The Flexible Office Economy - Ep 6 w/ Jacob Bates, CEO CommonGrounds Workspace

This week: the distinction between "Workplace-as-a-Service" and Coworking, what it takes to serve the enterprise occupier, engineering flexibility into the built landscape, whether we've hit "Peak Office", and more.

Listen to the full interview here:

Read the full transcript here:

Mark Gilbreath: This is The Flexible Office Economy and I'm Mark Gilbreath. This week we're talking about Workspace-as-a-Service. My guest today is Jacob Bates, the CEO of CommonGrounds Workplace, which bills itself as "an enterprise grade, human centric Workplace-as-a-Service company". It collaborates with asset owners to deliver Workspace-as-a-Service to customers in multiple US cities. CommonGrounds was founded in 2015 and Jacob joined as it's CEO in 2017. For Jacob, the latest step in a particularly diverse real estate career, including time spent as an occupier, as a service provider and now most recently as a space operator. Welcome Jacob and thank you for joining us today on The Flexible Office Economy.

Jacob Bates: Thank you Mark. It's great to be here. Thank you for the opportunity to join you on the podcast. Look forward to discussing the industry as a whole and see where it's going to take us.

Mark Gilbreath: Well let's start with your career arc. As I touched on, it's pretty notable. The arc of it has covered a lot of ground. You spent time on the service provider side with NAI and CBRE, and actually I think Coldwell Banker before that. You followed that up with three leadership stints with occupiers, all of them notable, Cigna in the financial services world, Nike, a preeminent brand company and Unity for the gamers out there, a tech platform for the gaming universe. And now you're on the space providers side. Is this arc happenstance or is it the reflection of some grand purposeful strategy?

Jacob Bates: Well I think there's no coincidences in life as I like to say is. And so it's really been driven towards where I think we've seen the evolution of how people work and how they office. And coming from that service provider side and understanding how as a service provider you're able to manage and help different corporations manage their portfolio globally, then coming inside and understanding the strategy and how you're really solving for people. And we're really in the people business at the end of the day. And how that evolution has now gone to where we're using space very differently. Technology is definitely changing that. Behavior change is happening. You've got other dynamics, with FASB and technology that's coming into play. And now seeing that evolution, I think coming on the space provider side is really allowing us to bring a lens to how the future of work and the future of office will really look going forward.

Mark Gilbreath: At a personal level, take us back to the very beginning. One of the connected dots across all of those firms and all those segments is real estate. You're fresh out of school. You step into a career path, and you've stuck with this general arc. Why real estate? What was the draw there or was that somewhat happenstance?

Jacob Bates: I've been massively passionate about real estate my entire career. Obviously I've been in it for 20 years and more passionate about not just real estate, but the corporate real estate piece of it and really getting into corporate real estate. And how is the user experience at the end of the day? How are we solving for talent and the needs that they need in the workplace? And so it's definitely not happenstance. I definitely fell in love with it, as a passion of mine. It even goes back to the core belief for me that we don't need another square feet of office space built upon the planet. We just need to use it very differently. And technologies is allowing that to happen and behaviors are starting to allow that to happen. And as we do that, I think if we can use office space more effectively, more efficiently, we will create a better place , we'll create a better environment, we'll create a better life for people.

Mark Gilbreath: So tell us about the prototypical CommonGrounds. You're sitting in Carlsbad, in one of your locations today. But, if one of our listeners was to walk into a CommonGrounds, what would they experience? What would they see?

Jacob Bates: So today they're going to see an environment where it's inviting. One of the things we work hard at, at CommonGrounds is to create a frictionless environment. So we're looking to remove friction. I've spent the better part of my entire 20 year career trying to understand how to measure productivity in the workplace. I think everybody's chasing that holy grail in some respects. It's very hard to measure productivity, but what we can measure is friction. And if we're removing friction, whether it's to the point of sitting in this conference room and being able to plug in and shoot up the AV on the wall within seconds, rather than spending the first 15 minutes of every meeting trying to figure that out and solve for it, to where it's having the ability to collaborate with different people, use phone rooms and conference rooms that are acoustically sound. So all of those things, all of those different friction points we're looking to remove, whether that's through technology, through design, or through hospitality.

Mark Gilbreath: Are you primarily focused on friction points within "the day in the life of a user", inside of a CommonGrounds, or you are thinking more broadly about friction?

Jacob Bates: We're definitely thinking more broadly about friction. And so it really comes down to a person's work life. Those things are very integrated today. They're not necessarily balanced. They're very integrated. And so how do we allow someone to remove friction in both work and in life so that they can be present in the moments of work and life? And if we're doing that and allowing them to remove those friction points they can be better focused, be more productive, and make more meaningful contributions.

Mark Gilbreath: What do you think is more important, or said another way, what's the higher execution priority for you - the friction of the user that's in the space on a given day or the friction faced by the company that's deciding whether or not to execute an agreement with CommonGrounds?

Jacob Bates: Definitely I think we bring it back down to the user level. I think that the employer that is sitting in the seat back at Nike, if I go back and put my corporate real estate hat on, you know there was definitely a time where we were shrinking and densifying the workplace and it was much more of a math exercise. Now we've seen evolution towards much more of a user experience exercise and we've realized that the cost of real estate on our balance sheets, for a Nike, for a Cigna, it's not their core business. It's a very small percentage of their P&L. But what is a big part of their business is people and if those people are having friction and they're not being productive, then we're not helping that company succeed and helping them grow revenue and helping them solve for other clients and customers. It's a complete domino effect that really can kind of spread across the entire planet.

Mark Gilbreath: Do you think that point of friction, and I relate to it as a user, but also as a leader, is that just table stakes today for any space operator in the Flexible Office Economy, or do you view it as something that is a unique differentiation for Common Ground?

Jacob Bates: We see it as a differentiation. We've designed, not only in the physical built environment, some things that are very different in how we can remove friction. I think it's going to become a standard in the workplace-as-a-service arena and how companies where we've seen, you know, if you go back to if I put my corporate real estate hat on and I was sending employees at Cigna, and Nike and Unity out into the world to work in these different flexible shared space environments, they weren't really an extension of my HQ, what I would build for my employees at home, at the home base and HQ. At HQ, we were focused on removing friction and were focused on the user experience. Those spaces weren't necessarily focused on that. They were focused on... it was much more of a math equation, its densifying and you're solving for something. A lot of times it's speed to market or it's just as simple stop gap or a math equation. Now what we're seeing is that friction, that methodology of it needs to feel and look and be designed and remove friction much like I would for an employee at my HQ in New York, San Francisco, Chicago, you name it. That's where we see the industry trending towards. And so that's a differentiation we've done at CommonGrounds is not only in the physical built environment but through hospitality and services and various other things.

Mark Gilbreath: As you scan the market that you're competing in, what does the typical Workspace-as-a-Service operator not understand that the enterprise occupier needs or wants? Again, you've got this unique vantage point of having sat in the seat at Nike and at Unity and Cigna? What does the market want that your peers out there need to open their eyes to that is being missed?

Jacob Bates: I think the number one thing is there's been a massive trend towards density and 50 square feet per person, it's just not going to work. We've already densified the corporate real estate portfolio from 300 square feet per person to call it 150 to 200 on average today. Pushing their talent into 50 square feet person is not going to work, so there's a density problem that probably needs to balance back maybe closer to 100 square feet per person and that's coming back to the user experience. The other thing too, and we'll get into this, is Workplace-as-a-Service, as I look at it from my corporate real estate seat, and we're talking to multiple other corporate real estate executives right now who share the same belief, is as you can do that in partnership with an owner, an asset owner of the building, it becomes very attractive to both the supply and the demand side. And so as you look at, you know, a high growth company such as an Uber coming into a space, into a workplace-as-a-service model, if you have a relationship that's truly integrated and collaborative with an asset owner, you're creating the opportunity to take an asset and allow an Uber to grow and flex and use different products and services within that asset. You're creating a full lifestyle kind of environment for their employees. That's what they're building at HQ in San Francisco for Uber. And that's what needs to be solved for by the workplace-as-a-service provider is doing more than just space. It needs to really focus on, are you helping my people, help my business be productive and helping my customers and helping my people have a better work life. And if you can do that, then we're solving for some things.

Mark Gilbreath: I've not heard you use the word "coworking" yet. And certainly it's a buzzy word that's been in the headlines for 5+ years. Is that purposeful, do you choose not to characterize CommonGrounds as a coworking provider?

Jacob Bates: We don't. We do not characterize CommonGrounds as a coworking provider. And a big part of that is coworking and workplace-as-a-service are very different in our view. Coworking as many of us know started, you know, back in the early part of this century as a shared environment and for the most part today is still a shared environment. While that environment's changed much from a massively open plan environment to some, you know, closed spaces - you're just still sharing a lot of the infrastructure, some of the meetings spaces and phone rooms, the communal areas. What we see as workplace-as-a-service, is much more proprietary environments that are brandable that also for us are also agile and flexible in terms of design - what we're calling hackable. And so something we've also differentiated on is our ability to hack the physical built environment in order to adapt it to the end user's needs. And so for us, workplace-as-a-service is, going from that, that focus of, you know, the freelance and the gig economy and the one to five person type of offices in a shared space, to the five to 20 in the fortune 1500 companies who really want their own proprietary suites. They might go onto a 30,000 square foot floor with two to four other type of fortune 1500 companies, but in an enclosed environment, that's their own 5,000 square foot suite for their talent.

Mark Gilbreath: So for the corporate occupiers that are listening or will be listening, tell us more about that hackability. What does that really consist of? How does that manifest? What's available to me? What, what can I hack, and how do you enable that to happen?

Jacob Bates: So what we've designed and what we're very proud of is our ability to not only hack the physical built environment, we've developed with a partner, Tecno out of Europe, a proprietary wall system that allows us to remove it overnight. The thing that I always struggled with over my career was demountable wall systems weren't, the ingenuity wasn't there and the quality wasn't there. The acoustics were terrible. This system doesn't have that problem. This system actually in many ways is better than a true dry or gyp wall that you would build that would be more fixed environment. So our ability to remove that wall, but the ability to integrate technology and branding through that wall system, because it doesn't have to be glass, it can be, you know, black, white, blue, pink, gray, solid panels, it could be acoustic panels, it could be whiteboard panels, all different types of different panels that we can integrate through great branding opportunities to create functional opportunities to remove friction. But the ability to divide and change the space is truly what this system allows us to do. But then that comes into a lot of design and no how. So if you go back in my corporate real estate days, I was using different operators in the shared space arena and I'd have a problem, I have 40 people in Copenhagen, Denmark and now I'm going to grow it and double it. Let's let's 80 people, we're going to take over a bigger part of this shared space environment. But I need the physical environment to actually change with it. That required removing some walls and that got very costly and expensive for us as an enterprise company. But when you did that, the lighting, electrical data and mechanical systems were all completely off unless you actually spent the money to adapt those rather than just removing walls. What we've designed is the ability to also make those systems adaptable. So make it so this wall goes away, it's a recalibration on the mechanical systems, it's the electrical data and lighting is already been thought through a lot of what, if, then, that scenarios where if this space changes then it can change. We're now iterating on a new model with our system where we are going to be able to drop in, you know, eight, 10 person conference rooms or offices, six person huddle rooms, phone booths, at the drop of a hat.

Mark Gilbreath: Jacob, how liberally are you using demountable walls in terms of a percentage of the linear foot inside of an overall space? Because those systems historically, at least have always come at a pretty distinct premium. And you know, the ROI of that demountable or modular wall system was usually a function of having had to move it a number of times. And so, os it 100% of the walling inside of a CommonGrounds or something less?

Jacob Bates: It's probably roughly about 90 plus percent. And if we look at that, we've done some modeling where if you come back to the asset owners, they built spec suites for the longest time. These are fixed, built environments. They're not using demountable systems, they're using, you know, gyp and some glass, but it's all fixed construction grade stuff. And they build it for an occupier who might come in to take it for three years, with the assumption that the next occupier is going to use this space in the exact same way, right? That never happens. And so an owner ends up repurposing that space for the next occupier and spending that money. Where if you build it where it can be hackable and truly flexible, you could adapt the environment literally overnight for the next user or if that current user wants their business needs change, one of the things we had at one of the previous occupiers that I worked for, was we had team spaces where we're working in open plan. We believed much more in a hybrid mobility model where we had team spaces, different typologies of space to solve for different needs of the businesses. And what would happen though, the team sizes would change, right? They'd grow or they'd contract or it'd be a project team on something for, you know, 12-18 months and then the next project team is not eight people, it's 12 people. Well the built environment didn't change, it couldn't change. What we've developed is the ability to change that. And so our cost savings are actually pretty impressive. We have a master service agreement with a very notable enterprise customer who's about to go public. They asked us to remove 22 of these walls in their proprietary 10,000 square foot space in Denver and we're able to provide that opportunity for $40,000 and remove it within less than two weeks. That included putting the walls back when they were done. Now, if I go back to my corporate real estate days, I could, that would cost me that much to just remove one wall.

Mark Gilbreath: I asked you what most WaaS operators perhaps don't appreciate about the enterprise. Put your Cigna or Nike or Unity hat back on and think about that audience and the people that occupy those roles. What do most corporate occupiers still not yet adequately appreciate about the flexible office or workspace as a service supply base or do you think they are fully informed today as a class?

Jacob Bates: I don't think they're fully informed yet. I think that that's still an evolution. We're still in the infancy of that, in my mind. I think we're trending quickly towards adoption, but we're probably still in the very early stages, whether it's leaving infancy into adoption, we're still in the early stages of that. I think that there are still some, you know, the old school of thought that you know, it's traditional, we should own it, we should occupy it, it should be our space, We should lease it or own it. FASB is gonna change some of that. We're seeing some astute corporate real estate executives or CFO's are saying, we need to think about this differently, given how the impact is going to be on our balance sheets. Some of them, it's not impacting the balance sheets, and so they're looking at it from a different point of view, which is they'll pay for flexibility. And that's where I think Workplace-as-a-Service is going, whereas opposed to the shared environment is it's now they're saying, well, okay, I'll pay a premium for the flexible lease or rent terms, you know, the three year agreement, but I also want the ability, I might have a janitorial national contract with a company. I don't necessarily need the Workplace-as-a-Service providers. So the ability to hack your own services as a Workplace-as-a-Service company, it's going to be important too. Rather than just saying it's a one size fits all, the ability to be flexible on your service offering is also going to be very important. And so there's definitely still some education that needs to take place with the occupiers of the world and how they're using space. And that's still to come. I believe it's going to be roughly on average, 30% of their portfolios will be put into this type of product over the next, you know, call it 10 years. Now you're going to see an Uber who might be much more progressive, I'm just going to continue using Uber is just an example, but you know, they might be more progressive in how the percentage of that portfolio, where a financial services company might be like a Cigna might be less.

Mark Gilbreath: Have you yet seen a company, speaking of FASB, and for our audience, it refers to the new lease accounting standard for real estate leases, and Jacob keep me honest here, but new lease accounting standards that require companies to report on their balance sheets, the financial obligations associated with leases. Have you yet seen a company that has actually diverted or redefined it's workplace strategy to shift to Workspace-as-a-Service because of that? Is it a primary driver yet for anyone or is it a factor that's being talked about?

Jacob Bates: It's not a primary driver yet. And it's not going to impact everyone completely. It's got an impact because your assets and liabilities and how that will balance out on your balance sheet now that you have to disclose it rather than it being a footnote or just completely irrelevant, not on your balance sheet, it's going to shift. We have seen an occupier who is a public company, a very progressive, more modern public company, in the financial services industry and maybe a little bit of a fintech topic, but they're a big company. They shied away from a 10 year lease in New York City for 150,000 square feet because of FASB. And so they looked at what that would do to their balance sheet, taking on that lease, especially where they were still having the old school thought of, "Hey we only need really 30,000 and it's 150,000 feet, it just doesn't make sense.This is wasted space." And so that's where if you really work with a Workplace-as-a-Service provider who also has relationships with the asset owner, I can create those opportunities for you to product mix in a building and you're going to get there. But they shied away from that lease because they took it to their board and their board said, wait a minute, what's the impact on the balance sheet? Accounting came back and said, we don't like this. Big part of it was with that they think they're going to be thousands of people in this market, but they don't know how fast and when. And so to commit to a lease now just didn't make a lot of sense.

Mark Gilbreath: So if I was to walk into a CommonGrounds today, the average or typical location, who's the customer that I'm most likely to see or set another way, what's the ideal customer today that you've got in your rent rolls at CommonGrounds?

Jacob Bates: So we're able to solve for all different types of buyer personas. We're definitely building an environment and our target is much more that that 10 to 20 person company or the Fortune 1500s. There's actually an interesting data point I was looking at yesterday or the supply for the one to five person offices in people or companies is probably met. It's pretty close to actually met the supply might be there. The supply for 5 to 20 and and Fortune 1500s it's not there. It's massively underserved. So at Common Grounds you walk in today, we built an environment that even the freelancers and the Gig economy loves to use as well as the startup down the street. But we have some very prominent multibillion dollar unicorns sitting even here in Carlsbad today. We have some Fortune 1500 public companies sitting here in Carlsbad today. We have a very prominent company sitting in Denver and in San Jose as well. So you'll see all kinds of different walks of life. They like that collaboration. They find it that it's very beneficial to the environment and enriching their employees day to day life.

Mark Gilbreath: In characterizing that target customer as Fortune 1500, is it less likely to be a Fortune 50 company or is it anybody in the Fortune 1500 today, from a sweet spot standpoint, who do you think the more ideal customer is?

Jacob Bates: For us, the most ideal customer today is going to be anything in that Fortune 1500. We do have a Fortune 50 company that's about to take space for us on the East Coast, a very prominent company that's gonna take some space. So we're starting to see that trend and we have some Unicorn setting here, they're not public, but they're $6-8 billion company today, actually sitting in the office behind me.

Mark Gilbreath: You shared a vision, and we've heard in the market a good bit, that you see corporate adoption of flexible office or Workspace-as-a-Service growing to as much as 30% of portfolio. Yes?

Jacob Bates: That's correct, yes. I definitely see it being on average 30%. like I said, users will use it differently. More progressive's we'll use it in a bigger percentage, while more conservative companies might be in a lower percentage,

Mark Gilbreath: So from your research and data, where do you think we are today? For that client that ultimately is going to grow to 30% where do you think we are today in terms of market penetration into the corporate world?

Jacob Bates: Less than 1%.

Mark Gilbreath: So that's a pretty radical shift. I mean that's a major adaptation, not just for corporate real estate as a practice, but for the real estate industry as a whole. Lingering on that corporate real estate customer, what stands in the way of happening? Why isn't it bigger now? If we're less than 1%, and if everyone's talking about being 30%, why not more sooner?

Jacob Bates: I think they've had a number of things. I think it's, it's gonna be progressive as it goes into it. FASB is one effect. The other thing is business cycle planning is now maybe 12 to 18 months into the future that's beginning to lend itself towards a need towards this. You're also seeing talent demanding it. Take an example of a big financial services company whose core business is not real estate. They haven't focused a lot on the employee enrichment and the physical built environment. That's where coworking got started was, hey we're gonna start with the gig and freelance economy. We're going to create an enriched environment for people. And some corporate real estate executive saw that and said, that's great, let's do that there. It's still education. It's going to take some time. I think it's got to be a little bit like a hockey stick. So I think you're going to see some little bit of growth over the next probably three to five years. And then it's just going to completely hockey stick completely up towards that 30% mark.

Mark Gilbreath: How much of an impedance is availability or supply in your estimation today? You touched on one to five person sort of requirements perhaps being at markets stasis or stability, but that five to 15 and F1500s is under supplied. Talk more about that.

Jacob Bates: Yes, so the supply, if you think about what's been built the last 10 years for the flexible workplace world, it was built for a different buyer persona. It wasn't built for the unicorns or the Fortune 1500 companies and what they're going to demand. And what we're starting to see them demand, is a space as frictionless, a space that is enterprise grade, and a space that has ability to flex and adapt to their needs. It feels like an extension of their HQ. So what we're doing at CommonGrounds, and what I believe the industry will do, is what's going to built the next 10 years is not what was built the last 10 years. So what will be built the next 10 years is something that's much more of an HQ-as-a-Service type of product, that's enterprise grade, but plug and play at the same time. It has to be enterprise grade through all of the technology and systems for the design. If I go back and put my occupier corporate real estate hat on, I'd have to send an IT team to work on something for a week to get just the firewalls, all the IT systems set up and going, it would take a four person team and a week to do it. They need to plug in. And that's something we've done a Common Grounds is the ability for an enterprise company, a Fortune 1500 company, and we experienced this with our occupier, both in San Jose and Denver, they literally walked in, plugged-in in four hours and most of that time was actually setting up monitors on screens and making sure people are connected properly. It wasn't spent on actually making sure they're connected to their dedicated lines, their firewalls, all of that. That was truly a plug and play environment for them.

Mark Gilbreath: Let's shift to the other of the equation, the property side and building owners. You've spoken of then as a key audience. Are they a landlord or are they something more for you?

Jacob Bates: For us, they're a customer and for us the Workplace-as-a-Service company, we look at the asset owner actually as the primary customer. Really for us, I think that what isn't talked enough about in the industry is workplace-as-a-service is an offering for owners to partner with the Workplace-as-a-Service operator to solve for the end users needs. And so we look at the asset owner as our primary customer and helping them solve for the next generation of workplace to product mix, to create services and hospitalities over their building and to activate it from a technology perspective and from a programming and enrichment perspective. And so for us it's really how do we collaborate and integrate with an owner, not just to go in and take a couple of floors in a building and be in our four walls and a door perspective and not talk to each other. It's actually how do we activate this building for you, your amenities that you've either built or haven't built and how do we build it together and how do we activate that through technology so people know how to use it. And if we do that, then some of the levers owners can, pull is they can increase rates, and there's price mobility and there's retention. Let's focus on retention. If we create a truly enriched, productive, frictionless environment, together that's product mixed with the right services and hospitalities, the end user, you know the Mark or Jacobs, that go into that building every day to work are going to tell their head of corporate real estate or their CFO, CEO, I love working here. Don't ever leave. And now you have retention. That's value that we're creating for the owner.

Mark Gilbreath: Is the ideal landlord or asset that you would end up targeting and working with a property that's being repositioned that maybe has a prior life that was now off the mark with what the market wants or is it more likely a new asset that's come into the market that's being absorbed for the first time?

Jacob Bates: We're seeing all of it. So we're, we're seeing older assets that are beginning to be repositioned. We're seeing brand new buildings, we're actually acting as an advisor and consultant to a couple of owners across the country who are building brand new million square foot buildings. And they're looking to us to help them understand how to not only design it, how do I monetize it and how to properly program and activate it. And so they're taking a very progressive approach and how they're thinking about it. But it's all walks. We've seen buildings that definitely need to transform and become activated. We've seen buildings that have somewhat baby stepped into that by monetizing. And we're seeing brand new buildings that are looking for how do we create the latest and greatest sustainable technology. Everything in this building, design and product mix it right from day one.

Mark Gilbreath: Have you gotten involved in being a partner to create the amenitization layers as well, as some other Workspace-as-a-Service operators have, or do you leave that to the landlord?

Jacob Bates: We have. And so when we look at any asset and collaboration with an owner, we'll do leases, although the industry is trending towards management agreements, and we're doing those as well, but if we're not integrating and collaborating with an owner beyond our space, then we're not really that interested. We're really interested in helping them manage the amenities, helping them manage the programming and the enrichment and activation of the building through our proprietary technology and placing that over the whole building. We look at every person in that building as a customer because they're a customer of the owner.

Mark Gilbreath: So if I'm a building owner I want to have team spaces to facilitate the corporate occupier. You got that. If I also think I want to have a lounge area, common areas, will CommonGrounds also execute on that?

Jacob Bates: We will, we'll execute their design and build, on behalf of the owner, or if that's already existing, we'll manage it and program it and throw our technology layering over it. What we found is, you know, one example might be that middle part, which is an owner that has amenitized their building in the last five, 10 years. I spent an enormous amount of money building this beautiful amenity space and the utilization is 7% and that's mostly driven because they're not actually looking at how do they engage with the end user, let them know what's available, how to use it. There is no technology layering over to use it. And so that's something we're coming in as programming, adding our proprietary technology, touching and reaching out to their customer, letting them know how to use it, programming different events in the building for them to use it. The other thing too is, there is actually money being left on the table, so even activating it in those different ways and reaching out to the end user within that building, it's a million square foot building, it's a lot of, and end users, you're still probably going to reach 20, 30% utilization. And so what we're finding is corporates, Fortune 5,000 companies, they're beginning to trend towards wanting to use this space rather than continuing to go to the boring hotels. And so now there's a whole other market that you're going to open this up to, to allow the owner to capture some of that monetization and so you're not, go ahead.

Mark Gilbreath: Do you think owners have over invested in amenitization in this last cycle? As you mentioned the last five years, there's been a flurry of this. Did they put too many dollars in or just dollars in the wrong places?

Jacob Bates: I'd say they put the dollars in the wrong places. I think that's probably a better way to put it. I think some of them want a little bit, they overreached quite a bit, but definitely, I mean I even, I saw a plan last week from an owner that said, hey, how should I think about this new building in this market? It’s at brand new 800,000 square foot building. They got this brand new amenity kind of tenant lounges they’re gonna build and they got ping pong and billiards tables and then the game lunch, and that's not today actually what the corporate estate executive wants for their employees. They want an environment that's productive, that's frictionless. So those aren't the things that you need. You don't need a game lodge today. It's not what they want. You want to focus on wellbeing. You want to focus on spaces that have different typologies. I can go and have a phone call or a meeting. You want to focus on food and beverage. How do you enrich it through food and beverage, whether it's coffee or a cocktail. And so you're thinking through those things and fitness and wellness and bringing those things into the building and then an environment, not ping pong and billiards tables. 

Mark Gilbreath: From a business model standpoint, you, you touched on, you can be a, you can sign a lease with a landlord and you also mentioned that the management agreements for the uninitiated in our audience or listener base, explain what it means to do a management agreement and how that differs from you simply leasing space from a landlord.

Jacob Bates: Yeah. What we're seeing is really three different approaches to how you integrate and collaborate with them. One is a traditional lease, which we're still seeing that, still doing that. And part of that is a slowness of the capital markets to really look at this as something that's forward valued. The other option is what we're defining is kind of a JV structure, which is basically a revenue scrape for the owner. So it's a subsidized rent with a high tenant improvement package, but there's revenue scrapes and other things that are going on in true collaboration and integration happening, um, between the operator and the asset owner. The third is a pure management agreement, which is, you know, I'd liken it as much to the hospitality industry where you have many owners who are all in. You know, the Marriott's down the street are not owned by Marriott. They're owned by five different owners but the operator is Marriott. And so you look at it like CommonGrounds to becoming the operator of the workplace or the amenity spaces, the operator of the different products and services that are going on in the building and doing that on behalf of an owner. We're going to see a large pivot in that direction, especially as capital markets begin to underwrite and realize that this is forward value not backward value, and it's actually a more valuable asset, more valuable if you look at it and product mix it correctly. We'll get there, but it's probably going to take us 10 years.

Mark Gilbreath: I've spoken a good bit in the past about that conundrum of office being valued by the capital markets uniquely relative to all other real estate asset classes. What do you think it takes for that to change or flip? What will that evolution in the capital markets valuation approach look like and is there anything that the market can do to sort of help advance that or did we just have to be patient?

Jacob Bates: I think it's going to be a couple of things. It's gotta be creating some case studies. We're doing that with a couple of owners who say, I would love to do a management agreement. I can't get my capital partner to agree to do it. So let's do a JV. Let's baby step into this, prove it works. And I think we can get the capital to agree to try it, management agreements. So I think it's having more and more case studies to prove it works. I think the industry needs to go through an economic cycle at the same time. I think that's the top of everybody's mind, even though really it's gone through that in some respects a couple of times. Uh, it, it needs to go through a more modern one right now given its growth in size over the last 10 years. I think it will do fine. But I go through that.

Mark Gilbreath: Which of those models that you test on, the hospitality-like agreement, the JV with some scrapes or traditional lease, which do you prefer?

Jacob Bates: For us, we prefer much more the asset light. And so we prefer that JV or that management agreement rather than the lease. We prefer that because it actually creates true collaboration and integration with the owner rather than it just being, even in a lease where we're trying to do other things on behalf of the owner to create value in the asset. The other two actually, really you are joined at the hip, so you're kind of crossing arms and saying we're in this together, more so than just a straight lease. And we believe we've already shown and proven that you can bring and drive more value out of the square feet for an owner and allow them to capture that. And so that just creates a lot more that's good for not only the owner, it's good for the end user. And so the end user, the end of the day, if that's where we're trying to solve for it, you're creating a better product and service for them.

Mark Gilbreath: Across your owner partnership base today, does it, do you have public REITs as well as private owners or?

Jacob Bates: We have both. So we have a couple of public REITs. We've done a couple of transactions with one REIT in particular. We're actually working on our third transaction with them and we're beginning to baby step into that, that second mode, which is a JV, that first couple of were leases. The REITs have more challenges around, you know, how they look at revenue, NOI revenue rather than just straight lease revenue. But everybody started to get a little more creative in how they do it. And the capital markets are starting to listen a little bit. They're going to struggle to get to a pure hospitality management agreement and a style thing, at least today. But the REITs are definitely, there's definitely owners of REITs who would love to do this tomorrow. It's a matter of the structures and the regulations around them potentially preventing them from doing that.

Mark Gilbreath: Thinking of building owners and the interests behind them - build more, fill it and make money, you made a comment earlier at the start of our conversation, about the planet not needing another square foot of real estate. Elaborate on that, that broad point of view. Are you suggesting that there's better utilization of space that can be drive? What was behind that comment from a philosophy standpoint?

Jacob Bates: Yeah. So from a philosophy standpoint, I think I'd go back to and put my occupier hat on and if I look at all of the portfolios I managed, even going back to my servicing days at CBRE and NAI, the utilization of space in a good market was low, 60% utilization and a downmarket got into the forties, So let's just call it 50%. You've, we're only utilizing space to the best abilities that we can at 50% and so if we look at that, we don't need another square foot of office probably on the face of the planet. We just have to use it differently. And the way we're using it actually is continuing to evolve and change where we're probably getting 50% on average, it's probably going to continue to trend downward. And so it's not a growing product per se. And so is there an argument to be made that, you know, buildings need to potentially be demoed and new buildings built to be more sustainable, more technology, technologically integrated in advanced? Absolutely. There's, there's an argument for that. But in terms of adding square feet to the planet is not necessarily something, and we probably need to do, we need to use it better and something we're doing a common grounds as we've got density and utilization sensors, really understanding how people are using this space cause it's continuing to evolve and change. And if we can understand how the end user using it, then we can create better design so that we're using that space more effectively and creating a much more frictionless environment. And so that at the end of the day is what we're really trying to achieve is that's like we're going to lead to, hopefully it's an amazing journey in the next 10 to 20 years and we'll see where it takes us

Mark Gilbreath: In a TEDx talk I did a couple of years ago, I threw out the question, are we approaching "Peak Office"? Along with that I said, might there be an "Age of Unbuilding" that we're approaching? Those two concepts, Peak Office and Unbuilding really were associated with your explanation that you just laid out. Do you think we might get there? Do you think in our lifetimes the next 40 years, let's say I'll be generous with myself, you'll out-live me, do you think there might be such a thing as Peak Office?

Jacob Bates: I think we've probably hit it. We just haven't acknowledged it. And so really I think the next 10, 20 years is going to be acknowledging it and then trying to trend in the right direction towards something that's more sustainable and more efficient. And so, I mean, I've got a whole other theory on Coliving and where that potentially will evolve, we can save that for another day. But there's other drivers and catalysts that are driving that use just space that's built today very differently.

Mark Gilbreath: So you announced $100 million Series A funding earlier this year. I mean, first off, congratulations!

Jacob Bates: Thank you.

Mark Gilbreath: There are a handful of firms in the Flexible Office economy that have raised big dollars, but you're on a short list, in terms of that scale. How did that come about and who's behind that?

Jacob Bates: Yeah, so we're very proud of it. We've raised that hundred million. We've got a number of very prominent people behind us. They are big believers in what we're doing and big believers, not only in the Workplace-as-a-Service industry, but in a future that is much more geared towards asset owners and enterprise customers. And so some of our prominent names are Mohamed Alabbar, one of the world's largest real estate developers and founder and chairman of Emar properties, a VC, Bob Davidson who started a technology company in the late nineties and sold it for billions of dollars. And we've got some other people that are coming in now. We're actually in the process of raising more money. We have raised more money. It's simply we haven't announced it yet, but we can't do it here today. On the podcast yet, but that'll be forthcoming in the near future as well.

Mark Gilbreath: And are you raising it as equity? Are you raising that as debt? What can you tell us about the mix of that?

Jacob Bates: Right now it's all equity.

Mark Gilbreath: With investors writing checks of that scale come expectations, for growth presumably. As I understand it, you've got eight locations open, 12 I think revealed and something north of 30 more that are under development. Are Those numbers roughly right, or can you fine tune that for our audience?

Jacob Bates: Yeah, those numbers are roughly right. Currently we have five open, we have five opening in the next, literally I think three weeks. I know the Ops team is every week opening a new one here in a couple of weeks and it's not going to end. And then we now have roughly about, oh, it's about 20 in different phases of design and construction and about 30 in development behind that.

Mark Gilbreath: So 30 in development, meaning property relationships in one of those three models you touched on inked and in, in the pipe? Or earlier stage than that?

Jacob Bates: A little bit earlier than that, but probably more like it's at the table, we're trying to decide which one with the owner. So it's definitely something we're going to do with the owner. It's now we're deciding what's the right structure.

Mark Gilbreath: In CommonGrounds' history, and I'm not sure if this was pre you joining the firm or not, there was a merger I think, right, with Wheelhouse coworking? Do I have that right, out of San Diego?

Jacob Bates: That wasn't a merger. We did bring Craig Loeber who started Wheelhouse in Carolina and we brought him on and hired him as our Director of our Growth and Strategy team. And so Craig is here. It wasn't a merger or an acquisition. Craig will tell you that he definitely looked at the industry and said, you know, where the industry is going, is going to be Workplace-as-a-Service. It's going to be geared towards solving for asset owners and enterprise. And we shared a vision. Craig and I definitely share our vision for not only where this thing is heading now, but where it's going to head in the future. And so we were very aligned on that and he's a big part of our team, a big part of where we're heading.

Mark Gilbreath: Do you think that acquisitions are going to be a part of a consolidation path for the Workspace-as-a-Service world, or "The Flexible Office Economy" as we call it?

Jacob Bates: I think there will be. I think that definitely there will be consolidation and acquisitions, if that's what you're referring to. I think we've seen a little bit that with TechSpace, you know the recent acquisition of TechSpace by Industrious, I think you're going to see more and more of that. I think there will be some consolidations. I kind of liken it to the hotel model. You know, Marriott's got different brands and flags that work for different buyer personas and needs. And so I think you're going to see that. As you do that though, you're still not completely solving for what enterprise wants and needs, because it hasn't been built, other than what we're building today and maybe a couple of other operators are building it as well.

Mark Gilbreath: So does that mean you would not consider an acquisition? Is that not a part of the optionality that you put in front of you from in terms of how to grow?

Jacob Bates: No, we are considering it so we will look at all opportunities. So we're not going to shy away from that. We're very proud of the product that we build, but that doesn't mean we're going to shy away from acquisitions if it makes a lot of sense.

Mark Gilbreath: What would be an ideal acquisition scenario? What's the demographic of an entity that would be a no brainer for you to absorb, and under what conditions?

Jacob Bates: I think it's going to have to be something that compliments each other. I think acquiring somebody where you're doing the same thing may not make a lot of sense. There could be some synergies there, but I think it's more about the synergies and the compliments of the different products and services you'd be bringing together, to really try and offer something much more than what you're offering today to the end user, and the asset owner.

Mark Gilbreath: So you're comparatively, relative to the Flexible Office Economy, extremely well capitalized. Again, congrats on what you have announced, and congrats yet to come on the additional funding that you've brought in. Five locations now, 50 plus you've told the audience to anticipate in the next chapter, which is maybe a year or two. That's extraordinarily exciting growth for you. It'll put you as a relatively larger player. Even at 50 locations you'd be in the top 10 in North America in terms of portfolio scale. Against the backdrop of a plant with now 10,000 plus Workspace-as-a-Service locations, what's the longer term vision? Are you looking to build an entity that rivals the scale of some of the largest players out there? Or will you be satisfied with being an extraordinary high value provider clients, but with a more modest scale? What's the long view?

Jacob Bates: We're definitely relentless. And so I don't know that we're going to be satisfied. It's going to be hard to satisfy us. Are we chasing the 800lb gorilla? Not necessarily. I think what we're chasing is a very different product, solving for a different need. And so we're looking to, at the end of the day, if we can solve for those needs and create our footprint and create change and evolution in this industry, that's what we want to be a part of.

Mark Gilbreath: You touched a couple of times on satisfying the needs of the corporate occupier. You cited, that as you look at your competitors and the options that are out there, that there aren't a whole lot that've done it well, as you are now. How important is having scale for that corporate occupier? I mean before there was coworking and before there were as many options in the market, Regus of course achieved pretty impressive penetration of the corporate buyer of the corporate occupier. Largely, at least from my point of view, because they had network scale, they were the "easy button", as I've often said. Does scale is still matter for you to to win the partnership with the corporate occupiers or to retain it?

Jacob Bates: So what you said, I think is very interesting and you're not wrong in saying that. Yes scale, it matters, and definitely I go back and put my occupier hat on, we used Regus, we used WeWork, we used, you know, the bigger platforms because of scale. And I think if you ask most corporate real estate executives today, you ask them why they might be using them or one other of the operators, it would likely be because of scale. What we're finding is actually, we are having a lot of opportunities hit our desk that are saying, "Look, we know you're not in this market. We would love to be in a Common Grounds product." And that's leading part of our go to market strategy. So we've underwritten the top MSAs throughout North America, and we have a strategy around that. But then there's another strategy, that's partnering with asset owners. The other part of that three pronged strategy is enterprise coming to us and saying, "look I need 30,000 feet in Phoenix. I need you to deliver it in 18 months". And so now Phoenix has become a market for us that we're heavily focused on. It's one of our priorities because we're solving for an enterprise need, and we'll probably take that more square feet than what they need. What we're finding is a lot of the enterprise, scale is not the number one thing they're looking at now. They're looking at their portfolio and saying, what's 18 to 24 months out? We really like your product and what's the stop gap solution? It might be another operator, it might be staying in this space that they are in today, but longterm they want to be in our space and we're working together to solve that.

Mark Gilbreath: You spent time at two or three large service providers in the past, NAI, CBRE, Coldwell Banker, I think. We haven't talked about the brokerage world. From your seat at Unity and Cigna and Nike, you built your portfolios with those firms working with brokers firms. How big a role do the traditional brokers play today in the CommonGrounds client relationship? Do they play a role today?

Jacob Bates: They absolutely play a role today. And so we definitely work with brokers, not only in finding the spaces that we're using, we do have an in house growth and strategy team we spoke to earlier with Craig and that's a bigger team, but we still use brokers in that. But we're also on working on a program right now where we're using brokers to fill our space too. And so we're being very innovative in how we're working with the brokerage world to help solve for the "fill side" of things at CommonGrounds. Those brokers have relationships. Those relationships aren't going away. It's still a very relationship based business. Will it evolve? Will the broker industry evolve as workplace evolves? Of course. I think they're going to have to. Are they going away? They're not going away and they're part of the solution and they're a customer the end of the day. Just like the asset owner and the enterprise is a customer, the broker is a customer.

Mark Gilbreath: Do you think the broker share of transaction volume of Workspace-as-a-Service, Flexible office, will grow faster or slower than the growth in the total transaction TAM?

Jacob Bates: If I was a tenant rep broker, I would be focusing much more on flexible workplace than traditional space right now. I think the savvy ones are seeing that. And I've even spoken to a few who have completely pivoted their business strategy to that. And those are the ones we're hiring to help fill our spaces. Not that traditional (leasing) is going away, it's not going away by any means. But there is definitely gonna be a huge, huge market for those who learn to adapt and solve for the flexible workplace world.

Mark Gilbreath: So Jacob, last question for you. How will you define success for CommonGrounds?

Jacob Bates: For us, success is really defined as, are we making a difference? We kind of look at that difference is, again, are we helping people have a better work and life? And if we do that, then we're making a difference. And so we strive hard internally to try to support each other as a team, and to respect each other's work life to create a frictionless work and life. And if we're doing that, then I think we're going to be successful. Now you can get into the other things, you know, will you take this and IPO it and will you make this behemoth of a company, of course those things are the things we'd love to do. But I think if we're not doing what we hope to do at the end of day, which is solve for people's lives and make our impact on the office and workplace world and change it for good. That really was what success looks like for me and for CommonGrounds.

Mark Gilbreath: Well, that's a noble ambition, and one, I'm certainly a supporter of as a citizen of this planet that needs better and more efficient solutions. So thank you for that. You've got a huge head of steam, sir, my friend. So congratulations to you and I hope you'll come back and join us a year down the road to report on the progress. It's an exciting forecast you've laid out for us.

Jacob Bates: We'd love to thank you, Mark, very much appreciate you having me on and look forward to seeing you a year from now. It'll be very different world I think. So it'd be fun to come back.

Mark Gilbreath: All the best. Cheers.

Jacob Bates: Thank you, Mark.