Flexible-workspace firm 1 Penn Plaza, several sources familiar with the negotiations revealed.
The firm, which operates several locations in the city, said it will manage about 80,000 square feet of flexible office and coworking space and 20,000 square feet of conference and event facilities on the first three levels of the property. The space will also feature food and beverage elements.
The deal is a centerpiece of a redevelopment on the base floors in the 57-story, 2.5 million-square-foot office tower by landlord Vornado Realty Trust. As part of the work, the $12.6 billion public real estate company is renovating the building’s lobby and exterior and will install new retail and restaurant space on the ground floor and basement level, which connects underground to Penn Station’s main concourse.
Vornado has hired architecture firm A+I for the project’s design and has said it will spend more than $300 million on the renovation. The project is expected to be completed by the end of next year.
The dramatic growth of the flexible workspace industry has paused in recent months in the aftermath of WeWork’s near collapse in October, but the Penn Plaza deal demonstrates how some players in the sector continue to thrive.
Rather than lease space conventionally, Industrious has focused on management agreements in which it partners with landlords, sharing profits from the operation of its spaces rather than paying a fixed rent—the structure it is using in the deal with Vornado.
“The landlord partnership model is the future of the flexible-workspace industry,” Jamie Hodari, Industrious’ co-founder and CEO, told Crain’s. “It has become clear that the leasing model is unduly risky, and it’s hard to put out the highest quality product when you’re not arm in arm with the owner.”
Hodari said he could not confirm or comment on the deal at 1 Penn Plaza. He revealed that the company just signed two other management agreements to operate flexible workspaces: at Carnegie Hall Tower on West 57th Street and in a 60,000-square-foot space at 135 W. 50th St.
Across the country, the firm announced it had signed on to manage about 700,000 square feet of new flexible workspace locations in the fourth quarter of last year, a period when many of the firm’s peers in the industry appeared to put growth on hold.
Management agreements relieve some of the chief concerns that have plagued the rise of flexible workspaces.
Observers of the industry have pointed out the mismatch, for instance, between the long-term liability of a conventional lease and the short-term commitments that flexible-workspace firms sign with their clients, leaving them exposed to a cash crunch if pockets of vacancy open in their portfolio.
Conventional leases also require workspace providers to spend significant sums outfitting spaces for occupancy, while management agreements generally push some or all of that capital outlay onto the landlord. Those expenditures were a factor in WeWork’s near collapse, as the firm lavished billions of dollars to fuel its frenetic growth, costs that consistently outstripped its revenues by roughly two to one.
“When you’re working with a landlord, you can deliver a space and an experience you just can’t when you’re across the table from that landlord,” Hodari said. “We can seamlessly integrate the services we provide not only into our own space but the broader building because we have the cooperation from the landlord.”
Other firms also have focused on management deals. Workspace company Convene, for instance, is close to announcing an agreement to operate a large block of space at the Starrett Lehigh Building, several sources confirmed to Crain’s. Neither Convene nor that property’s landlord, RXR Realty, would confirm or comment on that rumored deal.
At Carnegie Hall Tower, Industrious has agreed to manage two floors in the building, 43 and 56, totaling about 17,000 square feet. Industrious plans to operate a flexible workspace for smaller companies on the 56th floor and a conference facility on the 43rd, which features an outdoor terrace space.
“We felt the 43rd floor was better shared by the whole building rather than leasing it to an individual tenant,” said Jake Elghanayan, a principal at TF Cornerstone, which owns Carnegie Hall Tower and is an investor in Industrious. “Our partnership with Industrious is a recognition that there’s a section of the tenant market that wants more flexibility and a higher level of customization, personalization and hospitality.”
Hodari said Industrious, which has raised more than $200 million in equity investments, would continue to grow.
“I think we’ll probably open four to six units this year in the city and eight to 12 in 2021,” Hodari said. He added that the firm’s revenue was a little more than $100 million, and he expects it be double that this year. He said the firm isn’t yet profitable but soon will be.
“By the summer we’ll be profitable,” Hodari said. “We weren’t planning to be profitable for another two years, but it came sooner because our revenue has grown faster than we anticipated.”
SOURCE: Section Page News – Crain’s New York Business – Read entire story here.