COVID-19 has created massive changes in the commercial working environment. The pandemic has taken a bite out of commercial spaces, retail is getting decimated, and people are starting to reconsider office space. According to the IDC, 1.8 billion people in the workforce worldwide are working permanently two or more days a week outside their primary office space.
In this episode, Toby Mathis of Anderson Advisors talks to Frank Cottle, founder of Alliance, which has about 1,200 facilities representing 30-million square feet of space in 54 countries.
Frank is one of the largest players in the virtual office space and has a unique global management perspective. He has been in the service office industry and flexible workspace sector for 40 years.
Highlights/Topics:
- Remote Work:
- One day a week equals a 20% vacancy factor in commercial office space
- Two days a week, it’s 40%
- Today, most people now work three-and-a-half days a week at home
- Corporate America: Office space isn’t needed; policies to work wherever you want
- Who wants to commute? Nobody, especially when told not to take public transportation
- Real Estate Cyclicality: Good and bad markets sometimes equal vacancy or waiting list
- Repurpose Space: If not used for original intent, turn it into residential, retail, other uses
- New Hybrid Office: Work from home, near home, or electronically commute to office
- Property vs. Technology: Property companies require capital, don’t scale on same basis
- Membership Care/Pass: Allows access to office facilities worldwide anytime, anywhere
- Flexible vs. Fixed Office Space: Seek solutions to get away from inefficient fixed cost
- Conference Rooms: Use for Zoom, Teams, Webex, GoToMeeting—it’s all ubiquitous
- Constant Change: With every new lease and tenant, how can you make improvements?
- Unreimbursed Business: Provide complete remote workspace technology or access to it
- Dual Hybrid Model: When the government stops making rules, we’re back to normal
- Virtual Office vs. Virtual Address: What’s the difference? Pay as-needed or 24/7
- Office Space Models:
- Classic: People, place, and technology provide business growth
- Incubator: Same thing but provides mentoring
- Accelerator: Does what an incubator, but provides access to capital
Resources:
International Workplace Group (IWG)
Tony Hsieh’s American Tragedy: The Self-Destructive Last Months Of The Zappos Visionary
All Good Works Foundation – Office Leasing Meets Nonprofit
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis with the Anderson podcast. I have Frank Cottle with me today. Some of you guys might remember Frank from his previous podcast; we’re talking about non-profits. Frank has a very successful non-profit as well. We wanted to talk today about massive changes in the commercial working environment, given the pandemic, and Frank happens to be one of the largest players in the virtual office space—his company. I want to introduce Frank. First off, hey, Frank. Welcome.
Frank: Thank you, Toby. Thank you very much.
Toby: I should say welcome back. We’ll just dive right into it because Covid’s taken a bite out of commercial spaces, retail is just getting decimated, and I think people are starting to reconsider how they actually office. What do you see?
Frank: To put things in perspective, Alliance has been in the service office industry, the flexible workspace sector for 40 years. We have about 1200 facilities that are inside of our network in 54 countries representing just under 30 million square feet of space. We understand what’s going on oftentimes in a global situation more quickly than landlords who have longer-term lease cycles. Our average lease cycle is 12 months and the average commercial lease cycle is just over 5 years. Things hit us faster than we react faster, so put that in perspective, number one.
Toby: You’re nimble. Can we say that you’re more nimble?
Frank: I like agile. To me, nimble seems a little small. And our clients are, too. Our customer base represents everything from a government through the global Fortune 1000, to legal accounting, financial services, professionals, startup companies, mid-sized branch offices, a lot of media and technology companies. We get to see a big cross-section of business on a global basis.
One thing I want you to think about when we’re talking about change for just a second—let’s put things in quick perspective—if everybody works at home one day a week, that represents a 20% vacancy factor in commercial office space. Two days a week, it’s 40%. Today, we’re working on average 3½ days a week from home, in the larger corporations.
Toby: Is that worldwide?
Frank: That’s in the US, the UK, and Northern Europe. In Northern Europe it’s closer to 4½ days a week, depending on the economy. Let’s just stick with the US for a minute because I think that’s where most of your listeners are focused on. Let’s just recognize that one day a week represents a 20% vacancy factor.
Go to another scenario and let’s think about major metros for a minute. Most of us today don’t mind being in the office. Take your office as an example. You can keep it clean, you can keep people socially distanced, you can do all sorts of things to ensure safety in the office.
But imagine you’re in Manhattan. Your office is in Manhattan and you live in the Bronx, or Brooklyn, or out in Long Island. How do you get to your office? You get on that stinking, dirty train and ride the subway to your office. You don’t mind being in the office.
The problem in major metros today, all metros are dependent upon public transportation in order for their workforce to get to the central business district. Every one of them worldwide. No one wants to ride the transportation.
Toby: They’re scared.
Frank: They’re scared of that and they don’t like it in the first place. Now, they have two things going for them. First, they’re discouraged from doing so. Second, they didn’t want to. Overall, who wants to commute? Who liked that? Anybody you know? Nobody I know.
Toby: In Vegas, we’re lucky.
Frank: It’s the same in Southern California. I’m in Newport Beach (as you know) and it’s the same thing here. We all jump in our little steel cocoons and we feel comfortable about it.
And then, take a third scenario but a major change element. Take Facebook as an example. You got Zuck. He’s walking around the corporate campus with the CFO. They’re walking through the building, they’re looking around, look at each other, and say there’s nobody here. We’ve got policies that say they don’t have to be here anymore. They can work anywhere they want to. The CFO and Zuckerberg look at each other, and Zuck says to the CFO, how’s the company doing? The CFO says the company’s doing fine. The company’s doing great. They look at each other again and they kind of laugh. They said, […] we don’t need this stuff anymore. We don’t need an office.
And that’s what corporate America is going through right now. We consult to a large number of the major financial institutions that have a permanent real estate investment within their portfolios—fixed asset portfolios. Every one of them is saying, hey Facebook just renewed their lease, but they only took half as much space. Just took half as much space. Microsoft just took half as much space. All of the major tenants in most major buildings.
My wife’s law firm is a good example. They normally have about 120 people in the firm. They have two full floors in a nice building here in Irvine, California. She said there were six people there every other day.
Toby: It’s a lot like us. It was a nearly empty suite. We have three floors, but we have one floor where we have the whole floor, that the half is completely empty. We actually took all the furniture out.
Frank: And you probably not sublet that to someone, or you’re going to who doesn’t need as much space in their other location, or you’re just going to give some percentage of that back to the landlord. Let’s say you keep half and then give half of it back to still the landlord. Still, commercial property operators, particularly in large central business districts of major metros, are going to have to quickly rethink their strategy. What we’re seeing is a lot of planning going on, on re-purposing of space.
Let’s pick on Manhattan for a while; it’s easy. If you have a 50-floor building and you’re in the midtown or in the financial district—downtown or something—and half of your clients, half of your tenants take half of their space, then you’ve got a 20%, 30%, 40% vacancy factor. It’s not like it’s going to change. What do you have to do after that?
Toby: That’s a good question because we presume that people are liking this. They’re learning it, they’re liking it, and they’re going to maintain it.
Frank: We assume cyclicality in real estate. We all know that there are good markets and bad markets. Sometimes, you have a 10% vacancy factor. Sometimes, you have a waiting list. Sometimes, the market gets overbuilt. We assume cyclicality, we understand that, but we haven’t understood a complete migration. The migration is we don’t need it. Combination of pandemic, law, people changing their habits, not liking to commute, technology is huge.
Toby: They’re leaving the urban areas with certain finality.
Frank: Absolutely. Before, you had transportation as a major problem, getting people to and from their work. The reason they did that is because the cost of housing in a central metropolitan district was so very expensive. Now, you’ve got this massive amount of new space. It’s not being used where it’s originally intended commercial purpose. That can be repurposed into residential, retail, and other uses overall, and in the future, people that work in the city will also live in the city. There’ll be less commuting going on.
There’ll be a lot of shape-shifting in the way space is used. Right now, we look at our own industry and we say, where’s the best place to build a flexible workspace? It used to be in a major metro. Now, we say I’d rather build on a bike path than on a metro path. We’re really seeing the thing.
I’ll use Alliance Virtual as an illustration of that. In 2016, 2017, 2018 we did 60%, 65%, maybe a little bit more even, in major metro markets of our business. Today, we do about 40% in major metro markets, and the rest in the secondary and tertiary markets. That just proves the migratory issue, and how fast and how easy it is for the user to move.
The other thing that’s coming up—it’s going to adjust quite a bit—is people today are working from the residence. A lot of people are ill-equipped for that. You might have a nice office in your home, I might have a nice office in my home. A lot of people don’t. They’re still stuck working at the kitchen table. Or they’re in small apartments somewhere. Kids are driving them crazy, kids are home from school. There are all these things going on, so that person needs to get out of the house. That’s why they get on the train.
The new hybrid office is work from home, work near home, electronically commute to the corporate headquarters. Or maybe go there for important meetings every other week or something, but still work near the home environment that’s building up. When you say where’s the trending, well the trend is to move to the secondary and tertiary markets, that we’re going to see growth for all types of commercial real estate, number one. The type of real estate it will be, will be real estate that’s capable of handling short-term tenants.
The classic executive suite business center, service office center, coworking center, whatever label you want to put on facilities that combine people, place, and technology into a single short-term service agreement (as opposed to a long-term lease), facilities that have clerical, secretarial, administrative support, AV support, meeting rooms, conference rooms, all these things but a mile from somebody’s house.
The big illustration of that, bicycle sales in some markets […] as much as 500% in 2020. People’s ability to move within 1–3 miles of where they live without getting on public transportation and not necessarily needing to cold start a vehicle, is going to be a huge driver for the way we’ll see things in the future. And it’s not a long future. Right now, this is happening.
Toby: There are so many things that you brought up. Let me unpack them a little bit because I want to make this relevant to the folks that are out there, that are investors, that are landlords. The first one was a user stat of 3.5 days (right now) that people are working from home for a week. Is that a seven-day workweek, five-day workweek? Is that a percentage?
Frank: Five days. 1.8 billion people in the workforce worldwide are working permanently two or more days a week outside of their primary office space, according to the IDC.
Toby: What was it before the pandemic? Do you know?
Frank: It was about half a day.
Toby: Half a day. So you’re talking about a 7% increase?
Frank: Yes.
Toby: That’s just to put it in perspective because there’s going to be somebody out there that’s going to say what if it was three before? Well, it’s absolutely monstrous. That takes us to number two, which is in your line of work, the big boys are WeWork and Regus, right?
Frank: I like to put Alliance, too.
Toby: Yeah, I just like to have the highest cap and I’m thinking that these guys are not being agile. I’m thinking of WeWork is planning to do space plans because they were managing to lose money when commercial real estate was their premium. I still remember negotiating my first lease. It was brutal and there’s an entry-level into getting into commercial space. They won’t just lease it to anybody.
There’s a whole bunch of people that were forced to work from home or forced to bootstrap it, who now the world is changing for them, where they’re going to be able to access good space in a different way, That’s where I’m kind of getting with this.
Frank: That’s absolute. I’ll give you a good example of that. You mentioned Regus and WeWork. Let’s stick with Regus because they actually have IWG (International Workplace Group) which owns Regus—that’s the parent company—traded on the London Exchange, and they own a company called Spaces and a number of other companies within the industry.
Toby: Are they going to get crushed?
Frank: Absolutely. Their stock is up. The investment community in November–December just raised $1.6 billion for acquisition and growth. On the other hand, WeWork is shrinking and continues to have a variety of problems. The market is that there was nothing wrong with the concept of WeWork as a product. The problem was its management and its business theories. It convinced the investment community that it was a technology company and could grow at any cost. The reality is it’s a property company. Property companies require a massive amount of capital and they don’t scale on the same basis.
Alliance is different in that Alliance is a technology company. We don’t own any of our own facilities anymore. We look more like Expedia by comparison to the hotel or the airline industry, versus IWG or WeWork and others. […] Las Vegas with Tony J as an example of that.
I know IWG as an example. Their growth has been solid and they have what they call their business world card, which is a simple subscription card you can get free if you’re an Amex platinum member. It allows you the ability to walk into any facility anytime anywhere, make a reservation, or just walk in the front door and get a desk. There are a number of other freelance companies that have now built card systems. […], Deskpass, Colo, Alliance Access, et cetera, where you can just buy a membership card and then get access to hundreds or even thousands of office facilities worldwide. This is a new transient structure.
There’s a nice little company called Upflex based in New York. It’s a tech company. It actually sells hours of support to large corporate users. Microsoft can say, I have 5000 people in my sales department. I need them to move around to these 250 cities and 22 countries. They each need 10 hours a day of office time. I can get one contract to supply that. The US Federal government right now has put out an RFP for 10,000 workstations in 33 markets in the United States, and there’s a beta test for another 50,000 workstations structure.
That’s government, which is the slowest, awfullest, worst structure you can imagine. But even government is looking at all of these solutions to get away from their fixed cost of very inefficient. Fixed cost is the issue.
Toby: And also when you’re going into the flexible space. I still remember you and I were talking before about Tony Hsieh in the downtown project—Tony Hsieh recently passed—and one of the shared workspace groups here failed, but they were more of a collaboration space that was wide open.
What I keep thinking of is people don’t want to use somebody else’s computer. When I first started looking at it, they were talking about smaller computers. That was the big thing since then computer […]. And now, portable computers are getting strong enough for you to pretty much carry your workstation, plug it into some sort of system—if you use Surface it’s easy, if you use Macs you’re just going to go wireless—and most things are cloud-based. You can bring your workstation with you. What other things do you need? You have a camera built-in, you probably have a decent microphone or you have a headset, you can work from anywhere.
Frank: People do and the majority of people do these days. I don’t know anybody who doesn’t have a laptop. I don’t know anybody. I don’t know anybody who hasn’t had a laptop for maybe 10 years. We took our entire administrative, sales, service department call centers, et cetera, remote in February ahead of the pandemic rush. We saw what was going on in Asia and Europe because of our own offices over there. We did it all in 48 hours just moving the technology. I mean everything—call centers, everything—and never missed a hitch, never had a problem at all. I don’t know anybody that doesn’t have a laptop or any company that can’t. […] the entire system through the cloud these days.
Toby: Are there going to be like Zoom rooms where it’s like the old telephone booths?
Frank: Absolutely. Zoom rooms are a thing. Think about it. We used to call them conference rooms. We’ve got a motion-sensing camera that we can put in front or on top of whatever big screen is mounted on the wall we had anyway. Now, we can use Zoom, Teams, Webex, GoToMeeting, it doesn’t matter. It’s all ubiquitous to all of us now these days.
Toby: And even smaller little Zoom rooms. I think of you literally getting something out of my room.
Frank: Yeah, micro rooms that are set up literally as Zoom—
Toby: You just close the door and you’re in your own little world. Maybe it’s green inside.
Frank: I’ll tell you where those are happening. They’re happening in a lot of service offices and business centers, and really they’re set up as podcast rooms. They’re soundproof, got good cameras, they can do split-screening. They’ve got a system. You can Zoom and do any kind of personal meeting for two or three people in there. But really, an awful lot of them are set up as podcast rooms because podcasting has become the new medium for business social media (if you will). It is huge and you want to do it right, though.
Toby: If you’re a commercial landowner—let’s say that I have clients that own buildings and things like that—they’re the ones that are getting squished during the pandemic. They’re probably freaking out a little bit. If you own retail space, if you’re in commercial space, you’re the one who’s going to be beaten right now because your tenants are hurting and a lot of them are moving out, a lot of them don’t need the space. If you’re running a failed business, there’s a good chance you are not getting your rent. What could they do to capitalize on these changes? What would you tell them to do?
Frank: I think that we’re seeing […] property companies that are looking at the flexible workplace sector and they’re saying, let’s see if IWJ or Regus can lease space from a landlord, carpet it up a little bit, provide some services, make enough profit to be a multibillion-dollar corporation, I can do that. It’s not that complicated.
It is more complicated than you think (of course), but a lot of property companies are creating joint venture partnerships with local business centers, coworking center operations. A lot of them are entering that industry themselves if they have a portfolio of buildings that are well-positioned.
Another sector is a lot of commercial spaces is office park-style or R&D park-style, and also maker space that shares space. There’s a great model called Flexizone based on another one here called Cube in the US. They’re taking that type of space and repositioning it as flexible space. Another one called BizSpace by IWG in the UK looks like an office park. But it’s all shared workspace with common services and things of that nature.
The key for the workspace of the future is to stop thinking of it as space and start thinking of it as a service. Space is two-dimensional, service is three-dimensional. When someone moves into a two-dimensional space, they put desks down, they put WiFi in, they wire it for technology, they put clerical/secretarial people on the floors to manage the businesses. When those things are shared, they create much better value and much lower cost for the end-users. That is the wave of the future for all officing. I’m saying officing and not office because officing is a verb and office place is a noun, and the noun is going away.
Toby: You think that this is going to be forever, the world as we know it is shifting, and that all these commercial buildings, with all these people jammed in, that they’re going to have to change or they’re going to be slaughtered.
Frank: Just think of two things. First, the term ‘landlord’ is an anachronism, and kind of back off from that. I’m thinking castles, moats, et cetera. It’s sort of an anachronism. The other thing when we talk about change is an old saying. I forget where it came from or who said it, but it’s kind of true. Everybody talks about the new normal, the new this, the new that. The saying is this: ‘A man who stands on the river never touches the same water twice.’ The ‘new’ is constant. Unless you are constantly thinking about adjustments—little micro-adjustments—then you can’t keep up.
You know I’m an old racing sailor. You’ve known me for a while and that’s what I used to do. When you’re sailing a boat, every time you turn the rudder it’s a break. It pushes against the water and makes you go the other direction. The harder you turn the rudder, the slower you go. You want to go fast, make micro-adjustments constantly. You’re constantly micro-adjusting. You’re using the sails to turn the boat, not just the rudder, and you’re constantly accelerating your speed.
In business today, big radical changes are what you want to be thinking about. You want to think, how can I make a micro-adjustment? How can I do it every day? Every new lease I sign, every new tenant I deal with, how can I constantly make an improvement? The old business—it’s the way we did it yesterday, the way we’ve always done it—those death words that create a death knell for most companies really have to be looked at from the property perspective right now. Others are going to end up owning your building and doing what you should have been doing yesterday, and that’s creating a flexible environment.
Toby: You’re the landlord, you see this happening. Maybe it’s time to go to those tenants that are hurting, see if they are agile enough to make changes, and maybe you’re able to make use of their space to make some changes of your own?
Frank: And providing some services. There is a great company called Novel Coworking. It goes ahead and buys buildings—50,000- to 150,000-foot buildings—that had a high vacancy factor—50% or more, usually—and it reconverts/repurposes those buildings—the entire building—into a flexible workspace structure. They’re very full, very successful, they run in a retype model as a property company—about 50–60 buildings down their portfolio—and they can raise all the capital they want, no problem whatsoever because their return on investment is much higher than a conventional building, certainly higher than a building with a vacancy vacuum.
Toby: Do they use Alliance or do they do their own?
Frank: They do their own.
Toby: I bet people don’t understand what Alliance is, though.
Frank: Sometimes, I don’t understand.
Toby: I’ll put it in terms, folks. Alliance doesn’t own the real estate. It doesn’t do the long lease. Regus is the one that does the long lease. WeWork does these long leases and then they sublet. Alliance is software that goes over the top for somebody that owns the building, to provide you customers and takes a small percentage off the top, so they don’t have liabilities.
One of the things I’ve always liked about these companies is they don’t have big, fat liabilities on their balance sheets, so they never have to go bankrupt, which is not true of the others. I don’t think WeWork has to go bankrupt. I know that Regus has had some in their past. When the market shifts, they’re just too big. You want to talk about a rudder, have 10 floors of a building that’s a big rudder, when all of a sudden have space that isn’t needed. […] different because we have a pandemic. This isn’t just a market gone awry.
Frank: There are going to be three layers of change as a result of the pandemic, and going back to your original question of people working from home. Government dictated during the initial phase of the pandemic—and still has—that you must work remotely and you cannot congregate in certain places. It’s the law now. Like it or not, it’s the law, and it’s going to become even stronger in the very near future, at least for a while. As soon as the law or the government dictation of that activity goes away—90–180 days from now—the pandemic is going to be solved.
We have two things happening. We have a new administration that is going to claim it solved no matter what—as any new administration would (by the way) we fixed this for you—and secondly, we have a vaccine. Whether the vaccine really does everything we hope it to—people are so tired of this thing—180 days there will be an announcement. It’s over, everybody’s back to doing whatever they think. As soon as that happens, now the onus for work at home, essential workers, et cetera, falls on the companies individually.
Microsoft has to have its policy. General Motors has to have its policy. Everybody’s going to have an individual policy that they’re corporately responsible for because they can’t say the government made me do it. Government told me you have to work at home. The workers are going to come back and say I’m working from home for six months. Are you going to start paying me for the rent of my kitchen? That’s already happening. That happened in the old telecommuting days when the Clean Air Act was published in the late eighties and early nineties, and the corporations lost.
Let’s say you let me go and you haven’t paid me rent for three years. I need that rent now. Unsafe workplace, […] start cramping down. That laptop computer really includes a printer, a scanner, maybe an imaging equipment, and an unsafe workplace because there’s a three-year-old child that’s unsupervised. All these things will come up and cause even more change.
Toby: I just wrote an article with American Express on some of these issues. It was a huge issue because they won’t make you enforce […] for telecommuting clients or employees right now, but the big issue is it used to be if you had unreimbursed expenses, if the employer says you’re allowed to work at home, that’s one thing. Then, your rights are out the door, but the employer says you must work at home. The question was do I have to buy anything? You could put that back on the employer.
But let’s say they allow you to work at home. It used to be you could write it off on your Schedule A as an unreimbursed business. They remove that unreimbursed business. You can’t do that anymore. It could have been worse. They didn’t know a pandemic was coming, but they did make the situation where it couldn’t be worse for the employee. If your employer isn’t paying for those things, you’re getting hosed.
I would say that you turn back and say if it’s a condition of my working that I would want. We provide. We don’t want them going out buying their own stuff, partially because we want to make sure that the equipment is good. Sometimes, if you’re shopping with your own dollars you start getting cheaper stuff. We said no.
Frank: The company will have to provide the complete remote workspace technology.
Toby: Or access to one, right?
Frank: Or access to it. Again, the model that’s happening is the company will say no, you’re right. You shouldn’t work out of your kitchen; that’s not good. We want you working. You can work one day a week if you like to, but two days a week we want you on a business or a coworking center that’s near your home but you don’t have a problem commuting to. And then every other week we want you in the corporate headquarters for a company meeting or whatever. That’s a dual hybrid model that we’re seeing.
Toby: And we don’t have it yet, right? Maybe in some metro areas, but we don’t have it yet. Would you think that’s what’s coming?
Frank: I think that’s what’s coming. It’s migrating in that direction already. We’re seeing that from the large corporates. As soon as government stops determining the rules was okay, we’re back to normal, whatever normal is, whether it is—I hate the word ‘new normal’ because everyday changes and everything is new—the work near home in a highly flexible office center of some sort, business center, and coworking center.
Toby: We already have the retail stores that have all been failing. You just take some of those retail stores and say we’re going to make it into a…
Frank: Redeveloping malls to include large child care and common work areas have already been happening for the last 3–4 years, and that will just accelerate overall. The big regional malls will survive. Those with the high-end big regional malls, the destination malls. Those will still survive just fine. The local community–based malls or shopping centers is where you’re going to see most of the adjustments made, but those are community. That’s the perfect location in the community as a center for activity. That’s what we’re going to see.
We’ll also see churches, schools be completely repurposed for the way they use their real estate in many respects. All of that is happening right now. This is future stuff; this is going on right now.
Toby: And you could choose to participate in it. Again, with Alliance have you guys seen market increase and people using your services over this pandemic?
Frank: During 2020 we had a 45% revenue and customer base growth.
Toby: And is that normal, like you normally […]?
Frank: I’d like to say it was. Over the last five or six years, we’ve had an average of 20%–25% growth per year, year over year. This year doubled our average growth. As an industry, the flexible workspace industry, since (I’ll call it) 2008 has grown at 10%–12%, sometimes 15% per year, compounding year over year right through the pandemic. That’s a faster take-up in the PC industry in 2000.
Toby: Do you have a Zoom room solution? Is that something that you guys have broken off, or is that something you’re looking at doing small places where an employee can go in and rent it for a day at a lower cost or something like that?
Frank: On a global basis, we have a meeting and conference room structure which includes private offices, day offices, two- to four-person conference rooms on up through training rooms and centers. The zoom capabilities on all of those are dependent upon the AV setup in every facility. I don’t know of a single facility that doesn’t have that anymore.
Toby: The big question then is if somebody has real estate and they’re wanting to diversify into this area, how do they add the ability to have you bring them customers? How do they contract with Alliance? Is that something a landlord can do?
Frank: Alliance works with high-quality operators with a service track record, overall, but if somebody wants to adjust to this marketplace, I would say they should look at some of the very good franchising operations within the flexible workspace industry. There’s a Denver-based company called Office Evolution, which is excellent. Very low cost of entry and very high level of support. There’s another Florida-based group called Venture X, which is also excellent. Those are probably the two best ones in the United States. I would look at those today.
They’re both focused on smaller, secondary market spaces, Office Evolution in particular, where it really doesn’t do anything in the downtown central business district. It does everything in the secondary and tertiary markets. Average space size for a facility of theirs is between 8000 and 15,000 feet. They’re smallish versus WeWork which will be 75,000–100,000. Anybody that needs connection, or Toby, if you want I’d be happy to provide connections to those two companies.
Toby: What if somebody wants a virtual office? We have a lot of real estate folks, we have a lot of realtors, and they say hey, you know what? We’re five people and I don’t want to have a full-on office space anymore. How do I use virtual space?
Frank: That’s very easy. First, you have to determine the difference between a virtual office and virtual address. A virtual address can be digital or it could be something like a UPS store. You can’t call that a virtual office because it’s pretty hard to meet somebody at a UPS store. It just isn’t cool; it just doesn’t work.
A virtual office is what we provide in four- and five-star facilities all over the world. It gives you the use of the commercial address for all mail and package handling, as well as access to meeting rooms, day offices, conference rooms, private offices on an as-needed basis.
As needed is the key. You might say, I need something two hours a day, one day a week, because you have to meet somebody or a certain thing you have to do then. You never need to use more than you require and it’s all done on a month-to-month, 6 months, or 12 month basis, so you’re never hooked into a long-term lease, which goes to your balance sheet. It’s always just a monthly expense, so that works quite well. We have tens of thousands and thousands of clients all over the world.
All markets are dictated by the cost of the dirt under the building. London is pretty expensive, Singapore is pretty expensive, Hong Kong is pretty expensive. Kansas City isn’t. We see prices for a virtual office which is address-only, without predetermining conference and meeting room time, at prices as low as $49–$70 or $89 a month. We see prices inclusive of meeting room time in the $200–$250, $300 range per month.
Toby: Let that sink in. I remember starting and we didn’t have that choice back when we started our office. I just remember buying the servers. Today, we just use the cloud, but you remember that. You spend a couple of hundred thousand dollars on servers, and then the workstation draws $1000 a pop. I remember monitors; it was exciting when they went below $200. It was just ridiculous. Now, everything’s a lot cheaper.
Frank: The issue was you probably have two or three conference rooms in that facility that were used about 30% of the time, but you’re paying for them 24/7. That’s really the big difference. It’s almost our industry has been referred to as a communist conspiracy because you only need to use what you require at the time. Each unto their own and all that sort of thing. We share the workspace to make it more efficient. It has done exceedingly well through the years and the decades as is evidenced by the fact that government is now migrating to this model. Every global Fortune 1000 is in the customer base of ourselves and IWG; every single one of them.
Toby: What I’ve seen is the workspaces are becoming more transitory. You need to be able to go do business in different cities—you need to be able to go—and you can either be a part of that or you can choose to stick to the dinosaur. To me it’s like I’m the typewriter sales guy. Eventually, I got to realize that there may be some market for them, but it’s going to be really small and you may as well get into the PC world. At some point you’re going to have to.
Frank: It would have been even worse if you’re the typewriter ribbon sales guy.
Toby: Those will probably cost a mint now. You have a typewriter but it’s hard to find. Maybe just google it and buy that on Amazon.
It does seem like the world’s changed and I just remember 10 years ago when we’re doing downtown projects and working with those folks. It was so novel. They built the innovation center here, which is helped by Switch, one of the big data hubs here in Nevada, where the fastest Internet […] close to.
They have this center that was made towards an incubator, where all these small businesses would get together and work together. You’re seeing it completely turned on its ear a little bit. It’s really not the collaboration. It’s the expediency of being able to go in there and the convenience of being able to go in there and use space. Like you said, as needed as opposed to buying the space and having it available 24/7, when in all reality you only need it three hours a week.
Frank: And that’s it. You should buy only what you need. Define our industry a little bit, Toby. As I said earlier, our industry combines people, place, and technology into a single bundled product, which is delivered with a highly flexible service agreement. Within our industry—you’ve referenced a couple of things—there are different brands or models.
There’s the classic service office or business center model, which would be illustrated by Regus. There is the code and that model takes people, place, and technology, and combines it with professional imaging services. There is the coworking model, which takes people, place, and technology, and provides business growth through a collaborative community. Then there’s the incubator model. That’s the same thing but provides mentoring. Then there’s the accelerator model, which does what an incubator does but provides access to capital.
Those are your primary structures, and you can apply it to industrial models that have storage space combined with the people, place, and technology. You can combine it with technology models that really have server farms combined with people, place, and technology. All these different elements apply to the specialized needs of different types of companies. There are media centers, there are culinary centers. All of these niche markets have evolved and everybody’s using just what they require. They’re keeping it off the balance sheet.
Just imagine if you’re Cisco and you can take 10 million feet of 10-year lease space off your balance sheet. What does that do to your capacity to improve your stock value and raise capital for future growth? That’s what every major Fortune 1000 company is going through right now. They don’t just say we don’t need this. They say we get rid of all this debt on our balance sheet.
Toby: Which goes straight to the company […]. Absolutely. It’s all valued at the bottom line.
Frank: That’s the huge driver.
Toby: Yup. Frank, I really appreciate you coming on and sharing your knowledge. If somebody wants to learn more about Alliance, how do they do it?
Frank: They can go to either alliancevirtualoffices.com, or if they just want to learn about our industry they can go to allwork.space. We reach about 5½ million people a month on Allwork, so that is the industry’s largest news and information website—by far—and if people want to know more about the industry. If someone wants to reach me personally, they can do so through your office and I can put them in touch with whatever needs they require.
Toby: Perfect. I appreciate your time.
Frank: My pleasure.
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