This morning we announced a $25 million addition to our Series B, bringing the round’s total to $62 million. A growing startup raised more money. I’d forgive you for not thinking the world has changed.
But we also announced today that we’ve acquired PivotDesk, the digital flexible workspace platform. And that, whether or not you work in real estate, is part of a story that definitely merits attention. The real estate and workplace worlds are changing more rapidly than many of us thought possible even a few years ago, and it’s having profound effects on most American businesses. The rapid rise of coworking forms part of that change, but it’s not all of it.
Two powerful and contradictory trends have battered the fundaments of office real estate to a breaking point, and companies like us who are working to resolve that tension see a long journey ahead. So I wanted to use the occasion of today’s announcement to lay out the transformation going on in commercial real estate right now, and where we see things headed in the next few years.
The two trends that are transforming commercial real estate
For most of the twentieth century, the workplace needs of American business were happily obliged by commercial landowners. When businesses needed to concentrate downtown, cranes dotted the skyline of every major American city, and office towers rose to meet increasing office demand from Boston to San Francisco. When businesses wanted to follow their labor pool to the suburbs, the suburban office park entered its (regrettable?) heyday. Large asset owners, with their strong balance sheets and access to debt, chased demand wherever it went.
But there has almost always been one hidden building block of that relationship — long-term commitments from the businesses that leased their space. While residential leases typically only last a year, commercial leases last 10 or 15 years. For as long as businesses continue signing up for that kind of commitment, banks lend to buildings, buildings pay some of that forward to their tenants in the form of incentives to help them pay for their construction costs, and everything hums along on track nicely.
Trend #1: businesses’ rapidly growing need for flexibility
But without that, things start to go off the rails. And that brings us to trend #1: businesses’ rapidly growing need for flexibility. American businesses are finding it increasingly difficult to sign 10-year leases. As the pace of change increases in business, with every passing year the ability to project headcount in a city 10–15 years in the future is becoming more and more difficult, not just for small businesses and startups, but for the Fortune 500.
Trend #2: businesses’ increasing need for high quality, engaging workplaces
That discomfort is compounded by a competing directive, trend #2: businesses’ increasing need for high quality, engaging workplaces. Nearly all recent survey and employee behavior data makes it clear that workplace engagement has rapidly become a primary determinant in where people decide to work. For example, nearly 70% of millennials would pick a job for a better work environment. And because social media amplifies images of Google or Facebook’s offices, everyone at this point knows what a wonderful, inviting workplace looks like, even if they work in a soul-crushing, fluorescently lit cubicle farm. So American businesses of every size and stripe are racing to improve their workplace environment, lest they lose the recruiting battle to their competitor that does.
Why the two trends can’t play nice
For most businesses, these two trends have begun in recent years to make for a bitter cocktail. To understand why, think for a moment about why a residential lease only lasts one year while an office lease lasts 10–15 times that. When you move out of an apartment, you take your TV, your toothbrush, your sheets and some furniture. Your landlord sweeps the place up with a broom, and she’s ready for a new tenant. She doesn’t rip apart the kitchen every time a tenant moves out, or switch the location of the bedroom and the bathroom.
For large tenants in the office world, though, that’s exactly what happens. If Coca-Cola were to move out of a building in Dallas and Snapchat were to move in, they would rip apart and reconstruct an enormous portion of what’s existing. That’s time consuming and expensive. The payback period for that kind of buildout is, you might have guessed it, 10–15 years. And that’s why the two trends that dominate workplace demand right now tend to act in opposition: as businesses seek to up their office game, they’re cut off at the knees by their inability to commit to a period sufficiently long to fund it.
The diagram below lays out the consequences of this tension. If you think of the office market as a matrix, there is a gaping hole in the high-quality and flexible quadrant. No one, until very recently, had been able to provide a truly high quality, engaging workplace environment with flexible enough terms to match the needs of most businesses.
The problem is, that’s the dominant quadrant. I would venture that 90% of customers, if you held everything else constant, would prefer for their offices (or at least everything other than their headquarters) to be in that quadrant. The reason so few workplaces fit there has never been an issue of demand, but supply. Until recently.
Why coworking has grown so rapidly
When we launched Industrious, the question my cofounder Justin Stewart and I most often faced was, “what is coworking?” That was only three years ago. Now coworking not only feels ubiquitous, but it continues to be the fastest growing and most dynamic product in the hospitality and real estate spaces.
The reason is simple. Coworking resolves businesses’ quality and flexibility problem by creating a dynamic that’s closer to the residential market: office environments that are attractive and useful to multiple types of users, and as a result, don’t require razing everything and starting from scratch whenever a customer leaves. On top of that, by recalibrating what’s private and shared in an office setting, coworking brings into play sharing economy dynamics that allow a team of 5 to experience the type of quality and diversity of space uses, as well as amenities, that would typically only be available to teams of 250+.
For this reason, demand for coworking has seen an extraordinary explosion over the past few years, in nearly every city and across a shockingly wide variety of customer types, from solo entrepreneurs to oil companies with 50,000 employees.
The strongest players in coworking have elevated this a step further. At Industrious, for example, a relentless commitment to customer service and hospitality, paired with a vision of the office as a place that can be welcoming, comfortable, even cozy, has resulted in a network of spaces across the country that transform the way it feels to come to work every day. Nearly 90% of our customers say they’re happier and more productive after having moved to Industrious, and our customer satisfaction scores (NPS) are double the hospitality industry average.
Why move beyond coworking?
If coworking is growing so rapidly — our business, for example, has tripled in size the last two years and will triple in size again this year — why expand our product offering? Because in more than three years in this business, I’ve never heard a customer say “I want coworking.” What they say is, “I want my employees to love coming to work, but I can’t commit to a 10 year lease and create this all myself. Can you help?” That’s a powerful demand, and companies that can truly deliver on it will thrive. Coworking is a vital part of meeting that demand, but it’s not the entire solution set.
The companies that win in this space are going to be the ones that can be true partners to businesses in solving their flexible workplace needs across the country. Not only for teams of 10 or below. Not only in the Southeast. Not only for their young employees. And not only when they happen to have room for them. That requires a broader solution set than a simple coworking network.
For us, buying Pivotdesk is the first step in building out a physical and digital set of solutions that add up to a true outsourced flexible workplace solution for our customers. One that delivers spaces teams love no matter who or where they are.
So what’s next?
There’s not a lot we can say with certainty about what the workplace of the future will look like, or how enterprises will manage their real estate needs a decade from now. But there is one lesson from recent business history worth noting. This is starting to look a lot like other outsourcing trajectories, whether it’s manufacturing, customer service, or IT. Businesses are moving a cost line from a fixed obligation they deliver themselves, to a flexible service they consume from a partner: think for example of the transition from companies managing their own servers to using Amazon Web Services.
If you think of the Amazon Web Services example, the lesson is that once an outsourcing trajectory starts to gain momentum, the pace of change can start to accelerate very quickly. It looks very much like the workplace world has hit that point, and those of us in the heart of that change have an extraordinary opportunity at our hands if we can get it right.