Sandeep Mathrani spoke at the Global Real Estate Summit held in Israel by the DLA Piper law firm and referred to the collaborative future of the office market: “There is no reason that an office that is rented two days a week to one tenant, will not be rented the rest of the days to another tenant”. According to him: “When such evolution and disruption begins, as happened with Uber, it happens very quickly and will catch traditional property owners unprepared for change”.
“In the past, the focus was on long-term leases, buying buildings that provide rental income, the owners of the buildings make money from the rent they raise on occasion, according to market value, and then sell the properties. But this philosophy of investors, on the one hand, and tenants, on the other – has ceased to exist.
“Today, tenants want short-term contracts and turnkey solutions, and they say to property owners: ‘How will you finance us?’, The whole idea of commercial property owners was that those 10/15/20-year leases enabled them to finance tenants and were, in fact, referred to as bonds. Which is also why it was easy to trade these assets.
“But today, when this bond-like feature disappeared upon shortened leases, rise in tenant demands and dynamic pricing – holding commercial office buildings became as bad an investment as holding a hotel – a fluctuating income that derives from rapidly changing prices and input-oriented budgeting,” according to WeWork’s CEO, Sandeep Mathrani, who spoke today on a televised interview broadcasted at the Global Real Estate Summit.
Creating Opportunities for Growth
DLA Piper’s 8th Israel Real Estate Summit brings together major Israeli institutions active in the global real estate markets and leading real estate professionals from around the world. The summit is organized by the DLA Piper Israel group, led by attorney Jeremy Lustman and Naomi Maryles. The speakers provided an opportunity for insightful discussion on the key trends and issues driving change, creating opportunities for growth, investing capital in times of change and digital innovation in the real estate sector.
Among others, senior officials who attended from abroad who attended the summit included: Paul Bashir, Senior Managing Director, CEO – Europe, Harrison Street, Lowell Baron, Chief Investment Officer & Managing Partner, Brookfield Asset Management, Gabi Stein, Managing Director, Head of EMEA and APAC Real Assets Specialists, Nuveen and Abbe Borok, Managing Director, Head of US Debt, BentallGreenOak.
Sandeep, who spoke with Jay Epstein, senior partner and co-director of Dla Piper’s RE Department, illustrated his words with an example that “happened to us yesterday with a tenant in Chicago: We had a tenant for about a year in one of the buildings, and they were going to move to the building across the street, to a really good landlord who builds a lot in this area.
“The landlord said: I was going to give you a “Tenant Allowance” (participation of the owner in the rent or the capital cost of the property subject to the conditions in the contract), but I will not do so because: (1) I do not know how strong your credit is; and (2) I need to manage my cash – will I do this through tenant benefits, rent concession, paying off my debt? How can I best manage my cash?
“Eventually he had to refrain from providing that “Tenant Allowance” to the client, which played right into our hands, because that client just renewed his lease with us for two more years, especially since we provided a turnkey solution”.
Sandeep, who joined WeWork at the beginning of 2020, after serving as the CEO of the RE investment giant Brookfield, even referred to the office industry in the ‘Post-Pandemic’ era, saying that: “We are in an ironic world that continues and develops. Shared and flex workspaces are here to stay; they are expected to make up 15-30% of the total office workspace market at the end of the decade, and this is an industry where no disruption has occurred to date. In the pre-pandemic world, large clients (Enterprise Clients) saw shared spaces as a “Nice To Have” or a kind of perk.
“Today, however, those same enterprise clients want 80% of their properties to be based on traditional rentals and another 20% according to the “FLEX” model. That is, today, they see the idea of flex workspaces as an important part of their corporate ecosystem and real estate holdings. Small and Medium Businesses (SMBs) also understand that if they want to be present in good locations and attract talents, they must do so through shared and flexible workspaces.
“And so, suddenly, companies like WeWork that provide comprehensive, end-to-end, turnkey solutions gain importance – at a “Must Have” level. From this point of view – our industry receives an excellent tailwind”.
At the end of his address, Sandeep gave a glimpse of the future in the co-working and flex spaces field and demonstrated his words using Uber as an example of a “Serious Disruption” in the taxi industry. “Who would have thought that the medallions (licenses) of yellow taxicabs in the USA that cost millions would not be worth a penny today?
“Uber created this disruption. So, if we borrow the example into the world of offices, can we create a cooperative economy in workspaces as well? Can we tell the client, ‘You will use the office 3 days a week, and another client will use the same office 2 days a week’? And the question is: ‘Why not?!’ I think we will continue to evolve, and once such an evolution begins, it happens very quickly and will catch traditional property owners unprepared for this change”.