Episode 80: Office space after the pandemic

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This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show where we're always discovering how to make way more money and pay way less taxes. This is Tom Wheelwright, your host, founder, and CEO of the WealthAbility show.

Tom Wheelwright:

So we're in this really odd place right now where a lot of people are working from home. And there's this big question about what happens to commercial space when the pandemic's over. So we know it's in trouble right now, but we'll come back, what's the future? Now we have all these calls, video calls like this one, for example, and do we really need all that space? And if we're an investor, are there opportunities in that space? If we're a business owner, is there a way to legitimately reduce our space so that we reduce our costs without giving up the positives of being together in an office?

Tom Wheelwright:

So today I'm very… And we're going to discover the answers to all of those, because I have the expert on this. Chris Kane who wrote the book, Where Is My Office? By the way, Chris, I love the title of the book, I love the ideas of the book and it's something that I've been wondering for a long time. So Chris, if you would just give us a little bit of your background and why you're talking about this.

Chris Kane:

Thank you. And it's great to be with you. And I'm intrigued to learn more about the views of CPAs, because I think CPAs play an important role in how we rethink the future of the office. Because from my background, I suppose I started in real estate. I got a qualification in real estate and worked in the real estate industry with JLL. Then in the mid nineties, I had that life-changing call from somebody with an American accent.

Chris Kane:

And I couldn't figure this out because I was working for a very traditional British firm at the time, but it was from the Walt Disney company. 17 interviews later, I found myself working as an Imagineer and my eyes were opened and I started to learn about the USA. And I'm proud to say I'm a frequent visitor there, although not a lot in the last year or so. My last trip was last February to Miami, but I also then a few years after that got another big opportunity to work for the British Broadcasting Corporation. And the roles were primarily real estate, but I learned all about broadcasting.

Chris Kane:

I learned about branding and I learned about these things called balance sheets. So I'm not a real estate person in the conventional manner. And I wanted to write a book, having finished my tour of duty at the BBC, to help business leaders and accountants to figure out that there's much more to this thing called the office than just being an expense line item. Because I discovered working both with Disney and with the BBC, the link between a productive workforce and a productive workplace.

Chris Kane:

Now, a lot of people would say that real estate accounts for 20, 30% of your OPEX, and it's a big, big item and it's hugely capital intensive, but you also have to look at the people side of it. An effective workforce is also a very big prize to have given that 60, 70% of your OPEX is allocated to that. So I know enough about accounting to be dangerous, but I do know about debit and credit. I do know about balance sheet and I discovered this wonderful thing called provisions. And of course you guys are also concerned about tax and you got to be very smart about that. So I look forward to learning a little bit from this conversation as well.

Tom Wheelwright:

Awesome. So actually taxes play a big part, of course, in investing in real estate. In every country, probably even more so in the US because we have very beneficial tax laws for investing in real estate, even in used real estate. Much more so than in the UK and other developed countries. But here's the first question.

Tom Wheelwright:

So as the pandemic winds down and… Because I've noticed that traffic has picked up quite a bit in the last few months in Phoenix. In fact there was some pretty serious rush hour traffic. Last Friday, I was headed somewhere and I was noticing the amount of rush hour traffic on a Friday, which I was surprised at. So it sounds like people are starting to come back to the office. What do you think is the future of the offices post-pandemic? Are people going to stay home? Are they going to come back? Are you going to see a mix? Where do you see this going?

Chris Kane:

I honestly think that nobody can give you a straight answer to that because it's still evolving. I think it will be a mix for some. And I think it'll be sort of driven by a number of things. Organizations and their leadership, where they are in their life cycle and the culture of that organization. And you take large US corporates at the moment. Many of the technology companies are biding their time by saying, “well, no one comes back on for the summer or the fall.” Some companies have come out and been very forthright. The most recent one has been Spotify saying, “We're going to have a work… Everyone's going to work from home.” But we're also hearing in the last couple of weeks, the emergence of a new label. WFA, work from anywhere. Now that may make sense for some corporations, but for middle size or small size businesses, does that make sense? Nobody knows.

Chris Kane:

So one of the big lessons we've learned out of all of this is that many of us, I think you and I are alike in this, that we've been around the block a bit. And we were brought up predominantly in the 20th century where we were trained to think in a single dimension, everything has to be homogenous. The Henry Ford way of thinking. Whereas digital is now a way of life here and we've been moving from analog to digital, but the debate about work and about using offices hasn't moved on. Because frankly for a lot of people, you can work any place, anywhere, any time. And that's causing a huge dilemma for a lot of business leaders of how to figure things out. Then you add the money side of it. You have a big cost item, investors are concerned about taxes.

Chris Kane:

Many of your corporate customers will be coping with the fact that US gap. I think it was started number 16 in the last few years, introduced this idea that leases are no longer expense line items. They have to go on the balance sheet, which is another new dynamic people have got to deal with. And you've got the headache of keeping people safe and it's a real headache. So we at Six Ideas, my little consulting business. It's a niche boutique operation, which is independent and objective. I've been trying to work with clients to figure things out and create some fresh perspectives about all of this. Whereas the press is saying it's either A or it's B, it's either office or work from home. Not everybody can work from home. Not everybody wants to work in the office. So it's a real mixture.

Tom Wheelwright:

Well, here's what we found. So I have a CPA firm besides my company that runs the WealthAbility network, but I have a little CPA firm. And what we found is that we have people who have been in the office throughout the pandemic. They do not want to be home. And I find them mostly to be single. The young single people. That's their social environment and they really want to be there together. They do not want to be from home. We have others that I think will stay home permanently. So that's, I mean to me that's the question is, do you think what's going to happen… My theory is that what's going to happen is people will still have offices. They'll just have smaller offices.

Chris Kane:

But they'll also have multiple locations. And I can't help cross referencing back to your August 28 show where you talked about choice. And you also talked about your policy with your people, which I think you get a gold star for leadership in terms of giving people the option, but also giving them the support. And I think that's another aspect that we're all discovering for both large and small organizations is that it's about leadership and it's about management. It's about helping people figure out how best to work through this and apropos at the office. We have this fixation with the physical, whereas we're living in the digital world. So maybe what we'll end up having is you'll have a downtown office, but it may not be as much square footage as you might have had pre-pandemic. Some people you will offer the ability to work from home on a fairly regular basis.


Chris Kane:

But you may also want to say to them, “look, guys and girls, we're going to go to give you the ability to go around and use a local work hub.” And there's lots of towns and suburban areas of large cities in the U S where people are happier maybe to drive around the block and go work in a place where two or three of their colleagues are. And you can organize that to all the various technology apps you have. I've seen a big pharmaceutical company in the Bay area. They've got 12,000 people. So there are people can work from home, go into the office, particularly if they're laboratory folk or they've got a card. I think it's provided by a company called LiquidSpace. And that card enables them to go around the block into a Regus or a Convene or WeWork or whatever. So choice, many of your clients advise large consumers and the power of consumption shifted in consumer goods to the consumer so many years ago. So what we're seeing now with real estate is that the power has moved from the landlord to the tenant, from the provider to the consumer.

Tom Wheelwright:

So you see, I mean, I think of it in terms of Airbnb or hotel type idea, and it's really, WeWork, right? I mean, that was their model although they were maybe a little ahead of their time and maybe a little aggressive. But you see that as kind of the future that people will be happy going into an office where it's not their people. It's just any people.

Chris Kane:

For some. And WeWork were ahead of their time, but what they did for the flexible space industry. There are hundreds of flexible space operators, car workplaces, for example, in the US have been operating for over 20 years. Regus has been operating for 25, 30 years, but they never broken to the big time onto WeWork came along and spent a billion dollars in marketing, which everybody else tagged on.

Chris Kane:

But the real issue there was that leaders of businesses, both large and small saw “Hey, what's this WeWork stuff?” And they suddenly realized that instead of having to access space by taking a long lease or buying a building, doing the due diligence, having brokers and lawyers and all of that stuff. They could just go down there and sign up. So like any other thing you do, if you want to sign up, give your credit card, you can have it for an hour, a day, a year. That's what part of the real estate model is going to move towards, because for the traditional stuff, I would summarize leasing and buying. Whether you're in California or Nashville or London or Germany, there are three factors which describe traditional leasing from the consumer perspective. It's costly, it's convoluted and it's confrontational.


Tom Wheelwright:

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Tom Wheelwright:

So if you're a high paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Tom Wheelwright:

So I have this thought here. So I look at WeWork. I was talking to somebody from NetJets just the other day. And to me, WeWork and NetJets is very similar. You've got a lot of spaces that you own, and you have enough people coming in to use it that it works for you, right? But I actually think NetJets is got a lot of pressure from the Airbnb model, the Uber model, where what you have is people having their regular offices.

Tom Wheelwright:

I mean, take me. I've got 8,000 square foot building, right? So why when I say, “Well look, if I'm only using 60% of my offices, why not just…” What will stop the technology from happening that will allow me to say, “Well look, I'm going to put myself on air office.” And air office then says, “well, I need an office space.” I'm here, for example… I don't want to be in the hotel. The worst thing is you and I both travel a lot and you know. I mean, there's nothing worse than working in your hotel room. I mean, literally, I cannot do it. I get claustrophobic, I don't want to do it. So if there were an office across the street that I could just go into an office, I would much rather do that.

Chris Kane:

Yeah, no. Great point. But the interesting thing is the power of disruption. Hotel groups, like Marriott for example, are now actively exploring how they incorporate an office function in their hotel portfolio, which is a great example of a supplier reacting to chips in consumer demand. And the big dilemma that the pandemic has exposed is that we've a real estate industry, which doesn't understand its customer. Any savvy business operator or investor. I challenge any of your investor listeners to answer the following question. Do you know what your customer journey is between the time a business leader defines a need for space, and whether that's 8,000 square feet or 80,000 square feet, what is the journey? And do you understand that? And by the way, do you happen to know your customer?

Tom Wheelwright:

No, it's a good point. Let me ask you about this comment you made earlier, which is kind of the social aspect. And having people say… I've had a number of people tell me, which I think is really interesting. I've got friends that say, we need to get people back from the office because they're not as productive at home and they need to be there for that environment. And I have not found that. Now, I haven't found that at all. I've actually found people to be at least as productive from home as they were when they went in the office. I just know that some of them want to be in the office and some of them would actually be very happy staying home. So what do you think that dynamic is and how important is that in the future of office space?

Chris Kane:

That's a great question. And I know from listening to your other podcasts, that you've got quite a reputation for being an interfering manager, and that's why some of your people are happier being away from home.

Tom Wheelwright:

They're happy with it. I'm away from the office. That's when they're happiest.

Chris Kane:

But you're right. We are all social animals. And I mean, whilst many real estate folk are really worried about the death of the office, which the office is not going to die, but it's not going back to normal. But the reason opportunity in all of this.

Tom Wheelwright:

Okay. So where is that?

Chris Kane:

The opportunity is moving part of the real estate model from a dry leasing basis into space, as a service. So when people come back and they feel it's safe to come back into downtown Atlanta or Phoenix or whatever, Palm Springs or San Diego, they're going to want a building, which is super safe from a pandemic point of view, because this virus ain't going anywhere for some years, I fear. But the other aspect is instead of rows and rows of anonymous desks and corner offices and stuff like that, the space has got to be really convivial to the social aspects of office work. Where people come together to collaborate, to be creative, to solve problems, to work in teams.

Chris Kane:

Because if I found one thing, which has been common in speaking to people right around the world from most of the States in the US. I was speaking to people in Canada this morning, South Africa last week, Asia Pacific the week before, is that many workers, whether they're senior or junior are saying, “Why do I need to commute to go into an office just to send emails?” It's a really interesting question, isn't it?

Tom Wheelwright:

Yep.

Chris Kane:

And so therefore, the nature of the relationship between the worker and the space has been brought into question as a result of lockdown. Managers are scratching their heads because they have got to figure out a whole new way of managing, which will be a blended take on traditional management functions. Real estate folk are saying, Oh my God their tenants are going to cut their space needs dramatically. And what am I going to do about that?

Chris Kane:

So there's some very significant dilemmas here, but as you, and I know you can turn challenges into opportunity. So what I would say to people is “let's figure this stuff out together.” One of the big things is that, if you look at the classic marketing model and it's all about the user experience. So savvy entrepreneurs say, “Where are my customers? What are their needs are what are the gaps?” So the big gap now for a lot of large and small companies is how can I recreate, repurpose my downtown office buildings into buildings which support this new, different way of working in social collaboration, creativity guises.

Tom Wheelwright:

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Tom Wheelwright:

Let's turn just for a minute to the investor. What are two or three things that you think investors ought to be looking at when they look at commercial office space over the next few years?

Chris Kane:

Well, I think it's about investigating opportunity of a concept known as space as a service. Evaluating whether you can take the tried and tested hotel sector model of propco/opco into the office world. And also then move beyond thinking about just one building, one deal to… Say like what Microsoft do with all their software products, they offer a subscription basis. What if some of the big property companies said, “Hey, Tom, let's imagine that you have got five cities at 8,000 square feet, and we'll give you the leases for all of them. We'll look after all of them for you and you can flex or grow, and we'll give you one invoice and it'll be much better than what you ever had under traditional lease.” Wouldn't you sort of be tempted by that?

Tom Wheelwright:

Yeah, of course. Now I do think that I'm not as big a fan of a WeWork where you go into a impersonal random office space. And I get that millennials are fine with that, but the gen X-ers and gen Z-ers aren't as fine with that. And they're actually and the baby boomers aren't at all fine with that. So you've only got that one segment. Yeah, it's a big segment. It's really only a millennials that want all this collaboration and they're happy to meet brand new people on there. They're willing to live with strangers, right? That's kind of the whole millennial idea.

Chris Kane:

Yes and no, Tom. I think once again, I was quite surprised in that WeWork seemed to be taking over the world when there were pre IPO. But they had a big building in central London where there was a lot of gen Xs and quite a number of baby boomers as well. So I think it's degrees of subtlety and you're right. And we shouldn't be just talking about WeWork because there's quite a number of other significant players who are being coming out of the shadows, which offer sort of variations on that theme.

Chris Kane:

It's all very nice and cool and sexy the WeWork brand, given that they spend so much money on promotion. But there's lots of other, as I said, [Car 00:23:07], Serendipity, Industrious, I think there Texas company. There's quite a number of other ones out there as well. And I've even noticed some of the residential investment players and REITs now saying we've got two or 300 residential facilities around the country. Maybe we might want to add in a local work hub into that. So I think it's all about choice.

Tom Wheelwright:

Yeah, no, I like that. So [inaudible 00:23:34], when it comes to your business owner, and you're thinking about how to deal with this from a space standpoint. You're planning, your lease is up in a couple of years. We all know commercial market always lags the residential, because the leases are longer. But your lease is coming up. You're going, “do I take a smaller space? Do I have maybe multiple small spaces? Do I go through and just do a subscription type thing?” What's your advice for the entrepreneur, the small business owner?

Chris Kane:

Well, firstly I think get a good CPA.

Tom Wheelwright:

Always good advice.

Chris Kane:

Yeah. But because it's about the fiscal element in terms of, what are my costs, but taking a holistic view. Too many people focus in on what I call the core real estate bit. And if you look at it, the real estate costs are 10, 15% of your total OPEX, but the people side. And one of the things I learned from working in the BBC was that you have to look at all of this stuff in the round. Not just the efficiency stuff, but the effectiveness. So and that's where you can't get a one size fits all solution. I developed something called the smart value framework, where you looked at efficiency, effectiveness, the worker experience, the branding and all of that to say, what sort of enterprise value can we derive from all of this?

Chris Kane:

And that's where people in your profession can look at this thing as opposed to a real estate person who can only talk dollars per square foot. We have to, and this is the one thing I learned in moving into the corporate world, about learning, as I said, about balance sheets. You're just one element of your value chain. So how do you look at the value chain in its entirety? What are the cash issues? What are the accounting issues? How do they all make sense so that my bottom line works? And clearly with expertise in your world, then you can sort of maximize your tax efficiency as well. Because it's all joined up together. And I think that's one of the things the pandemic has shown up, that everything we do is connected. And we have grown up in a time of mass production and silo thinking. Whereas now we're in the world of the system and the network.

Tom Wheelwright:

I love that. Thank you. Chris Kane, Where Is My Office? Great words of wisdom. I love the idea that you're focusing on… Let's focus on our customers, which includes our exterior customers and our interior customers, including our employees. Let's figure out what works for them, because what works for some may work differently for them than for others. And what works for your business, like I said at the beginning, it works just fine for us to have people come in if they wanted to. And if they wanted to stay home, they could stay home. And I was just looking at, let's take of our people, but not just on one side of it. So it wasn't, we're going to shut down, which I've never thought was a good idea, period. I don't like shut downs of any kind of business.

Tom Wheelwright:

Instead, why don't we look at all sides of this? And I love that. So you're looking at a very holistic viewpoint. Again, Chris Kane, Where's My Office? Just remember that as Chris says, your real estate is really just one part. First of all, it's just one part of your portfolio. It's also just one part of your business and you really have to look the people side of the business and take that into account when you're dealing with real estate, when you're dealing with your whole office space and your whole investing portfolio. So with that, thank you again, Chris Kane. Thank you for joining us. And just remember it's this kind of education that allows us to make way more money and pay way less tax. We'll see you next time.

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