,” according to Bailey who said retail is facing a similar value perception.
According to him, the big retail anchors that used to draw shoppers are bring replaced by pop-ups as landlords cater to a captive audience.

Bailey explained, “What we’re seeing in places like Fifth Avenue and in London and some of its key streets is that the audience is disappearing, brands are underperforming and the shops are shutting down. Suddenly the idea that the audience is always going to be there has popped, so what can we do as a real estate owner to keep this street interesting to bring content and keep the audience?”

Appear Here works with landlords to create a rotating cast of retailers that feels fresh to the shopper base. “Rather than one big retailer taking every store, you see thousands of interesting retailers popping up, disappearing, and keeping people engaged,” Bailey said.

So with this new model of filling space, Hodari said that landlords could be looking at valuing their property differently. As Industrious creates office spaces in partnership with landlords, Hodari said landlords could possibly start using subscription models based on amount of tenants.

“That’s what makes WeWork so scary,” Hodari said. “An individual landlord is going to be able to say a subscription for real estate could be $600 a head.”

Bailey added, “The reason why businesses like WeWork et cetera are doing so greatly is because they’re taking on a long-term lease even though their customers change.”

Based on a 2018 CBRE investor survey, commercial real estate investors are generally in favor of co-working spaces for adding value to a property, but are more critical about long-term gain.

“Co-working has captured the attention of both occupiers and investors and continues to gain traction in commercial real estate,” said Scott Marshall, CBRE’s Americas president of Advisory & Transaction Service and Investor Leasing. “While many investors are deciding how to participate, in general, investors have concerns that if co-working comprises more than a third of the rent roll of an asset, the long-term capital value could be negatively impacted.”

And CBRE’s global president of capital markets Chris Ludeman said investor views on whether or not co-working space adds value is still evolving.

“Buildings that attract the best tenants command the highest rents and valuations, and there is evidence that a best-in-class co-working operator is seen as an amenity by investment grade tenants who continue to desire traditional lease terms,” Ludeman said. “Further, a growing number of tenants view co-working space in a building as an option for periodic spikes in occupancy demand.”

For Simonetti, the main question behind this rapid shift in how tenancy works is how to value space now.
“How can we be working together to really come up with the right valuation metric?” Simonetti said. “If 30 percent of an industry is going to be flexible and amenitized, what are the valuation implications of that, does that actually increase asset value?”

“That’s something the industry and us as partners in that can start to push the conversation forward,” Simonetti said. “That’s a major bottleneck in the industry and the ability to respond to that is because of the lack of understanding.”

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