Adaptive Design and Flex Spaces: What Landlords and CRE Should Learn

Introduction to Adaptive Design and Flex Spaces

Drew: Welcome back to the Peak Property Performance Podcast. I am your co-host, Drew Hall. I'll tell you about today's theme first before I introduce Bill and our special guest for today. Today's theme is going to be what co-working operators understand about space utilization that traditional CRE often misses. So before we get into that, let me first invite you all to follow us, to like and subscribe, please. We are trying to influence a revolution, as we like to say, remind our listeners to do all of that, spread the word about this Peak Property Performance movement. If you think that you know someone who would be a good guest, let us know or let them know to contact us. And in terms of contacting us, you can find us on the peakpropertyperformance.com over at opticwise.com. You can find us on LinkedIn under OpticWise, or you come to Bill or myself specifically. It all leads back to the same place and we'd love to have you. These conversations always ended up being very insightful, lots of good feedback. So keep that coming. Without further ado, Bill Douglas, co-host, welcome.

Bill: Thanks for the intro, Drew. I always enjoy it when we have international guests. And today we're joined by Alex Passler, a global commercial real estate and flexible workspace operator with deep experience in space utilization and adaptive workplace design. In this episode, we'll discuss what co-working operators understand about utilization data that much of traditional CRE still misses, including how people actually use buildings, how operators adapt spaces based on real behavior and what that means for the future of office, mixed use and multifamily properties. Today Alex is in Dubai. I don't think that's where he lives, but he's calling in from Dubai today. So Alex, welcome to the show. I'm excited to have this conversation.

Data-Driven Evolution of Flexible Workspaces

Alex Passler: Alex, let's start. Why flexible workspace operators, or how, or when, flexible workspace operators became data driven, not even necessarily by choice, but by necessity. So when you compare that flexible workspace with traditional office ownership, why has co-working and flex workspace been forced to become more data driven?

Alex Passler: Yeah, I think there was a number of things. First of all, the usage or uptake of flex space is greater than ever before. Pre-COVID saw already a significant increase in usage of flexible workspace, but what really kicked it off was COVID. And that also shifted how people work within a space. Before it was a lot about sharing multiple products within a building. So whether it's open plan, co-working spaces, meeting rooms, lounges. So it was very important to use data to design a product which would really cater for where there were friction points or points where people would cross paths from different companies or different users would cross paths within a space. So you'd use data to design spaces like breakout areas, lounges to define how big your meeting room mix should be. That was kind of the run of the mill use of data and it became more and more relevant as the sector started to grow. Once COVID came, you almost had to then reverse engineer everything and create more private spaces, less friction points. And again, that was very much a data-driven decision to how you can not negatively influence your revenue, still continue to have multiple companies working on one site, but have as few as possible friction points or connection points. Data has played a more and more significant role in flexible workspace.

Operational Complexities and Space Utilization

Drew: Yeah. Well, I mean, is there any particular operational complexity that you can think of, like whether it be like matriculation paths through the building or just anything logistics wise, is there anything in those operational complexities that pushed you toward that deeper data collection? And then once you had the data, you were surprised at what you saw. Is there anything that you can think of there?

Alex Passler: Absolutely. One of the biggest surprises was probably one of the most important piece of data that we had to collect was the actual usage that coworking or flexible workspace operators bring to a building in general, right? So when we were pitching to multiple landlords to put in a flexible workspace into their A lot of landlords are very reluctant due to the heavy foot traffic that a flexible workspace is known to bring. So landlords are concerned about their elevator usage, number of people and the density of number of people on the floors and things like that. So this was a big roadblock for us in trying to secure the right buildings. So we started to run an exercise over a six-month period to track usage patterns of our members, of our tenants, so that we can go back and demonstrate that we don't think that the usage is any more than it would be on a single tenant occupation. So what we found out was actually the usage was a lot lower, predominantly because if you take a 50,000 square foot place and you've got one tenant in there, they will all have the same working hours. They'll go to lunch at the same time and they'll leave the office at the same time. So there's a lot greater congestion if you were on elevator wait times and leave an occupancy at one time on the floor. As we were tenanted with multiple different companies, they all have different work time schedules. So we could actually demonstrate through data that we're actually a lot building friendly, if you wish, to most of these office spaces than a regular tenant. And that really did open up a lot of doors.

Bill: Alex, I was going to ask next about what owners get wrong about space utilization. And you already teased that, right? So you said that they often think that co-working is going to be a congestion nightmare. So what are some of the other large misconceptions owners still have about how people actually use their commercial space? Not necessarily just co-working, but some other ones that you were able to sort out that were or were not co-working related.

Alex Passler: There's several things and they all, at the end of the day, come back to flexibility. I think, you know, for landlords leasing out space, they often prefer a larger conventional tenant than a flexible workspace operator because they feel that they have a stronger covenant or they're stickier, they're signing a long-term lease where their tenants in flexible workspace are signing, you know, a lot shorter term. What I think a lot of landlords are getting wrong is that flexible workspace in the building have access as a buffer, as a cushion or shock absorber for their vacancy rates. You've got tenants who are coming into the building, go in the building on a full floor, two floors. They want to downsize. If there's no flexible workspace option in the building, they'll probably give up their space and leave. Or if they want to grow and the building's full, they can't do that and end up leaving to a larger space. So having some form of flexible workspace in the building often helps secure that long-term stickiness for the rest of the tenants in the building, not just the tenants in the co-working space. And it has a lot to do with usage. There's a lot of tenants which will go into a building, don't necessarily have the budget to take a full floor and would look for a smaller option. What we're seeing now is actually there's a huge flight for quality in occupiers taking whatever space that be, whether it's conventional or flexible. So they tend to want to take a smaller footprint for their core business units and have other more hybrid force using flexible workspaces. So there's a lot of misconceptions about flexible workspace or just commercial real estate in general and what makes it sticky for tenants to stay in long-term. Amenities have played a big role in that as well. You know, go back 10 years, an occupier of a large building would typically want to have a coffee shop on the ground floor and it became bike racks and it became a gym. And now it's just, now it's full blown. They want daycare for the kids. They want all kinds of additional services which you wouldn't normally find in an office. And that is becoming a huge trend at the moment, that increase in amenities in a building.

Drew: We're seeing, even in multifamily, we are seeing flex or co-working spaces being implemented because that's one more amenity for apartments. We were seeing in workforce housing, you know, we're seeing the smaller the units, the more the push for that. So it's not just office buildings that are looking at this as a flex option.

Alex Passler: Absolutely. Absolutely. Obviously we do a lot of work in Asia and in Asia, the residential units, the square footage per apartment, for example, is a lot smaller than in the U.S. for example. So the work from home policies, hybrid work from home policies really doesn't work that well in Asia because either they just don't have the room or they're working on a laptop in their bedroom with a screaming child in the vicinity. So that's really seen an uptake in residential developers putting in the floor of co-working and then some breakout lounges, even a few meeting rooms in their residential towers. So that's definitely a growing area at the moment.

Adaptive Design Principles in CRE

Bill: So Alex, I mean, in terms of adaptive design, you mentioned just now the principle of like having a smaller footprint for the core, for instance, kind of drilling into some of those specifics. What are some examples of how you design spaces today knowing that the usage patterns will change over time? What are some details of how you can do that?

Alex Passler: Yeah. So that's always been a big cost. You know, it's been a big cost bucket for any landlord, whether it's a traditional landlord or a flexible workspace landlord, the way changes in work trends or workplace strategy throughout the last 10 years specifically, we've seen huge changes in working patterns. So being able to design ahead of time in a way that you can adapt without tearing up a whole fit out and redesigning, reconfiguring is becoming more and more important than it ever used to be. That goes back to the technology question, right? So a lot of landlords now are using more and more sensors to really track movements within the office and how people are using space. I'm not sure everyone uses the data much, but we, in our case, have used a lot of data to plan ahead. And when we build out space now, we build out all the base builds, mechanicals, engineering, air con, all these things on a very tight grid so that we can move partitioning six feet, 12 feet one way or the other within an hour or two, same with floor boxes and all kinds of things, right? So just minimizing the downtime, minimizing the waste, I think ESG is becoming a big one. So we don't want to be tearing down drywall every time and turn it like a different configuration. So it's about building and designing to be able to very quickly adapt with minimum waste, minimum capex and minimum downtime. I think downtime is becoming a big one.

Drew: Wow. That's impressive. You said within an hour or two, like those types of modular walls. That's interesting. So am I right? I mean, I'm kind of picturing like a nice conference room in a nice hotel or something like that. Is that generally kind of the same thing where you do have permanent walls in the space, but maybe those are pushed out more than normal so that you have these temporary walls that can be moved like you're saying?

Alex Passler: It's a little bit different because we typically sound insulation or noise travel is also a big consideration.

Alex Passler: I think what you see is movable walls, which you would have in a hotel conference facility. They don't necessarily solve for that. What we're doing is more, if you look at the ceiling slab and the floor plate slab, we are having a grid system. It's like an aluminum brackets where we can basically technically unscrew the partitioning, move it. Same with the floor tiles, floor boxes. It's a bit like a Tetris where you can move things around, yet still go slab to slab on partitioning, which really does guarantee you solid sound insulation. So it's not visible. And it's not like we can pull a handle and push the wall one way or another for an hour. I mean, it does take a little bit of work, but it can be very, very quick.

Drew: Yeah, I see. Okay, so now the image I had in my mind is like, you know, pick your favorite arena that hosts basketball games and hockey games, oftentimes on the same day. You know, I'm picturing that time-lapse that you've seen where these incredible workforces are completely transforming the space, you know? And you wouldn't know it. You wouldn't know that four hours prior, it was a completely different build. That's interesting. So, I mean, if you walked into that space right after you did a two-hour redesign of the walls, you wouldn't necessarily be able to see that that wall was not there two or three hours ago.

Flexible Workspaces in Various Real Estate Sectors

Bill: So, Alex, with so much underutilized space, but particularly in our office and mixed use, where do you think Flexible Workspace annually fits in commercial real estate now? And where do they not?

Alex Passler: That's a very good question. I think with so much space available, Flexible Workspace solves for a number of things, mainly due to the way Flexible Workspace operators are partnering with landlords today. So, if the landlord has a lot of vacancy in the asset, they can sit, hold out until they find a new single tenant for that larger space. Or they could bring in a Flexible Workspace operator to operate that redundant space, often with very little capex, and they can monetize it as they ramp up a lot quicker. Flexible Workspace will typically, you know, ramp up to full occupancy in a lot shorter time than a conventional space does. So, it serves a bit as a revenue generator for redundant space. The same thing applies to commercial real estate. The same goes for residential and residential, depending on the design and layout of a residential complex as often podium levels or deeper areas where the residential units would be less suited. And you could put in a couple thousand square feet of Flexible Workspace, which doesn't require the same natural light and infrastructure that a residential unit has, yet you're still making use of the space and bringing an amenity to the building.

Alex Passler: Where does it not fit in? I think, strangely enough, Flexible Workspace is coming up everywhere. We're seeing it even in logistic parks and empty warehouses and hangers. So, it's kind of this product which you can really put into anything. I mean, if you look at what's happening in the retail sector in a lot of markets, retail's struggling. Often, retail malls are converting some of that space to a flexible working, co-working, lounge-type product. We're seeing a lot of that at the moment. The great thing is it's an adaptable product. It's a low entry point. People can use it by the day, by the month, and it's often serving as a placeholder for other things. Very few places where I don't think it's suited.

Management Agreements and Post-COVID Trends

Drew: Without giving up anything proprietary to your business model, could you elaborate a little on a management agreement? If I'm a commercial real estate owner of the building, got a gaping vacancy, does a management agreement mean we have a revenue share on what we earn or are you paying rent reduced and it's flat? I mean, talk about the levers that are my risk reduction or my income.

Alex Passler: Yeah, so it's interesting because there's two scenarios. Sometimes it's the landlord one is talking to. Sometimes it's a large occupier that now has 30% of his workforce working from home and got these empty floors, but he's tied into a long lease and he's just paying rent because he can't get out of it. And so there's that two scenarios. I think when it comes to a landlord, we're seeing more and more operators go in with management agreements, very similar to the hotel industry. And the hotel industry has been doing it for years. When we come in, one helps design the space. The landlord would typically fund any CapEx required and the operator would run it, sometimes as a white label or under the landlord's brand or sometimes their own brand and collect a management fee, which is a percentage of revenue. That'll typically cover the operating costs of the space. And then thereafter, there'll be a revenue share or a profit share, depending on how the deal is structured. Now, landlords can mitigate their risk by adding a layer of a minimum guaranteed rent, which is often the case. So it's like at minimum, you gotta be paying the X and anything above will split. There's a lot of variations of it.

Alex Passler: When you talk to an occupier, and this is post-COVID what we've seen a lot, take an Amazon or Google, they've got a full building, but 50% of their workforce is working from home. They're typically bleeding tremendous amount of money in rent every month for empty buildings. So flexible operators are going to them and saying, look, currently your rent roll is whatever it is, a million bucks a month. We'll come in, we'll operate. We won't pay anything. We'll just split whatever revenue we can generate in this space. And that'll always be better than the current situation that occupier has, right? Because instead of bleeding 100,000 or a million, it's bleeding half of that. So we're seeing a lot of that occupier profit share agreements.

Drew: Okay, that's very helpful. I've known that they operated like that, but I didn't know how. So thank you for sharing that.

Alex Passler: Yeah, no worries. I do see that becoming the new norm, that the lease arbitrage model we've seen, you know, when the market tanks and the operator has a fixed rent and can't change that, yet their end users, their members, you know, are paying half of what they used to, then they run into trouble as we've seen during COVID. So I think more and more landlords and operators are actually going for a management agreement. If the market tanks, the landlord earns a little less. And if it does well, the landlord earns more. So it's a lot more of an aligned business model for both parties.

Personal Insights and Career Advice from Alex Passler

Bill: Okay, Alex, this final section of the podcast we call The Extra Floor. And everything we've done so far is about the industry, obviously. But now we're just gonna transition to question, like we're gonna do three questions here that are really just to help our listeners get to know you better, like the human side of our guests here today. So here's those three questions. Number one, what's the best place, or sorry, the best piece of career or life advice that you've ever received?

Alex Passler: That's a very good question. I've received a lot of good advice over my career, but I think a lot of it has to do with aiming or thinking big. You can never think big enough. Exaggerate where you actually really wanna go and you'll be surprised how far you can get. That's been proven to me now many times, going into very tough markets, thinking, okay, I'll never get a management deal in this market. Or there's so many different examples I can give where that's proven to be the case.

Bill: Alex, what's one habit or practice that consistently makes you more effective?

Alex Passler: A lot of coffee. I think communicating well, right? Communicating well and very clearly has been incredibly beneficial throughout my career, being able to get the most out of others on your team or people you work with or work for. But very direct communication is something that has always helped me achieve what I wanna do best and for the business.

Bill: Okay, well, last question, Alex. Would you consider yourself an early bird or a night owl?

Alex Passler: I'm an early bird for sure. And that's switched. Once I hit 50, I'd switched. But yeah, I'm definitely an early bird now.

Bill: Well, Alex, I talked to you last night at 10 o'clock your time, and it's what, eight o'clock your time right now. So you're flipping the model just to be on the show and I'm grateful for that, thank you.

Alex Passler: No, you're very welcome.

Contact Information and Closing Remarks

Bill: So Alex, how can our listeners contact you? We'll put this in the show notes, but tell them for the audio listeners only, tell them the best way to reach you.

Alex Passler: Sure, the best way to reach me is either on LinkedIn at Alex Passler, LinkedIn, or through our website is alexatvalist.com.

Bill: Well, thank you, Alex. And thanks to all the listeners. And as Drew said at the beginning of the show, be sure to like, subscribe, follow, and share this with a friend. Our guests are doing things that are changing this industry and we're trying to make it more digital and data focused and all the conversations are welcome. So thank you, everybody. We look forward to the next episode of Peak Property Performance.