Mindspace CEO: Coworking space is just starting out

Dan Zakai and Yotam Alroy Photo: Shlomi Yosef

After opening its third Munich branch, the company's founders explain to "Globes" how they have expanded their business to 21 branches in 11 countries.

Two weeks ago, shared workspaces company Mindspace opened its largest branch, 7,200 square meters, in Munich. It is Mindspace's third branch in the city and its 21st branch in 11 cities worldwide.

The company's first branch on a 900-square meter floor in Beit Zion at 45 Rothschild Boulevard in Tel Aviv opened in May 2014, before shared workspaces giant WeWork began doing business in Israel.

"Because WeWork wasn't there, we were pioneers in the market. It was very hard to explain to potential customers what shared workspaces were," says Mindspace co-CEO Dan Zakai, 39. "Our first customer was a friend who founded a startup and took a place on the floor in Beit Zion," he remembers. "In order to understand what was missing and what should be changed, we constantly asked him what he needed." Several months later, another floor was opened in the same building, and in 2018, after the insurance company left Beit Zion, Mindspace opened four more floors in the building.

In May 2015, exactly one year after opening its first floor on Rothschild Boulevard, Mindspace opened another branch nearby at 54 Ahad Ha'am in the same building that once housed the Tel Aviv Stock Exchange (TASE). Mindspace rented the entire building from Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which was looking for another tenant to replace the TASE after the latter moved to its new quarters on Ahuzat Bayit Street. Mindspace rented the building on Ahad Ha'am at an estimated NIS 80 per square meter. Two of the five floors in the building are rented by the technology department of Barclays Bank, while the other three floors are leased as shared workspaces.

Mindspace's two Tel Aviv branches have 10,000 square meters in aggregate shared workspace.

"The entire market has changed," says Mindspace co-CEO Yotam Alroy, 39, "including in buildings with a tiny proportion of shared workspaces companies, in which most of the space is leased to tenants with ordinary leases. Both the tenants and the owners of the buildings realize this, so they're trying to increase the space leased for shared workspaces. This has a growing future."

Friends from second grade

Zakai and Alroy have been friends since second grade. They grew up in the Ramat Ilan neighborhood in Givat Shmuel. Zakai and Alroy are also graduates of the law school and business administration school at the Herzliya Interdisciplinary Center, and they both have MBAs from the University of Chicago and Northwestern University in the US. Their business experience led the into different areas. Zakai worked as an investment banker at HSBC and Lehman Brothers, after which he founded a solar energy company in Israel, while Alroy was VP business development at SHL Telemedicine and Roboteam. Meanwhile, the developing overseas shared workspaces market led the two to join forces and found the first branch of Mindspace in Israel.

Mindspace has raised $75 million to date from private investors, a London private equity fund, and Crossroads, a European real estate companies listed on the London Stock Exchange. Israeli private investors in Mindspace include businesspeople Yoav Harlap, Gilad Altshuler, and Kobi Rogovin.

As of how, Mindspace has 14,000 community members. "At the beginning, the end users of shared workspaces were startups and self-employed people," Alroy says. "Today, demand is increasing among large companies, such as Microsoft, which took half of the space in our Herzliya branch, and Barclays Bank, which took two floors in on Ahad Ha'am Street in Tel Aviv."

Alroy says that this trend is also gathering momentum in the overseas co-working market. "Global forecasts say that by 2030, the proportion of shared workspaces will reach 30-40% of the offices market. This amounts to a correction in offices and its adaptation to current needs."

"Globes": You have grown a lot, but you are nevertheless not as well known in Israel as WeWork.

Alroy: "In the bottom line, all of the companies' prices are about the same. We don't believe so much is making a rumpus and noise. We believe that in this market, the customers essentially come because of recommendations by friends who are located in the place and are familiar with it. We're not saving on space; we have more shared space than other companies, and all of our branches are in the heart of the main cities. All of our offices are open 24/7, and members of our community can enter any branch in the world with their pet.

"In the bottom line, we're getting brands like Samsung and Microsoft. 18 months ago, the company had 30 employees. Today, Mindspace has 180 employees, including 80 in Israel, because we're constantly expanding. The property owners also know us and are offering us additional space that they have in other countries. We took a building in Warsaw from a large European real estate company named Globalworth, and after the company saw what we did with the building, it asked us to considering opening a Mindspace branch in the company's building in Bucharets. We went for it, and the branch is about to open."

You are opening more branches, but what is the minimum occupancy of offices and workspace that you need in order to make the branch profitable?

"The key to economic success is at least 60-65% occupancy. Any occupancy higher than that is already profit," Zakai explains. "We have a total of 100,000 square meters of shared office space worldwide with a 95% average occupancy rate. Our desire is to continuing growing in strong cities, including in Israel."

Where is the offices market going?

"On the one hand, despite the fact that it's the future, the number of large players in the workspaces field is really not large in either Israel or the rest of the world," Zakai answers. "There are places in which there are many small players, but there are almost no large shared workspaces companies. On the other hand, the forecasts are talking about an increase in demand for shared workspaces. The services provided by shared workspaces in the end will become the standard for every office building."

"Once upon a time, a representative of an overseas high-tech company used to go to a real estate agent in Tel Aviv and ask for a space suitable for the company, and the real estate agent would present the existing options. It's not like that today, because the market has changed completely. The high-tech company goes to the property owners with demands, and the level offered in shared workspaces is a threshold that the property owners have to meet. Property owners therefore want shared workspaces activity in their building, because it gives the building an advantage. In this way, tenants with ordinary contracts in the building can also go to the building owner and ask for the same services there are on shared workspaces floors, even if the services are fitness rooms, events, lectures, insurance discounts, hotels, etc.

There are still traditional professionals such as lawyers and accountants who prefer offices in the buildings of Azrieli or Amot, not shared workspaces.

"There are professions for which it isn't natural to be in the same room, and that's fine," says Zakai. "Lawyers and accountants in general are not inclined to go for shared workspaces, but lawyers and accountants in high tech or technology do take shared workspaces. Furthermore, sharing workspaces with high-tech and technology companies enables them to recruit more potential clients."

Expanding worldwide: "With a little Israeli impudence, it works"

Mindspace is about to add five more branches soon in two more cities overseas: three in Bucharest and two in Utrecht in the Netherlands, which will give the company 26 branches in 13 cities worldwide. Companies renting space in Mindspace's branches around the world include Samsung and Agoda in its Berlin branch and Expedia and Yahoo! in Hamburg.

How different are your offices and users in different cities?

"Every place has its own preferences and its own industry," Alroy says. "Our customers in offices in Washington, for example, are more political organizations. In Berlin, it's more startups and venture capital funds, while in Hamburg, it's more media companies. When we talked with an owner of a building in Germany, for example, and asked what about air-conditioners, he said that there are no air-conditioners in offices in Germany - that's how it is. So we told him, 'OK, so there will be 200 air-conditioners here because you can't have a shared workspaces area without air-conditioners.' With a little Israeli impudence, it works."

Mindspace opened its first overseas branch in Berlin in 2016 with 5,000 square meters. Two more branches have been opened in the same city since then, three in Munich, five in Amsterdam, two in London, and the company also decided to put out its shingle in the US by opening branches in San Francisco and Washington DC. Mindspace is now planning further expansion in the US. The company opened another branch in Israel in 2017 in 6,000 square meters that it rented from Kobi Rogovin and Reit 1 (TASE: RIT) on Manofim Street in the Herzliya industrial zone, half of which it has rented out to Microsoft.

You are two young guys with no real estate background. How are you able to find a property in a foreign country with suitable demand and occupancy?

"It's more operational management than pure real estate," Zakai says. "The key is a central location and the high-quality personnel we employ. In some cases, we have a local partner with an excellent knowledge of the local market."

Alroy adds, "When we came to Berlin to find Mindspace's first overseas property, all of the real estate agents jumped all over us and offered us 5,000 square meters that had stood empty for five years without anyone taking it. The building was in an excellent central location, but the market had already given up on it. Although we saw potential in the building, we decided against taking it, and rented another building in the city. When we saw that demand for shared workspaces in the city was excellent, with good occupancy, and the first building was still empty after another 18 months, we took a deep breath and went for it. We invested in it and achieved a 55% occupancy rate in it after a short time. We were also careful; we didn't take it at first, but you have to be daring and recognize usable potential."

Shared workspaces have changed the market: "If you have NIS 1.5 million, buy an apartment, not an office"

"Price per square meter is a term that went out of use a long time ago in the offices market," says Jacky Mukmel, chairperson of CBRE Israel, which markets commercial and offices space. "Shared workspaces have changed the market. Demand is no longer coming from a lawyer wanting to rent an office for 20 years. The startups are in an office today; tomorrow, they buy it and move somewhere else. The market has become dynamic, so the questions are no longer how many square meters and how much the rent is, but what essential needs are provided, including construction and adaptations.

"In traditional offices, tenants have to buy furniture and understand planners and consultants, so they rent for a long period that will justify the investment. Shared workspaces come ready with top-notch furnishings, and there is no commitment to a long period. The advantage is also in the timetables - you can start working as soon as you join.

"In the influence on the market, there is no effect on large companies like Azrieli and Amot Investments, which offer large areas, because shared workspaces companies are offering limited space. The main damage is to owners of small offices. Small tenants today have no reason to rent an ordinary office, pay per square meter, invest, and furnish the place when they can pay a slightly higher rent that includes services and their needs. Furthermore, if they want to grow, they have a problem, while shared workspaces can usually be expanded.

"Shared workspaces can be only in buildings with a single owner, not in buildings constructed by a buyers' group, for example. The shared workspaces market is likely to continue growing and will expand to cities with business centers outside Tel Aviv, such as Ra'anana, Rehovot, and Petah Tikva, so if you have NIS 1.5 million, it's better to invest it in an apartment, not in an office."

Published by Globes [online], Israel business news - en.globes.co.il - on October 11, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Dan Zakai and Yotam Alroy Photo: Shlomi Yosef
Dan Zakai and Yotam Alroy Photo: Shlomi Yosef
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