Katharine Lau of Industrious on Chasing the Coworking Trend

Lau said that Industrious has moved away from traditional leases. “A majority of our current pipeline is revenue or profit sharing leases of varying terms, but generally for 10 to 15 years,” she said. “Traditional leases often pit us against landlords and we want to align ourselves so we’re on the same side.”

Commercial Observer: What do you look for in terms of real estate?

Katharine Lau: It really comes down to where there is customer demand and finding the buildings or the physical assets that fit in those areas. There are a lot of things that go into demand at Industrious or within the coworking space that’s very different from how a retailer would do it. We rely on real estate metrics. We look at vacancies, absorption, how rents have increased over time. There is a correlation between that and our business.

We also look at demographics and psychographics. Are these people eating at Sweetgreen or are they eating Subway sandwiches? Do they shop at Sears or do they shop at Nordstrom? We also look at proximity to public transportation, affluent residential population, we look at daytime work force. Is it a daytime community or is it more of a mixed-use environment?

Another great one is looking at who the tenants are  in the immediate area and understanding their growth pattern and that’s another good indicator for demand. But it’s a science that’s evolving. When I was at Equinox the exercise was, “where are the rich people?” Where do they live? Where do they work? Ok, let’s put a gym there.” It’s much more nuanced in the coworking space.

I assume when you are talking about the different indicators, Sweetgreen versus Subway and Nordstrom versus Sears, you’re targeting the Sweetgreen and Nordstrom customer demographic?

The Industrious customer is quite diverse, but I would say in general, since we are the premium player in the coworking space, that our customer is more likely to buy lunch at Sweetgreen and shop at Nordstrom; therefore, we keep that in mind when making site selection decisions.

What about in terms of real estate, in terms of the buildings or environments that you look for?

Our portfolio is unique in that we are in high-rise CBD [central business district] office buildings, glass, steel-towers and we’re also in industrial warehouse, adapted-use buildings and everything in-between. We’ve opened a location in a retail space, in an enclosed mall. It’s called Scottsdale Fashion Square.

Is that in Arizona?

Yeah and that was a partnership with Macerich. That type of diversity in our portfolio really indicates that Industrious and this business model and our brand can really be successful in different types of environments.

How long have you been in Scottsdale?

We struck the deal last year, but we opened in February this year.

How is that location doing? What kind of customers are you getting in that environment? This kind of plays into this trend of activating retail properties with untraditional offerings.

Totally, totally. Scottsdale Fashion Square was definitely an experiment that paid off. We opened around 65 percent presold. I don’t anticipate that being the case everywhere, but it was a good indication that there are customers that are happy to work in a retail environment because of access to lunch options, shopping and other amenities in one singular place.

In Scottsdale we took over a former Barneys box so we have a dedicated entrance, we have a pretty high-profile facade so people know we’re there, that it’s an Industrious building. It’s validation that there is an opportunity to reassess these retail spaces that more traditional retailers are no longer occupying.

Do you have more plans to partner with Macerich?

Yes. We have signed our second [deal] with them, but across our partnership strategy we are working on our second and third locations with a number of existing landlords, building relationships with these landlords that go beyond a single deal, which is very exciting.

Across our landlord relationships, we’ve signed probably 20 partnership agreements with landlords and it spans the entire country. Different types of buildings, different kinds of environments, different markets so that’s really encouraging.

With the partnership strategy, there’s a huge opportunity to help landlords in activating their buildings, in building a pipeline of future tenants who would then take space with some of these landlords. Now working on our second and third locations with these landlords, the proof is in the pudding. They want to keep working with us, and not just in coworking but also in amenity management. It feels like in some cases that these landlords are outsourcing the flexible workspace and amenity management because landlords have a certain expertise, in investing in real estate, in property management, facilities management, asset management, financing and all those things. And our expertise is on the operations side so it just makes sense that this is happening.

Can you tell me what market you are targeting with the second Macerich location?

Um, let’s just say it’s West Coast. It’s in California.

You partnered with EQ and the Granite Properties in Glendale. Are those some of the companies you are looking to do more with?

Yes, but those conversations are still pretty back and forth.

What markets?

In the L.A. area with Granite. And then with EQ, we’ve been exploring the possibilities in L.A. and across the country.

Any plans to go international, and, if so, where?

There are. We’re finalizing a few things. I think the first couple will be either in the U.K., Canada or Mexico. But there might be some other unique ones thrown in. We see those opening in 2020.

Are there any fears or concern about an impending downturn or flattening of the market and its impact on Industrious and the coworking space?

We tend to be quite conservative and thoughtful in our underwriting and our downside risk analysis. When we evaluate every single project, we always consider the downside. Every single location, even in a downturn scenario, has to do well so that we are mindful of that, especially as we’re partnering with owners. In terms of the downside risk, we’ve built in enough profit margins and enough buffers that we can absorb any kind of recession.

The fears I have are not necessarily about Industrious, but more so about the broader coworking space. With the decisions that WeWork (WE) is making and other big operators are making—expanding really quickly—I don’t feel like everyone will weather the storm. Maybe they will get hurt a good deal, then how does that reflect on Industrious? Because obviously with a lot of the big names, if something happens to them a lot of owners and stakeholders in the real estate industry will automatically think that must be the same for all coworking companies.

You also have traditional brokerage firms that are launching their own coworking brands as well, such as JLL and CBRE. What are your thoughts on that?

I’m curious to see how that plays out. Certainly, they have a lot of strong relationships with occupiers. What hasn’t really been proven is their ability to operate a day-to-day operation. When you think about it, in a hotel, you have to make a guest happy for one or two nights, however long their stay is, but within an office space, you basically have to make your clients happy five days a week, 52 weeks a year. There are so many opportunities to fail that the operational piece is where we have expertise. It will be interesting to see how some of these brokerage houses get used to that.

Are there any concerns since they do have this relationship with occupiers and properties that that could slow down your own expansion?

No, again we’re not concerned. If anything, it’s probably a good sign that more people want to jump onboard. The entry of these traditional real estate companies just further validates that flexible office is not a trend, it’s one segment of the office industry.

Where do you see coworking evolving in terms of what you offer clients?

We learn so much from our own customers, how they utilize space, what they want, what their concerns are, what their frustrations are, that we can then expand our scope and our expertise.

We’re already doing this in Playa [Vista] and other projects, expanding into amenity management. We have a lot of built-in amenities in our coworking spaces, but to offer that type of experience to a broader tenant base or building audience or entire campus is definitely in the cards for us in the future. If we can expand our scope to a bigger community I think that will be a big opportunity for us.