COMMENT: CBRE has bought a 35% stake in flex space provider Industrious for around $200m in cash. In addition to the cash, CBRE will transfer its own 10-location flex brand, Hana, to Industrious. What does this tell us? It tells us that CBRE is a chicken, and Industrious is a pig.
I have a lengthy presentation about #SpaceAsAService, including eight factors critical to success. Number one, in the prime spot, asks: are you a chicken or a pig? This riffs on the joke: ‘What is the difference between a chicken and a pig in a bacon and egg sandwich?’ To which the answer is: ‘One is involved, but the other is committed’.
The reason that is in the number one slot is because, although it does not matter which you are, if you are going to be an operator of flex space you have to be a pig. Operating flex space is too complicated, and too much a mission, for it not to be central to your core business.
For a giant brokerage like CBRE, Hana was never going to be core. Yes, it had the clout to throw a lot of money at it. But without it being something they invested real, from-the-core commitment in, was it ever going to succeed? Its core, transactional business would definitely benefit from having ‘skin in the game’ of the flex market, enough so that it deeply understood the dynamics of the sector – but strategically the much better option, by far, is to do so via a true ‘pig’ company like Industrious.
Skin in the game
Where this leaves other real estate services companies is interesting. Has the Hana experience 100% invalidated any of them trying to launch their own flex operations? Probably. So what should they do?
Last year I criticised another real estate services company partnering with an operator, on the basis that it should be buying at least a decently sized stake instead. If it executed the partnership well, buying a stake would become almost an inevitability – but by then it would be much more expensive. The ownership stake itself would provide the incentive to execute well. Put some skin in the game. And save yourself a fortune.
The CBRE situation has, I think, validated this argument perfectly. The pandemic may have done this particular company a favour, in postponing its partner’s growth trajectory. But if I were them I’d be coughing up for that meaningful stake ASAP.
Where this gets interesting is in thinking about the position of landlords. Covid-19 is clearly a near-term ‘bug’ for the flex industry, but it is a massive long-term feature, as the demand for flexible space is set to grow enormously – to the size that every landlord, and even every prime multi-let office building, will need to offer flex options.
To date some landlords have been building their own offerings. But are these efforts even nearly enough? Are we dealing with chickens or pigs? I think most definitely the former, as with CBRE. The skin in the game is trifling, even for pre-pandemic conditions – for post-pandemic demand, orders of magnitude off.
Make your mind up
So, what to do now? Current plans are too little. Is internal commitment lacking as well? The flex sector is becoming core, or at least a critical component, of any serious, scale landlord. So ‘pig’ behaviour is needed. Are they up for that? CBRE said it was with Hana. But it wasn’t. Perhaps, given the way the real estate industry is structured, that was, and will be, an inevitability.
It’s make your mind up time. Landlords that are building out their own flex operations need to up their commitment tenfold, or they need to make plans to back out immediately, and work on plan b – which is to decide who their target customers for flex space are, then pick a range of truly committed partner operators, because different customer types require different brands and various value propositions.
Then firms need to align the incentives between themselves and these operators – by buying meaningful stakes.
Antony Slumbers is a real estate and technology consultant
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