Industrious' CEO tells us why the coworking startup is ditching leases and managing property instead - bigger rival WeWork is eyeing a similar pivot to help erase losses
Flex-office startup Industrious has nabbed $80 million in Series D funding, with investments from landlord-partners, Fifth Wall Capital, Equinox, and others. Industrious is up to 80 locations in 45 cities since launching in 2013, and has raised $222 million overall.
- The company is inking more management partnerships with landlords, where it designs and operates an office and its amenities, but doesn't pay a traditional lease. Its CEO said that's key to turning profitable.
- Coworking giant WeWork, which lost nearly $2 billion last year and is valued at $47 billion, said in a filing last week it is "actively pursuing" alternatives to traditional leases.
- WeWork recently made its detailed financials public as it lays the groundwork for an IPO, in turn casting a spotlight on the prospects for its competitors.
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Industrious, which just nabbed $80 million in fresh funding, is moving away from signing traditional leases and doing more partnerships with landlords instead. We spoke with the coworking company's CEO and co-founder, Jamie Hodari, who explained how that approach works and why he thinks it can help Industrious become profitable.
The latest funding round for Industrious came little more than a week after coworking giant WeWork unveiled its detailed financials - a key step towards an IPO that also revealed $47 billion in future lease obligations and a nearly $2 billion loss in 2018.
Industrious is moving away from leasing office space and then re-renting it to its customers, and instead focusing on management partnerships with landlords. And the company pegs its hopes for turning a profit in the near term largely on the success of those contracts, which it predicts will be a majority of its office portfolio by 2020.
The company has 20 landlord partners so far, with management contracts accounting for 80% of the deals it has signed in 2019. In those kinds of agreements, Industrious designs and operates an office and its amenities but does not pay a traditional lease to a landlord, similar to the partnership model popular with hotels. Landlords share in the upside of a successful flexible office space.
Industrious is not alone in preferring management partnerships, Hodari said. But he thinks it is well-positioned to be flexible in making the shift. Hodari estimated that more than a third of deals Industrious is negotiating would have the company manage tenant experience for the whole building, and not just in flexible office space.
Indeed, WeWork is also "actively pursuing" alternatives to pure leasing setups, according to its recent S-1 filing, and looking at doing more arrangements like management deals and participating leases. WeWork noted in the filing that it has limited experience with negotiating these kinds of alternatives.
According to Hodari, here's what the numbers behind management deals can look like.
First, Industrious and the landlord negotiate the terms of the contract. They then build the space, with a landlord putting up 90-95% of the capital and Industrious funding the rest. Industrious is paid in two ways: a management fee of 5-7% of the office's revenue, and then 30-50% of the marginal profits over a benchmark, usually what the market rate for the office is. Hodari said that the landlord usually ends up making 30% more than market rate with this sort of partnership.
Industrious' $80 million in Series D funding, which it announced on Thursday, came from a group of landlord-partners, Fifth Wall Capital, Equinox, and others. Since launching in 2013, it has grown to 80 locations in 45 cities and has raised $222 million. The company declined to provide a valuation in its latest funding round.
Another coworking competitor, Knotel, on Wednesday said it secured $400 million in financing from Wafra, an investing arm of Kuwait's sovereign wealth fund.
Industrious plans to use its latest fundraise to continue growing its network, including international expansions for the first time. It plans to acquire some new locations through M&A, something it has done twice since its Series C with acquisitions of Assemble and TechSpace. As the flexible office market has grown, Industrious is one of a few companies who has turned to M&A to increase network size.
Industrious has also been experimenting with flexible working spaces in places other than traditional office buildings. It has signed a deal with mall operator Macerich and opened a location in the Scottsdale Fashion Square mall in Arizona earlier this year.
That's a response to companies working to identify what their staff wants out of a workplace as a way to retain talent.
"When you get more responsive to that, you pull away from the idea that work can only happen in a glass and steel high-rise with a cold marble lobby," Hodari said. "It's not the only way to work"
Industrious also aannounced a partnership with gym company Equinox in May, and their first partnered space is slated to open this fall at Hudson Yards in New York.
Integrating workplaces with retail and wellness spaces has been a recent trend in the flexible office industry, with RXR Realty partnering with Convene in its multi-use buildings at 75 Rockefeller Plaza and 530 Fifth Avenue in Manhattan..
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