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Reworking Office Space: Industry City, Brooklyn Case Solution & Answer

Reworking Office Space: Industry City, Brooklyn Case Solution

Overview

Jamestown wants to lease a portion of its new development to accommodate maker, innovative and creative communities. Jamestown wants to invest in the new trend of shared office space like other well-known players. David Himmel has to take decision that whether he should lease the space to third party co-working management, or operate their own shared office space or should lease to a traditional tenant. The decision of David should be based on economical, operational and reputational benefits of the each alternative.

Evaluation of leasing Alternatives

Jamestown has three alternatives including lease to a shared office operator, Jamestown-operated shared office and lease to traditional tenant. Qualitative and quantitative analysis has been performed to evaluate each alternative.

Leasing to a Shared Office Operator:

Jamestown was pursuing creative and younger employees and leasing to a shared office operator as a tenant could help seed Industry city. Larger operators could consider the buildings of Industry City because of the good reputation. According to the quantitative analysis, SOO’s operating profit margin would be 66% which is quite low in comparison with other two options. The cost of capital for this alternative would be 9% it means that the company would get 9% return on its investment. The cost of capital is also low which indicates that, risk associated with the investment is low in comparison with OSO.  The exit cap rate is 7% which shows that the company’s investment is profitable because it is low. The 785 vacancy rate indicates that the company could utilize this vacant space for some other operations. Although the company would earn less rent for per square feet but the positive net present value of all discounted future cash flows indicates that company’s earnings would be greater than its investment.

In leasing to a shared office operator, the operational complexity would be lowest as compared to other operations because the company would not have to manage each tenant. The company would target large operators like We Work and they would consider the majority of the space and bring younger and creative employees and manage them by themselves. The economic benefits in terms of net present value would be moderate in comparison with other two alternative options. This expansion alternative will change the business model of the company and the stakeholder’s of the company might resist because of the risks associated with this expansion plan. In a nutshell, operational, economic and reputational benefits would lead to the favorable profits for the expansion plan.

Jamestown-operated shared office:

Another alternative is to build their own flexible working environment for new startups and operating it by themselves. Jamestown would target similar build-out and dense layout like other SOOs. The operating profit margin is 68% which is highest amongst all alternative options. Per square feet rent and cost of capital is also high, which indicates that this alternative option is very risky. Higher risk mostly pays the higher return therefore the net present value of this project is highest amongst all other alternative options. The NPV of this project has been calculated on perpetuity basis as this project would be for infinite time period. As the NPV of this project is positive, indicates that the cost of the project is less than its revenues. Although the company’s cap rate is 14% which is more than SOO’s cap rate but the company’s NPV is indicating that the company would generate higher future cash flows under OSO project. The company could earn additional benefits through conference room, guest fees and printing etc.

The operational complexity would be high under this alternative as the company would have to manage each individual by themselves. The economic benefit in terms of NPV would be also highest under this alternative in comparison with other alternative options. The company’s reputational benefit would be low as the shareholder’s would resist because of high risk as the company’s business model would change completely. The company does not have any experience of this business so there is high chance of failure as well under this alternative. The risk of competitors would also high because number of existing competitors are providing shared office space.

Traditional Tenants:

Jamestown could target credit worthiness tenants because of its extensive network and experience. James town would have more ability to cater the traditional tenant base as it is the core responsibility of Jamestown. It would have a greater control over the user experience because of curate ability. Traditional lease makes tenant commit to the agreement and cannot leave before the maturity period. Although the operating profit margin is 70% in traditional tenant alternative but per square feet rent is very less which decreases the overall future cash inflows. The cost of capital is 8% which is lowest amongst all three alternative options as, Jamestown has experience in this business segment and Industry City is still providing this facility. Jamestown would have 30% vacancy rate which indicates that the company would have extra space available to utilize for other operations. The net present value of traditional tenant alternative is lowest in comparison with all other alternatives. It means that the company’s would not earn higher return on its investment under this alternative.

The operational complexity would be moderate under this alternative as the company has experience of traditional tenant and it is a core competency of Jamestown. The economic benefit in terms of NPV would not be the lowest amongst other alternatives. The stakeholder’s of the company would be highly interested in this alternative plan as it is the core competency of the company. The company would be able to capture huge market because of its reputation and credit worthiness………….

 

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