Industrious CEO Jamie Hodari on the Next Big Real Estate Trend

It's called 'core-flex leasing,' and tenants and landlords are going to want it, he says


For the many companies that have emerged to satisfy the demand for coworking, or places where folks can come to work without their bosses having to commit to the space for years and years, it’s been a strangely lucrative time. 

The Wall Street Journal reported in late August that shared office space firms like WeWork (WE) and Industrious were capitalizing on businesses losing their sense of long-term direction as they grapple with the multiple meanings of the pandemic. WeWork had one of its best sales months in July. And Industrious had its best sales week ever in its nine-year history during the last week in July. And it came in at 489 on Inc. magazine’s 2020 list of the top 5,000 fastest-growing companies.

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Commercial Observer caught up with Industrious CEO Jamie Hodari earlier this month to help explain what’s going on. We met at the firm’s Equinox/Hudson Yards location, at 31 Hudson Yards, across a courtyard from the supertall 30 Hudson Yards, a courtyard partially filled with a tent under which outdoor spin classes were being conducted. It seems the uniform for Manhattan workers these days is not a suit and a tie; it’s yoga pants and a top to sweat in.

His comments have been edited for clarity and brevity.

Give me a short history of Industrious.

I co-founded the company with my best friend and next-door neighbor growing up [Justin Stewart, the company’s president, who oversees the company’s real estate team]. He was an only child, so it was almost like brothers.

And, almost a decade in, we still, really, I think, love working together. It helps calm some of the ups and downs of being entrepreneurs. I know the typical experience in high-growth startups is you have a lot of co-founder friction over time, but I feel very lucky that that’s not the case here. It’s part of what makes the company what it is.

It was just us, and now we have 500 employees. It’s wonderful that we still have each other. The founding of Industrious is something that me and Justin have reminisced a lot about, and draw a lot of energy from.

I was running an educational organization called Kepler, that runs affordable universities in East Africa, using a kind of hybrid model, where you do online lectures at night, and you do your homework and stuff in-person during the day. And our largest funder was Ikea. I had a meeting with the president of the Ikea Foundation in New York, and we had very few New York employees. Our New York offices were only three people, so it was in a shared workplace.

This was the most important meeting of my life. When you run a nonprofit, your biggest funder is kind of your boss. I went to prepare and the table was sticky, there were lightbulbs out, it was very loud in the hallway, and the acoustics were bad. And, at the last second, I had to email him and say, ‘Can we do this at a coffee shop across the street?’

I was just so embarrassed, and also so frustrated, that I was paying for a workplace and the quality was so low, I couldn’t hold the most important meeting in my life. I had to hold it in a coffee shop.

And, Justin, he was working in real estate and had a similar experience with some Chinese investors.

And we just said, if we want to take advantage of a flexible workplace, but need something more professional and more elegant, there must be 50,000 companies that feel the same way. 

I very firmly believe that if you have under 200 employees, companies should be buying their employees workspace as a product. They should not be ripping workspaces to the studs, building it out from scratch, signing a 10-year lease for 71 employees. Only in the last three to four years have conservative companies found that providers like Industrious could meet that demand.

So what kind of agreements are you doing instead of leases?

Instead of signing a lease with a landlord, and you owe them $70 a square foot every year, it’s much more like a hotel. We call them either management or partnership agreements, and you basically work with the landlord, creating a shared workplace in their building. And then, you pay the management fee and an incentive fee if the unit does well. It’s a complete transformation of the business model.

We’ve done 100 management agreements, and they’re the gold standard, but they’re extraordinarily rare still, outside of Industrious. Justin’s done a very good job.

What do you think gives Industrious an edge over WeWork, Knotel, Convene and the other companies that are in your space?

There are two things: No. 1 is that the DNA of the company from very early on is built around saying, ‘Can you deliver a workplace experience to employees that’s on par, or better, than when customers do it themselves?’ There’s a clarity of focus that a company is solving for. We weren’t solving for the highest possible revenue growth. We weren’t solving for the lowest possible cost base. We weren’t solving for how to build for a quick exit. 

And we’ve been doing that for 10 years or so. Over time, there began to be big, positive differences for people who worked out of Industrious vis-a-vis other providers.

No. 2 is, because of those outcomes, it enabled us three years ago to transition our business model from signing leases with landlords to signing management agreements. There are trade-offs to doing those agreements. Despite those tradeoffs, that difference in business model has been a real source of advantage for the company, because it’s a much less risky business; the management agreement business is much steadier than leases; and you sit down with the landlord and work together for the best possible outcome, rather than have an adversarial relationship with the landlord.

So, obviously, you’re in partnership with Equinox, but you are also in partnership with Related. This is Related space we’re sitting in. If they find someone who’ll pay considerably more than you’re paying, they’ll kick you out.

And that does add a layer of complexity. Your customer is the occupier and the landlord, and you’re trying to fulfill both their needs simultaneously. That’s an advantage in the sense that you can bring everyone to the table and figure out what’s best for everyone. But it also means you have more masters you’re trying to service.

What do you think the COVID crisis has taught the coworking industry? And what are you doing to address the concerns that are out there? I saw on your website that you updated your layouts and reduced capacity.

The general consensus in the real estate world was that the pandemic would hurt the flex industry in the short run, but it would accelerate adoption of what we do in the long run. That sounded nice on paper, and was nice to hear and to think, but it was all prospective last year. 

Every month now, we’re selling somewhere around the pre-COVID sales record. Maybe at the high level, I would say the changes in workplace strategy and individual people’s preferences wrought by the pandemic have, by and large, favored our industry. From what I know about our competitors and what I know about our numbers, the data bears that out.

People want the right to decide where they want to work and when. Almost every company in the country right now is moving toward allowing their employees more flexibility, which means greater variability on who’s in the office and when. All of that stuff is really hard to accomplish in a company’s own real estate. It almost invariably requires a partner to accomplish: a workplace-as-a-service provider.

So, basically, you partner up with companies and they tell you, ‘We want this in our spaces?’

Yes. This might be too wonky for the article, you can decide. But I think the other thing is the next frontier of where this industry is headed. For anyone that works in real estate, I think they will be surprised that two years from now, they will be seeing an enormous amount of this, a new type of leasing in an individual building. There isn’t a generally accepted term for it. The closest thing would be core-flex leasing, where a company signs a lease for a portion of a building, with a right to grow into flex space in the building.

For companies right now, who don’t know if they’re going to have 200 people in the office, or 500, they can’t go sign 100,000 square feet. But they can find 50,000 with the right to grow into more space, if they end up growing or they end up with more people having the appetite for coming into the office than they thought they would. For the last 20 years, most customers would have either signed a long-term lease or go with the flex market. What you’re seeing for the very first time right now is a set of customers saying, ‘I want both in a single building.’

We have a big project, for example, with Vornado [Realty Trust] at One Penn Plaza. And I suspect you will see a lot of that at that building.

In the Aug. 24 WSJ article, they quote somebody from WeWork saying that in a time of uncertainty, companies are looking at flex as a way station while trying to figure out what their employees want.

I think that was underselling what’s happening right now. The implication of that quote was that companies are stuffing their employees in a shared workspace while they figure out their plan. And, by implication, the eventual landing spot would be to go back to the traditional leasing market. What I see is a much more durable shift in companies’ workplace strategies.

In none of these meetings with Industrious are they saying, ‘I’m just looking for swing space.’ They wouldn’t be paying Industrious for that anyway. There are more low-cost options for that. From everything I see — from the CBRE (CBRE) deal [the real estate services firm announced in February that it had invested more than $200 million in Industrious, taking a 35 percent stake in the company] and meeting with most occupiers, saying, ‘How do we move to a nimble, more employee-centric workplace strategy?’ — that can accommodate work from anywhere in an ongoing way, not as a temporary way station.

That same article said that the last week in July was Industrious’ strongest in its history, so I’m curious about the weeks that followed.

That has held up. If anything, I am surprised by that. The airline and hotel industries had very strong Junes and Julys, but then the delta variant caused pretty material dips in August and now September. If you were an outside observer, you would suspect the same would happen in the flex workplace industry.

What about your own flexibility? How prepared are you to go from the post-COVID environment to whatever the new normal is?

That’s a great question. The genesis of the shift to management agreements was that I was speaking at a conference, and at every conference I ever spoke at, someone would say, ‘Hey, what do you think about the biggest problem in your industry, which is the mish-mash of assets and liabilities, long-term obligations with your landlords, and short-term contracts with your customers?’ 

And I had a prepared speech I would always give about why it wasn’t as bad as it seemed, and I just felt that my heart was not in it. It just felt a little bullshitty. Why am I trying to explain away what is obviously the biggest problem with this industry, instead of trying to solve the biggest problem with this industry?

The shift to management agreements was primarily predicated on resolving that issue. There are all sorts of additional benefits, one of which is it makes you a much more nimble company. You are sitting with Vornado, you are sitting with Brookfield or Blackstone, or a family-owned building, and you are figuring out together how to respond to what comes next.

It seems that up to this point, people figured that demand was always going to rise, though the degree and the velocity may vary. But now, real estate folks aren’t so sure. The five-day workweek has become the three-day workweek. Can you maintain under those circumstances your own velocity?

Everyone assumed prices would go up, up, up, up, up. A lease you signed in 2015 could be above water, but, if they signed in 2018 or 2019, below water. With the partnership-based model, there’s a little more ability together with the landlord to ride the ups and downs of the market.

I am biased here, but all day, every day I’m in meetings with the companies that are trying to figure out what their future-facing plans are. I can’t say for certain what is going to happen with commercial real estate more broadly, what’s going to happen with pricing, what’s going to happen with demand. 

Our industry is still such a tiny fraction of commercial real estate more broadly — it’s 1.5 percent, it’s 2 percent. The vast majority of businesses are saying that flex is going to comprise, say, 20 to 30 percent. You need to build a business that can withstand ups and downs. You need to build a business that doesn’t just assume everything is going to go up and to the right.

I think you’re going to see continued compounding growth in demand for flex office, even if demand for long-term traditional leasing stagnates.

Weren’t you guys thinking about going public before COVID, and what are your thoughts about the WeWork misadventure?

We were in high-growth mode and we added 1 million square feet last year, and we’ll probably add 1 million square feet this year and launch about 50 locations next year. What often happens with these late-stage, high-growth companies is that they consume an enormous amount of capital. So, they have to IPO simply to find the capital to meet their burn rate.

I think we’ve chosen a slightly more conservative business model that doesn’t quite have those dynamics. As a result, our hands aren’t forced by having to IPO by a certain date or else. On the other hand, it could raise some inertia. It’s more a strategic decision about when our investors would want liquidity. I think that would be some time next year.

It’s something the press writes about a lot. Every time I give an interview, if the IPO comes up, it ends up in the headline. It would be disingenuous to say it plays a front-and-center role within the company. It is probably an important strategic decision. We have to set a date and move toward it. But it’s a top 15 decision at the company, not a top five decision.