CBRE & Industrious - The Chicken and the Pig
Head and wings of a fantastic bird. 1507-19 Albrecht Durer
On the 22nd of February it was announced that CBRE had bought a 35% stake in Flex space provider Industrious for circa US$200 million in cash.
In addition to the cash CBRE will be transferring their own 10 location flex brand Hana to Industrious.
What does this tell us?
It tells us that CBRE is a chicken, and Industrious is a pig.
I have a lengthy presentation about #SpaceAsAService, and in this 8 factors critical to success are defined. No 1, in the prime spot, is a slide that asks ‘Are you a Chicken or a Pig?’. This riffs on the joke about ‘What is the difference between a chicken and a pig in a bacon and egg sandwich? To which the answer is ‘one is involved, but the other is committed’.
The reason it is in the No 1 slot is because whilst it does not matter which you are, if you are going to be an operator of flex space you have to be a pig. Operating flex space is too complicated, and too much a mission, for it not to be central to your core business.
For a giant brokerage like CBRE Hana was never going to be core. Yes they had the clout to throw a lot of money at it, but without it being something they invested real, from the core, commitment to, was it ever going to succeed? Their core, transactional business would definitely benefit from having ‘skin in the game’ of the flex market, enough so that they deeply understood the dynamics of the sector, but strategically the much better option, by far, is to do so via a true ‘pig’ company like Industrious.
Where this leaves other real estate services companies is interesting. Has the Hana experience 100% invalidated any of them them trying to launch their own flex operations? Probably. So what should they do?
Last year I criticised another real estate services company partnering with an operator, on the basis that they should be buying at least a decent sized stake instead. If they executed their partnership well buying a stake would become almost an inevitability, but by then it would be much more expensive. The ownership stake itself would provide the incentive to execute well. Put some ‘skin in the game’. And save yourself a fortune.
The CBRE situation has, I think, validated this argument perfectly. The pandemic may have done this particular company a favour, in postponing their partners growth trajectory, but if I was them I’d be coughing up for that meaningful stake asap.
Where this gets interesting is in thinking about the position of landlords. Covid is clearly a near term ‘bug’ for the flex industry, but it is a massive long term feature, as the demand for flexible space is set to grow enormously. To the size that every landlord, even every prime multi let office building, will need to offer flex options.
To date some landlords have been building their own offerings. But are these efforts even nearly enough? Are we dealing with chickens or pigs. I think most definitely the former, as with CBRE. The ‘skin in the game’ is trifling, even for pre pandemic conditions. For post pandemic demand orders of magnitude off.
So. What to do now? Current plans are too little. Is internal commitment lacking as well? The flex sector is becoming core, or at least a critical component of any serious, scale landlord. So ‘Pig’ behaviour is needed. Are they up for that? CBRE said they were with Hana. But they weren’t. Perhaps, given the way the real estate industry is structured, that was, and will be, an inevitability.
It’s make your mind up time. Landlords that are building out their own flex operations need to up their commitment 10X, or they need to make plans to back out immediately, and work on Plan B. Which is to decide who their target customers for flex space are, then pick a range of truly committed partner operators (because different customers types require different brands and value propositions). Then they need to align the incentives between themselves and these operators. By buying meaningful stakes!