Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, coworking centers, incubators, accelerators, culinary centers now, media centers. It’s that combination of people place and technology with a highly flexible service agreement to support it. There are about 45,000 such facilities around the world today.
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Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor broker, lender, property manager, attorney or accountant
Darrin Gross 1:03
Welcome to commercial real estate pro network CREPN Radio, Episode Number 254. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show.
Today my guest is Frank Cottle. Frank is a futurist based in Southern California. And in just a minute, we’re going to speak with frank about the future of commercial real estate. But first, a quick reminder, if you like the show, CREPN Radio, there are a couple things you can do to help us out you can like you can share and you can subscribe. And as always, we’d love to see your comments. So if you feel inclined, please leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this on YouTube at Commercial Real Estate Pro Network. And also please consider subscribing there as well. With that, I want to welcome my guest Frank, welcome to CREPN Radio.
Frank Cottle 2:27
Thank you Darrin really great to be here. And I don’t want to add disappointment to your program right now. But if you want to see how handsome I am, you probably ought to look at a picture of me 40 years ago
Darrin Gross 2:39
I’ve always always humored by the the guests response to that but that’s all in fun. And trust me you’re you’re setting the you’re setting the curve on the positive side there so nothing to worry about. But, Frank before we get into our talk about the future, if you could share with the listeners a little bit about your Your background.
Frank Cottle 3:01
Well, I’ve, my career has spanned five decades. I started in the late 60s, early 70s as a commercial Diver of all things, working independently and also as a contractor to one of our federal agencies doing what was termed interesting work for a few years.
From there, I started racing yachts.
I spent a decade racing, large sailing yachts all over and working to build a yacht brokerage here on the West Coast based in Newport Beach in California. As I matured in that business a little bit, and we were quite successful, we got very lucky. I made the decision that I would never be an owner so long as I was a broker. As a result of which I had to leave the bad part of my work. I started in commercial real estate 1979 at time period. I come from a ranching and farming family. So the concept of land banking was appealing to me buying dirt in the path of progress, if you will. But I didn’t want to stay farming they didn’t want to go that route. So we would buy large parcels on the edge of masterplan commercial developments sponsored by Prudential land, Chevron land, mobile land, the Trammell Crowe Boston properties, the Irvine company, really big property master plan developers. We would buy a little piece of land out there on the edge of their master plan project. A biggest piece we could buy with the most entitlement and we put a small building out there 3040 50,000 foot building, but we had three, four or 500,000 feet of entitlement REITs to go up, if you will, but the timing just wasn’t right. So I had to figure out a way to hold the land. And we came up with this concept and watching what was going on. We figured out that these funny little things called executive suites generated the most revenue per square foot of anything in commercial real estate. They were fairly unknown in the late 70s, although just starting as an industry, and so we built dedicated buildings and hosted in house shared workspace back in the late 70s and early 80s. We built that portfolio for 10 years across the southwestern us, California, Arizona and Texas, sold the portfolio in about 1990 and started building classic What are referred to as business or co working centers today, myself and two partners, we built across the entire nation 195 projects. We were the largest private operator in the industry at that Time. And that portfolio was sold in 2000. Right at the height of the.com. Boom, good time to sell things. What the reason we sold that portfolio that I wanted to sell at least, is that I didn’t like the risk exposure of the lease liabilities on the properties. With landlords understanding real estate is a cyclical industry. And I wanted to own the customer instead of owning the center’s so we built the structure of the inventory control systems and the technology to do that. And today we have clients and I don’t know how many in 54 countries about 1100 facilities, but we don’t own the facilities. We just use those facilities in much the same way that Expedia uses the hotel Straight to service our customers. And it’s been a real fun ride, taking us down a lot of interesting paths. And today we’re considered to be one of the progenitors of the flexible workspace industry. And we still try and push the limits daily.
Darrin Gross 7:21
That’s fascinating to hear you talk about that and then just thinking back about you know, executive suites and how that was such a, like a trend setting concept back in its beginning there. And now you look at least workspaces is kind of a second. I mean, people know what you mean when you, you know, coworker or a kid was one that tronic complete blank. What’s the We Work said?
Frank Cottle 7:54
I think that’s one of the ones that while We Work, this is kind of interesting. debacle, they grew overly fast, not paying attention to some core fundamentals and got themselves in quite a bit of trouble. They’re referred to as the biggest deflated unicorn in the history of market. And SoftBank, who’s their primary financial sponsor has lost multiple billions, billions so far on the company, all through just too aggressive a business plan. Now they get not paying attention to the fundamentals. And one of the reasons I’m not in that business is they own to the centers, they were exposed to the leases, they had the huge capital expenses. Every time they wanted to capture another thousand customers, they had to build another center, and that costs them anyplace from 15 to 25 $30 million in the combination of capex and leasehold liabilities. If I want to do 1000 CAD thousand customers to my model have to pay Google some pay per click and then build them. That’s it. So it’s a technology driven company in a software as a service model, servicing real estate customers as opposed to a facilities based model. We use others the facilities that are owned by others.
Darrin Gross 9:20
So are you are you leasing space, enter, you know, sorry, my driving.
Frank Cottle 9:27
We basically own the customer and we place ourselves and our customers into other flexible workspace facilities around the world. Think of Expedia. As a good example. Were around when they started, some guys are Microsoft and knew them quite well. And if you run a hotel room, from Expedia, via Hilton or Marriott, you have a business relationship with Expedia, not with Marriott. They collect your money, but they do Give us a special deal they give you the loyalty program etc. And they have a deal a wholesale transaction structure with Marriott with a variety of hotels that allows them to put you in at a discount. So you may be paying $500 for that room. Expedia is only paying 350 or $400 for that same room. And so they work on that wholesale margin where they own the customer the business relationship, we do the same thing with commercial real estate, utilizing the flexible workplace sector as our core inventory model. So it’s very much like the hospitality structure.
Darrin Gross 10:43
Got it. So you’re, you’re basically the marketing broker arm for the the properties or the landlords or the property managers. Like I said, you you create the relationship with the occupant, a tenant that
Frank Cottle 11:00
That’s correct and and it’s really a scenario where a lot of times people don’t like to go direct, they feel they can get a better value by shopping across a platform like ours, or many times, they don’t want to have relationships, larger customers in particular, don’t want to have relationships with 20 different service providers, they want to have one contract with one aggregated service provider that can deal across multiple currencies, multiple contracts, multiple time zones. So in our models, you can come in and you can open 10 offices in 10 countries in 10 currencies in 10 minutes. It’s very simple to do. You just drop into a website and open an office. And we can do that globally. We we’ve been operating globally since the early 2000s and is a very effective structure especially for large customers. Our largest individual customer right now has over 11,000 separate accounts with us to put things in perspective,
Darrin Gross 12:09
Frank Cottle 12:10
Yeah, one customer. Wow.
Darrin Gross 12:15
And what’s what’s a an average client, if that’s a very large
Frank Cottle 12:22
Average client in our model has about three to five offices or virtual offices, usually in multiple cities. And that’s why they come to us again, they it’s much more convenient to work with a single inventory aggregator than it is with five companies in five cities might be independently owned and operated with different types of contracts. All different types of billing cycles, etc. legal departments from large corporations love us because they have one contract reveal Especially when they start going offshore. Right, that makes a big difference in our industry is very well suited for companies that are global or international in scope. I don’t know how much you know about human resources requirements in Singapore, as an example, or maybe in Egypt
don’t know nothing.
Usually larger companies don’t either and it’s very costly for them to get into it. So they fall into our industry in general, large providers like ourselves. Another great provider is a company called international workplace group. They own the brand called Regis excellent company also. And they larger clients in the multinationals, falsies structures like us, as well as local, a lot of local business as well.
Darrin Gross 13:56
So do you. You work with Regis then Is that one of your providers?
Frank Cottle 14:01
We like Regis? Yes, they’re fine, fine provider. We work with them through our European offices, primarily. They’re headquartered in in Europe. And we also have our own structure and offices and technology based companies based in continental Europe, a company called flex.
Darrin Gross 14:20
Got it. So from a user standpoint, if I’ve got a facility needs and multiple markets, and maybe a Regis isn’t in those markets or whatever, and I go to you, you have contacts or relations with providers in those various markets. So I still just have the one point of contact as opposed to having to go to each market and
Frank Cottle 14:41
That is correct. That is correct. And depending on whether we’re using one of our directory structures and partnerships with various brokerages or our own internal inventory, we have between 1100 and 18,000 different facilities that we can access around the world.
Darrin Gross 15:01
Gotcha. And as far as the so you contract with the facility provider as a, is it like a referral type mark, are you actually
Frank Cottle 15:16
We’re a wholesale, wholesale warehouse. We have a pre determined contract and a pre determined discount rate with every provider that’s inside of our system. And so we know exactly, you know, what our margins are, what our costs are, etc. And it’s, again run very much in an e commerce and software as a service type model. We have reservation booking systems for meeting rooms, conference rooms, we have our own call centers, to backup the offices with live receptionists around the world, etc.
Darrin Gross 15:51
Got it. So if I own a a office facility, and I’m looking to do some sort of You know, what is what’s the the broad term for this type of space? Is it shared space?
Frank Cottle 16:10
Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, co working centers, incubators, accelerators, culinary centers, now, media centers, it’s that combination of people place and technology with a highly flexible service agreement to support it. And there are about 45,000 such facilities around the world today.
Darrin Gross 16:54
Got it. So if I have a facility that I have space to lease? And is there a way to contact you? Or are you one that goes out and contacts me when you have a client that has a need?
Frank Cottle 17:11
A little of both? Generally, our inventory comes to us through our industry reputation. We don’t really have a big sales team that goes out there. We’ve been around for 40 years in those industries. So people do know who we are and what we do. And our websites are very easily accessed all over the world. So it’s a we’re more of a responsive marketing team than a outreach marketing team.
Darrin Gross 17:44
Gotcha. That’s that’s a interesting model especially as you know, space needs continue to change based on you know, the ability to work mobile or or
Frank Cottle 18:00
Well, right is right now, I think think about it. today. We’ve got about 1.8 billion mobile workers in the world. And yeah, look at what’s happening with our current pandemic of the month, I guess I’ll call it, you know, the Coronavirus? How many people have started working remotely and telecommuting just in the last 60 days, globally, right, millions and millions and millions, okay, they can do that because of technology. They can do that because all companies, all corporations and government itself knows they have to have flexible workplace plant plans if they’re going to win the talent war in recruitment right now, which is critically important. People are looking at looking very much at balancing lifestyle, with their work style. And so having again, a flexible workplace plan where you can work from an office you can work from a co working center, you can work from Starbucks, you can work from your home, all of these things blend into a new sort of real estate 2.0 or 3.0 I guess now, approach and the our industry, the flexible work sector is a core component to solving that mobile work issue.
Darrin Gross 19:29
Yeah, and let me ask you about just the, the, you know, the the use of space because I mean, obviously, the technology avails itself now to where literally you can work from home you can work from the coffee shop, you can work from wherever but the, the fundamental need of a space that has certain attributes, features like an office hmm Do you ever see that like I mean, have you seen it change? And in the time you’ve been in, in engaged in this?
Frank Cottle 20:06
Oh, yeah, market? Absolutely. Um, number one, we all need a place to work. We need a place to work where we can focus. So it’s usually not the kitchen table isn’t the best place. And it’s certainly not Starbucks, good coffee, bad place to work.
Even though you see a lot of people have laptops in there.
See people with laptops and tablets everywhere. You know, it’s like an appendage these days, right? And I’m as guilty of that as anybody. But But we all need places to work and we like to work around people. We, as human beings, we are gregarious, we enjoy being around others and sharing with others, etc. So you have to find environments that combine the technical Which today bandwidth is like air to oxygen to all of us. We have to have massive amounts of bandwidth and has to be secure bandwidth. We have to have a productive workplace. It’s not too far from the house because we’re very environmentally conscious now where we want it to be near public transportation. They shouldn’t we want to have amenities around that. I forgot about our interview this morning and didn’t know was on video. So I’m dressed because I’m going to the gym right after this. So we want to have amenities around this good restaurants, health clubs, etc. And all of those things that need to be combined into that perfect location. But most importantly, we want to be around people that we like. So when I say people place in technology, I’m not just talking about the support services of clerical secretarial and administrative support that facilities provide.
When I’m talking about the community of people that are working in the facility as well. 10 years ago, people would look up an address, and they’d say, Oh, I want to be on that street at that address. And they would see pretty pictures of a nice facility and say, Oh, that looks like a great office. Today, they’ll go on to Facebook. And they’ll, they’ll, they’ll find that address. But before they really looked at that, locations, pretty pictures, they’re going to go on to Facebook and see who’s there, what’s happening there, what sort of activities are going on there. And then they’ll come back to the website. So the community that you surround yourself with is as important today as the facility within which you work. And that has to do with everything from communities that are focused on social responsibility and charitable structures. Profit structure is on up to highly technical communities where all of the most brilliant programmers from Google are going to end up doing their spare work. So, that’s a very important component now in in office selection
Darrin Gross 23:18
Yeah, it’s interesting, you know, I in one way I feel like people have essentially isolated as much or more than ever before but connected virtually like what we’re doing right now. So there is that that the virtual connection but still the the physical, you know, proximity to be in amongst people and be able to have a community of whatever that space looks like or whatever that you know, your requirements are recognized that is still being a there’s still some sort of social, although
Frank Cottle 23:56
They’re very important, very important aspect to that. Again, we’re, we’re working remotely because we can but today I’ll be in this type of a meeting, I’ll be in a workplace environment that has other people, as well. And I’ll be socializing like to say, I’m going to the gym in an hour. So that we have different patterns that we need to involve to have a balanced in our lives. And it’s not just sitting in a room with a headset and a microphone on 24 seven, that right, that’s a little lonely. And if you look at mental health, loneliness is an epidemic as a result of some of the technology isolation that we’ve we’ve used today. So having a place to go, where you have a community that you enjoy being with is elemental to that work life balance.
Darrin Gross 24:55
Wow, I definitely agree. You know, as you mentioned, With the the corona virus, and all of its, you know, just amazed just how the tentacles keep reaching and just how you like Italy currently centrally shut down and just this just trying to minimize the spread, we’re trying to minimize the movement of people and minimize the movement of the germs or whatever. Are you seeing any kind of an uptick and in space demand because I you know, like even I think like Amazon and other other companies have kind of restricted travel for their employees. has that affected your business?
Frank Cottle 25:42
We don’t know yet. From a January in February, we’re both record months. So we don’t know whether it’s affecting us on the positive side or whether there’ll be a whiplash effect on the negative side. I think in our sector Whereas a lot of people use our type of space as secondary or tertiary space a lot of large corporations do. While we’re used very strategically, when people aren’t in the office all day long every day, we like virtual officing. We like workstations, drop ins, hot desking. We like all of these factors. And that seems to be part of a solution.
Overall, if you look at large corporations and the way that their facilities are laid out with big cube farms oftentimes or big open workspaces with a multitude of people, that’s what people are trying to keep away from right now. So we again, we aren’t seeing a negative aspect but I think it’s too soon to tell whether people will just stay at their home? If so, there’ll be using our call centers. So, you know,
Darrin Gross 27:10
we’re even just kind of curious if not so much of a, you know, a negative is as a potential for, you know, positive a guy as, you know, there’s a group of people in a certain region that are used to traveling but, you know, for the short time or, you know, looking not to and they’re saying I can’t work from home, I gotta get, you know, someplace, I could see that. Some sort of a,
Frank Cottle 27:36
We are seeing a little uptick in the hot desking. The drop in type business right now. But it’s not. It’s not large enough to call it a trend reaction. But we’re seeing a small uptick in that. I think, for a short issue like the face it Coronavirus is is got a label, it’s got Name, etc. But it’s the flu. We have the flu every year. And this seems to be a little bit more virulent. And it seems to get a bit getting a lot more press. But people go through this type of a structure every year. And so the normal reaction is you go home and work for a few days. Or you work right. You know, you just stay away from all offices for a few days. But it doesn’t seem to affect the occupancy rates or the migration in occupancy for real estate in general.
Darrin Gross 28:37
Right, right. So, we’ve talked a little bit about kind of the, I guess the from where you started to where things are evolved to do you have any kind of a sense of how things will continue to progress as far as this you know, this class of real estate And how it’s used and your business?
Frank Cottle 29:02
Well, if I go back to the way it was originally used in the early 80s, we had the predominance of the clients. We refer to them as members now. We’re legal accounting financial services professionals. They were used, they were the biggest users in most stable users within the classic old style executive suite environment that migrated to small technology companies, marketing and media companies, etc, coming in, but it was primarily smaller companies. In the early 2000s, the migration started shifting to larger companies. They recognized through the.com and then dot bomb issues that went on in the late 90s through the early 2000s. That flexibility was Key, you had a lot of large companies, particularly large tech companies that built massive campuses during the.com. Boom, only to have them sitting 4050 60%, empty three or four years later. And their balance sheets reflected a tremendous amount of debt. That went on all over. So flexibility. And today, the CEOs and the CFOs that are running larger corporations, they’re looking at their employee lifecycle, which is around seven and a half years for the average employee in most large fortune 1000 companies. And they’re saying, Well, our lease cycle or our debt cycles should match the life cycles of our employment base. That only makes sense. Otherwise, you’ve always got a lot of excess and they’re trying to carve that excess off of one way they balanced their portfolios and shed a lot of lease liability which is debt on the balance sheet is by utilizing our industry and running with 1015 20% of their employment base in the flexible workspace, it has a rolling one year contract and that never hits their balance sheet. So they get two benefits. First, they win the war for talent by having a good flexible workplace program. Second, they shed debt from their balance sheet which improves all of the valuation ratios and ultimately the stock price for all of the stakeholders.
Darrin Gross 31:31
Yeah, no that that the balance sheet. I wonder if you could take a minute and just expand on that a little bit because I you know, I think is most of the audience I think just from people I’ve talked with and you know, had a chance to talk with our either investors themselves, or professionals or somebody who’s looking to get into commercial real estate and You know, one of the things that I don’t know that it’s fully understood is the value of not having that long term lease on your, on your, your balance sheet. If you’re a you’re a tenant, you know, if you have whatever your company is, can you speak a little bit to that is how they they look at that and why that’s
Frank Cottle 32:24
That that it’s a critical issue. Let’s assume that I am a large technology company with an employment base in the United States of 100,000 people. And I lease on a 10 year basis, my space to house and host those people. I so I have a 10 year lease. Well, the first year is expensable. The years two through 10 are debt lease is nothing but a debt instrument. I mean, it’s just like a loan right? Just say I have an agreement, you have an agreement to provide me a certain amount of space over a specific period of time and in a contract actually, based on my agreement to pay you and that contract creates a debt. And that debt becomes a liability on the balance sheet. Well, if you have extreme liability, extreme debt on your balance sheet, you’re not as good a credit to the banks. That means you also not a good credit to the bond markets, or your stock value has more exposure and risk. So anytime you can reduce the liabilities in your balance sheet, that’s a very good thing. And if you can do it simultaneously, while still being able to grow, that adds flexibility and agility that we talked about. What’s the big term for CEOs these days? Oh, he’s a real agile or she’s a real agile CEO. Well adding agility to your business model through a more flexible workplace program and a series of one year rolling contracts rather than 10 1520 year leases or even a debt on owned properties is a much more agile style structure and that creates a better stock value ultimately
Darrin Gross 34:24
Yeah, no I I appreciate you going into that a little bit. I think the thing that’s always kind of caught my attention is how I think some of these like Walgreens and these other I think a lot of it seems like it’s drugstores have gone out and built out a large footprint, you know, everywhere. And then after the the buildings up and they’re operating, they’re looking to sell that and, you know, the opportunity to, to buy in or, or, or buy or however that is but just you know, As somebody who looks at Real Estate as an asset that I’m wanting to own because I want the, the tenant You know, sometimes you forget the the flip side of that, how they, how they view the debt and how it affects and put, you know, kind of a drag on their performance. And you know how it doesn’t make them as attractive to like said the investors or bankers or, you know, bond market?
Frank Cottle 35:26
Sure. Well and look at Oh, it’s not real recently, but look at the large retail models, such as Sears. Yeah. Okay. What killed Sears facility. They had massive, massive investments in facilities, and they couldn’t generate enough revenue from their retail activities to support those facilities and ultimately, that brought them down. They also didn’t change to an e commerce model. It’s funny, you know, as the first catalog sales company, they should have been the first day commerce sales company as well, but they just didn’t make it. They’re kind of stuck in their own history. But that’s a simple example of, you know, that being a problem at one point in the one was, it was in about in the late 90s IBM’s real estate department, actually, because of the growth of the market in general during the first phase of the.com era. They actually put all their leases purposefully into their balance sheet, which they didn’t have to back then. But they call them an asset because they had leased space at under market values, and they were claiming the Delta as an asset in their balance sheet.
That kind of got wiped out by their auditors A few years later. But people have always played games with the balance sheet and really estate on both sides from an investor’s point of view, and I’ve owned a lot of investment properties and both residential and commercial. Obviously, you want to buy the property. Hope you have a tenant or tenant group that supports positive cash flow. So really, your debt side is your balance sheet side, it’s just a matter of what your courage is with leverage. You know, are you going to go on a 90% leverage or zero percent leverage? myself, I’m a very conservative person when it comes to debt. So, you know, I think less is better and cash flow is is good. I’m very much a cash flow investor.
Darrin Gross 37:52
Well, definitely, there’s some some people that forget those, those good lessons every now and then and and Why the cycle continues? I guess. So if you were to I guess point anybody that was either looking into it, let me ask it this way is that the world continues to get smaller from the standpoint of of technology and the ability to be anywhere and work from anywhere. Do you find that your type of the facilities that you guys are placing clients in? Are they do they still tend to be in your larger metro areas? Or do you find that they’re going into the tertiary markets or were
Frank Cottle 38:43
The original concept started the central business districts of major market cities. About in the late 90s as technology started to evolve and allow more distributed work, We started seeing secondary cities come up. And today, the smallest village in Germany or Italy will have a business or co working center. And they’re all equally successful relative to their costs. So I can build a center in Manhattan and I know that the dirt underneath the building is very, very expensive. Okay, but I know I still need to make a certain margin. I can do the same thing in Kansas City, or the same thing in Hutchison Kansas, outside of Kansas City. And it’s the my margins will be about the same, maybe even a little bit better in those secondary markets. And it’s all based on the cost of the dirt under the building. I mean, look, location has a valuation model and you just have to deal with that.
One of the reasons we like our model, which is technology based is it doesn’t require much of that thought process. We have a wholesale margin, we know what it is, doesn’t matter where it is, we don’t have risk side for marketing and customer management. So we’ve mitigated the risk through technology. And by changing our business model, even though we still serve the needs of a global real estate client base.
J Darrin Gross 40:24
No, it’s fascinating how you guys have kind of inserted yourself in that and now the market. You know, I guess I’m just trying to think of, you know, back in the day when everybody went to downtown to do work, and here we are really working. I mean, people are, people are choosing more of their place where they want to live and employers, like you said, are being more flexible about that. And, and so this demand is, is.
Frank Cottle 40:51
That’s really important, and I’ll use our own company as an example our senior executive team is is distributed globally. We have a corporate headquarters here in Newport Beach officially. But it’s a tiny little. I mean, we’re in one of our own member buildings. We practice what we preach when it comes to flexible work.
Our chief marketing officer lives in Lexington, Kentucky. He likes horses. He likes that lifestyle. That’s her his family is. Can you imagine if I had to move him or my CFO lives in Las Vegas, or my chief administrative officer who’s Monterrey? If I had to move all of them to Newport Beach, how disruptive that would be to their families, how costly it would be to the company. And I know our gentleman and Lexington. He would say sorry, I’m going to get another job. I think that I think each one of them were would they have families they’re so the old way of centralizing A workforce was very disruptive to lifestyle and families, and very, very costly. And again, we’ve been working remotely like this since the 90s. And totally paperless as a company since the early 90s. As well, I’ve always been embedded in technology and it just makes sense for the whole team and, and everybody’s lifecycle and lifestyle is exactly the way they want it.
J Darrin Gross 42:29
No, I it’s fascinating, fascinating, just to think about it and just think about the, you know, historically just the disruption and and, you know, people having to pick up and move and, and all to be in a physical place. You know, even though their work may not necessarily be local. And just the kind of the, I don’t say the cost, but Well, there’s a cost. I mean, obviously there’s there’s monetary costs, but just in the relationship costs and stuff and you know, And I guess it’s for every Ying there’s a Yang kind of thing, but, but it is, I guess the flexibility from the, the talent side of the, the equation to be able to, you know, make a make a choice to work for a particular company or provider, whoever, and still choose where they want to be located is, is, it’s just fascinating. I remember the first time I was meeting with a customer and, and all of a sudden his laptop laptop started making some noise, he opened it up and he was looking at a guy from, you know, across the world, and he said, Hold on a meeting. Let me call you back. And I’m looking at my, what was that, you know, basically the Jetsons right there and, and it was Skype and he’s, you know, Skype, like, new and, but it’s it is fascinating, just how it’s really, I mean, in in and I don’t even think that that much about it. I mean anymore. I mean, here we are on a zoom call and, and, you know, everybody’s got FaceTime or whatever it is on their phones and, and, you know,
Frank Cottle 44:10
It’s well, it’s, it’s gonna it’s gonna continue to progress. I mean right now we’re working with a couple of the larger video gaming companies. So you talk about where things go and how does that all work progression in real estate. If you look at the video companies, they’re starting to lose market share, not in terms of number of of people, but in terms of numbers of hours because the marketplace is maturing. And the kids that were on video all the time are going to college or they’re going to getting jobs, etc. If you look at that industry, they’re also the best rendering companies in the world. They can create the most virtual reality environments better than anybody else. And they’re already set for that. When you look at their distribution, at any moment in time, you can have 5060 100,000 people playing the same game at the same time. Globally, the crossing all borders.
So what we’ve been looking at is the creation of virtual reality offices where instead of going into a facility, you simply put on your headset, and now you’re inside of that facility. And you can interact directly with people on a fully rendered basis, beyond the old style avatar structures that we see. And what that means is when you talk about central business districts and major markets take Manhattan as an example. You know, across the bridge, office space in Brooklyn, it’s a lot cheaper, but it’s a lot nicer Manhattan until you put on your headset. Now, my, my office in Brooklyn is the same as if I was in the Lipstick Building overlooking Central Park. Okay, and I’ve got a 2000 foot office with my own conference room in it, etc. Well, I can create all of that with technology now and with Microsoft’s new HoloLens technology, I can actually just invite people directly into my office to meet with them physically, even though they’re not there. So, when you think of that, then you think of real estate and you think of investment.
If that comes to play, which we think about 2023 it will start will be started with at least the repurposing of commercial real estate is going to be massive. And the repurposing of that commercial real estate is going to radically change the way that cities are managed and it could have a huge impact on residential costs are going down and the way transportation moves around, etc. So it’s We look at flexible workspace. Ultimately, having that capability is the beginning of the next advancement in technology that we’ll see will have a major impact on commercial real estate. Virtual reality officing instead of physical offices.
J Darrin Gross 47:18
Do you have any sense of how that’ll affect valuations? I mean, I’m just thinking if people don’t necessarily need to be in a space,
Frank Cottle 47:28
It’s going to happen. In fact, it’s going to impact valuations primarily in the highest density markets first, because that’s where the biggest costs are and that drove the migration will be from and what you’ll also have is density compression. If I have a nice office, in a in a high quality building, it’s going to be 300 to 600 square feet.
But in this environment, I can be in a room relatively small cube with a headset and a pair of haptic gloves on. I’m done. Okay, so I don’t need to have an equal quality office now will I still want to go to an office? Sure. I want to go to lunch with my buddies. I want to workout after I want to go get a beer or something. So I’m still gonna want to be with other human beings. But when I’m slipping into my work mode, I’m gonna have a different experience. I’ll still be with people. It’s just gonna be I mean, I’m gonna be experiencing them differently.
J Darrin Gross 48:37
Yeah, no, it’s fascinating to think about how, you know how the future looks like is gonna play out and, and, you know, compared to the cartoon, the Jetsons and what we all were presented back, you know, back when and, and how much of that is actually somewhat here and, but the this virtual thing is, it’s kind of fascinating. I think so.
Frank Cottle 49:02
Well by but 2033 it’ll be normal.
J Darrin Gross 49:07
Right, right now. Yeah.
Frank Cottle 49:10
It’ll be a standard just like I had my first video conferencing set in our offices in 1981. Okay, wow. So now it’s standard, right? 80s through the mid 90s, even up to about 2004 or five. It was sort of a rarity.
J Darrin Gross 49:31
You were definitely a trend setter.
Frank Cottle 49:34
Yeah, we spent more money doing dumb things with front of everybody that I can imagine. But but but the technology works. So you have certain early adapters, that pioneer stuff and Pioneer ways to use the technologies. And then you have the market. Right? And usually there’s about a seven to 10 year lag.
J Darrin Gross 49:56
Right? Well, but those early early adaptors are ones that kind of helped shape it, you know if there’s not adoption,
Frank Cottle 50:04
you know? So my dad always told me says, you know, pioneers get stuck full arrows. Yeah. So don’t be Don’t be a pioneer. He said build railroads instead, you’ll be off a lot better off.
J Darrin Gross 50:19
Good. Hey, Frank, if we could, I’d like to shift gears here for a second, as I mentioned to you before, and I think we talked a little bit about risk, but just by day, I’m an insurance broker. And one of the things we do is try and manage risk with our clients. And there’s a couple of different strategies we consider when when doing so. The first strategy we look at is can we avoid the risk? If we can’t avoid it, then we look to see if there’s a way we can minimize the risk. And if we can’t avoid or minimize the risk and we look to transfer the risk and that’s essentially what an insurance policy is. I like to ask my guests and I would like to ask you, if you can take a second and and consider what you consider to be the biggest risk. And just for clarity sake, I’m not necessarily looking for an insurance related answer. But with that, if you’re willing, Frank Connell like to ask you, what is the BIGGEST RISK?
Frank Cottle 51:25
Well in in our business, which functionally is commercial real estate, I think it’s cyclicality getting caught on the wrong side of the cycle. And you’ve seen a lot of property investors overall and market timing is always crucial. So cyclicality is probably the biggest risk and the protection from that comes with debt management. You can be highly you can deal with it. As much more effectively if you have a debt, a debt management program. So that comes back to what we were talking about with leasehold liabilities being a part of that cyclicality, exposure, not just physical buildings that you own. And the debt cycle of flexible workspace as opposed to a fixed workspace, where you have a fixed lease versus a service agreement is the most effective way to manage the cyclicality in real estate and the cyclicality in business.
J Darrin Gross 52:40
That’s, that’s interesting. Well in it definitely, I think that the debt and the cycle thing is is something that we all should be aware of. And, and clearly, if you forgot the lessons of the last cycle, you’ll get a chance to
Frank Cottle 52:55
know the hard way in many cases in many cases. Exactly.
J Darrin Gross 53:00
So, Frank, where can listeners go if they’d like to connect or learn more?
Frank Cottle 53:05
A couple places. First, would be Alliancevirtualoffices.com. Alliancevirtualoffices.comm, that’s one of our primary sites overall. And if, if you want to just learn more about our industry, we also manage a publication called Allwork.Space. And Allwork.space is the by far the largest focused publication on flexible workplace sector. We have, you know, two and a half million people on social media reach and about 100,000 articles read a month and that sort of thing. So it’s a very active publication that we do as a service. It’s not appropriate to an unintentional nonprofit. We do publish that as a service to the industry and just in general so that people can learn more about flexible work and all the things that are involved with it.
J Darrin Gross 54:11
Got it. I will be sure to list that in the show notes for our listeners. And, Frank, I want to say thanks for taking the time to talk. I have enjoyed it. learned a lot and hope we can do it again soon.
Frank Cottle 54:25
My pleasure. I look forward to it.
J Darrin Gross 54:27
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