Large centralized offices which house a company’s entire employee base will become a casualty of COVID. While there are surely benefits of having everyone under one roof, the events of this past year have punctuated the downside. The trend of a distributed workforce accelerated as leaders wanted to find ways to prevent the virus from taking out an entire company. Motivations for doing so will change once the vaccine is widely available, but the benefits of the model will remain and may be strong enough now to prevent a return to the old ways.
The majority of a company's workforce typically lives outside of the downtown area where their office is located. My commute involved a car, a bus and a subway which totaled about 2 hours each way. My commute was not an exception, it was fairly normal for folks that work in Manhattan or other large cities. I’ve been traveling into the city for so many years that I became desensitized to the ridiculousness of a 4-hour daily commute. I was never one to favor working from home, but after 10 months of waking up and walking to my office, I don’t know if I can ever commute this long to work 5 days a week. I am not alone and that is where the benefits of a hub and spoke (or distributed workforce) model comes in. Small offices that are close to employees' homes provide the connection we crave to be with our coworkers (at least some of them), along with the benefit of a short commute like we have all recently become accustomed to.
When hiring specialist roles or high-output individual contributor roles prior to COVID, the search would typically be limited to those available and within commuting distance of the office. Companies are realizing that they can now hire across the globe to get the very best talent. As Reed Hastings (Netflix CEO) found - an average higher talent density creates a disproportionate boost in a company’s production.
The Economic Benefits
Large offices are expensive and an inefficient use of capital. The cost becomes even greater when a company’s headcount changes and the leaders need to figure out what to do with an office that no longer serves their needs, yet has 7 years remaining on the term (the inverse here is equally applicable - a company projecting rapid headcount growth would have to invest capital on a larger space than they need at the expense of deploying it on revenue generating activities). A Hub and Spoke model would involve small localized workspaces where price per square foot is a fraction of the cost of a where a typical HQ is located. Companies are embracing these spaces on hyper flexible terms (rolling month to month commitments) or through on-demand bookings so that they only pay for the office space that they need when they need it.
Not only can a Hub and Spoke model save companies money, but there are also significant economic benefits for the employees. Between gas, bus fare, and subway passes, it cost me approximately $500 per month to commute into Manhattan. An office a few miles down the road would cost me under $20 per month to travel to.
There are Downsides Starting to Emerge…
The common argument against the Hub and Spoke model has been that employees would miss out on face-to-face opportunities and the growth/development that comes with it. I believe this is an issue, but there are already a ton of exciting innovative companies addressing this, like the immersive ‘virtual’ workspace company gather.town. I came across the Tweet below which opened my eyes to a more serious issue that could be harder to address:
How Do You Build a Hub and Spoke Strategy?
Real Estate has always been expensive, but the process of finding an office was straight forward. You hired a broker, provided them with basic information such as headcount, budget, and submarket, and the broker did the heavy lifting. All the client needed to do was tour the spaces, make a decision, and cut a check. Many companies want to execute a Hub and Spoke strategy post COVID, but they are not sure where to begin. There are so many different options and models out there, and since this concept is so new, everyone is trying to figure out where to start.
Detailed below, in their own words, Real Estate Leaders describe their view on Hub and Spoke and how their companies can provide the services and guidance needed to navigate the new world.
“The world of work has gone through dramatic changes over the past year. Covid-19 forced us out of our offices and into remote work -- for some this was a positive change, and for others it's proved enormously challenging. What we've learned through this experience is that employees thrive on the creativity that comes from connection and collaboration, while some can be individually productive at home, a majority miss this office. Last fall, we conducted a blind global survey of professional employees and 90% said they wanted to return to an office at least 1 day per week. The pandemic has leaders at companies of all sizes considering a hybrid model for the future, one that provides flexibility for businesses and the people they employ. Many are rethinking the traditional corporate headquarters and 9-5 schedule in favor of decentralized satellite spaces that are closer to their employees' homes or de-densified offices with rotating schedules or intentional collaboration hubs for group work and maintaining WFH for individual tasks. A recent CBRE study demonstrated that 86% of respondents saw flexible work space as a key component of their future real estate strategy. Traditional real estate companies, often locking businesses into leases for 10 years or more, are not ready for these changes in strategy. WeWork was built for this moment.
Flexibility is at the core of what we offer -- WeWork members have options for whatever space they need, from a single desk to a full floor or building, whenever they need it, from an hour at a time to years, wherever they need it, in a single locale or across the world--- and all with zero capex, and top of the line speed to market. Our three products WeWork On Demand (hourly/daily rentals), WeWork All Access (a monthly subscription to our 800+ locations), and dedicated spaces (short to long term leases on private offices), can be quickly mixed and matched to accommodate an evolving strategy. This is especially critical during an unprecedented moment, as businesses plan for a return to work when the threat of the pandemic subsides. The future of work is all about flexibility and WeWork is ready for it, because flexibility is in our DNA.”
“The Hub and Spoke model has been around for some time, but version 2.0 is now on the horizon. COVID has brought it to life faster than expected because many employees will no longer seek work that forces them to be tethered to one fixed location. In recent conversations with clients, I'm often hearing them say things like "80% of our staff never want to commute again", "our staff have told us they only want to come to an office 1 day a week", "some of our younger staff have moved from downtown to the suburbs to get more space for the same rent", "we know we need to shrink our footprint downtown and potentially add space elsewhere" and so on.
This global experiment we've all been thrust into has shown us how technology can facilitate many of the jobs we perform with more ease than we thought (even amidst an incredibly stressful situation!). All you have to do is imagine what the pandemic would have been like before high speed internet to grasp the impact of technology's role in keeping the world moving during a global lockdown. These factors (and more) are likely to cause the office as we know it to "unbundle" itself. Enter Hub and Spoke 2.0.
In light of all of this, some of the most important questions CEOs should be asking themselves are: ‘Do I have too much space in one spot? Do I lack space where my employees actually want to be? How can I rethink my workplace(s) as a network of space that facilitates employee choice? How do I balance my real estate portfolio to reduce my costs and risks while I improve my ability to attract and retain a broader-based talent pool?’
For brokers to best help clients answer these questions they will be collaborating with their partners in other geographies and Space-As-A-Service operators more than ever before.”
“Hub and Spoke is not a new concept but the definition and implementation of this strategy is radically changing. Historically, Hub and Spoke largely consisted of a central headquarters and/or regional hubs with the spokes spread across multiple cities in the form of satellite offices. While this structure still exists, the new framework for this model revolves around a central Hub supporting culture, collaboration and productivity initiatives while spokes consist of some combination of spec/agile suites, flexible workspaces, work from home, coffee shops, etc. which can provide workplace optionality, a massive recruitment and retention tool for the future. The new age Hub and Spoke model could be leveraged nationally and even within a certain city/metro area with the same components.
There is no one size fits all model and different organizations will deploy different decentralization strategies including fully remote organizations, which scares most industry professionals (I am not one of them). In any scenario, flexible workspaces and mobility offerings are going to need to be considered as very few employees are seeking to work from the central office or Work From Home full time.”
“Just like everything else in commercial real estate, the traditional Hub and Spoke model will undergo significant changes. It must become more cost-effective and meet the needs of the employees - not just the workplace strategy decision-maker. At Flexday, we believe all cities will begin to see the true commoditization of workspace. In the post-COVID era, the long-tail of workspace will accelerate quickly and places to work will be curated by entrepreneurs, retail operators, existing tenants with too much space and landlords looking to amenitize and monetize their spaces. This proliferation of workspace will create tens of thousands of desks and meeting spots across all neighborhoods. These locations will be your 'spokes' as they'll be closest to employee homes...as for the 'hub', they will most likely be in co-working locations or right-sized, short term office leases in very well-located buildings.”
Hub and Spoke is just a Foundation
As Justin points out above, a decentralized labor force will mean a large oversupply of workspace as both operators and tenants make their empty space available to local demand. What previously defined AAA inventory will shift as the value pendulum swings from a prestigious address to a convenient and productive location relative to each employee. The increased supply will invariably have a downward effect on price as markets correct to account for localized consumption.
Flexible real estate once just meant the rental contract wasn’t long-term. The tech industry had been disrupting the workplace (and by extension the office) long before COVID, not just directly with WeWork and IWG, but Google with cloud based collaborative document editing or sales enablement and marketing automation companies. COVID forced more widespread utilization of these tools and in doing so proved that remote work/WFH is very much more feasible now than 10 years ago.
The Hub and Spoke model has been around in some form for some time now, but in a post COVID era we’re seeing a rethinking of this. Going forward the ‘Spoke’ won’t just be physical, but could be software based or employees home-office stipends as well as suburban workspace locations, coworking memberships, and other convenient locations. Flexible real estate will be much more about the flexible nature of consuming real estate by employees and employers.
What’s clear is that Hub and Spoke requires a whole new ecosystem to extract the opportunities that exist. One that joins landlord and asset owners to consumers, consumers to amenities, and layers on top digital innovations. Companies like OfficeRnD are developing software that allow operators and landlords to provide these solution to their customers, and it will be exciting to watch the next wave of innovation in this space. I recently wrote about workspaceOS, and Hub and Spoke is effectively its foundational design.