If You Can't Beat 'Em, Join 'Em: Landlords Embracing, Investing In Disruptive Forces

Despite the real estate industry's reputation for adapting to technology at a glacial pace, Manhattan landlords have made a rapid about-face in the last few years. Pressed to stand out in the most competitive office market in the country, they have begun welcoming disruptive forces into their buildings and into their investment portfolios.

Montreal-based on-demand meeting space provider Breather is a prime example of the rapid shift in mindset. Last year, Breather signed 50 leases totaling 80K SF in New York City. Breather operates almost 140 spaces in 150K to 175K SF here at the moment, but vice president of real estate Maggie Burns said the firm is planning to have more than 200 locations by the end of 2017. 

Breather, which also operates in Toronto; Los Angeles; San Francisco; Washington, DC; Denver; and London, leases spaces of up to 4K SF and provides full-services meeting spaces by the hour or the day. The firm started its Manhattan journey in Midtown South catering to tech tenants, but its growth potential reaches far beyond.

Burns considers some of the firm's most recent deals — at 183 Madison Ave., the first in a Tishman Speyer building, and at 594 Broadway in SoHo, its first with Newmark Holdings — achievements because of the caliber of landlord that has recognized the company's potential.

"Two and a half years ago, the best-case scenario for us to sit down with a Class-A institutional owner was for them to say, 'Seems interesting, let us know how it’s going in six months,'” Burns said. "Now the level of excitement is palpable. We're getting a lot of inbound requests from landlords."

Just as important as the landlords who recognize the firm's potential — which Burns called "massive" numerous times in a telephone interview Thursday morning — is the volume of major, multinational companies seeing a need for its service. Breather is now the official small meeting space provider for Estée Lauder worldwide, Burns said.

"We are serving more clients than ever before, and I think we’re just scratching the surface," Burns said. "We’re now very focused on serving [major institutional] clients, but also thinking about how can we meet the needs of these massive occupiers globally as they think about their real estate footprint? We see a really massive opportunity there."

If that business model sounds familiar, that is because it is reminiscent of what the office market's biggest disruptor is also striving for.

When WeWork struck a deal to manage nearly an entire building, 70K SF, on behalf of IBM near Greenwich Village, it effectively sent a message to brokerage giants like CBRE and JLL that it is not content to simply serve as a landing spot for some companies. WeWork and Breather launched effectively as middlemen between landlords and tenants. Firms of their ilk now see offering real estate as a service — managing spaces directly on behalf of major clients — rather than short-term deals for freelancers and entrepreneurs — as the business model that has the best potential to scale.

"From Day One, we wanted to be both B-to-C and B-to-B," Burns said, referencing platforms facing small consumers and large enterprise clients. "But two years ago, we started reorganizing around B-to-B, because the opportunity was just so massive." 

Likewise, landlords are not waiting for tech firms to come to them. Canadian giant Brookfield just invested tens of millions of dollars in Convene, another on-demand workspace company. On Tuesday, CBRE, Hines, Lennar, Macerich and Equity Residential were among the founding investors in Fifth Wall Ventures, an investment fund that raised $212M to invest in real estate startups contributing to the "Built World."

"We’re in the early innings of one of the single biggest shifts in the history of the U.S. economy," Fifth Wall's launch announcement reads. "The 'Built World' encompasses much more than buildings: it represents an entire ecosystem of the companies who own and operate physical space, and the innovative startups developing technologies that will transform, optimize and democratize access to these spaces. This ecosystem hasn’t yet fully been realized."

While technology was bound to change the way the real estate industry operates eventually, the acceptance of the change at every level of the industry in New York City has been significant, especially over the last year. And it is not just the technology itself, but the ethos and environment that technology inspires.

"Fried Frank, which is one of the most prominent real estate law firms in New York, in their office downtown, they put in a pool table," RFR senior vice president and director of leasing AJ Camhi said. "Law firms are usually about efficiency and offices, and in a million years you wouldn’t think they’d encourage downtime. Park Avenue buildings are now putting in ping pong tables and open tenant lounges. It spreads the gamut now. It’s pretty wild."

For landlords like RFR, which owns the Seagram Building, attracting the right employees to the right project is more important than checking the hip, trendy boxes. 

"[The building] is an architectural masterpiece," Camhi said. "We are never going to redo that building to attract tech tenants. We were one of the first buildings to offer an executive lounge and a 7K SF terrace, but we’re not going to put in pool tables."

But the area where WeWork and Breather really succeed — personalized touches, service, programming — have landlords taking note.

"We view our tenants as our partners, we want them to do very well. If they do well and we treat them well, then they grow within our building," Camhi said. "What WeWork has done has raised the bar for a lot of other landlords. A lot [of] amenities that are now springing up have a little to do with what WeWork provides. It’s showing that level of service works."

Camhi and Burns will be among the speakers at Bisnow's NY Workplace of the Future event at 575 Fifth Ave. on Thursday, May 11.