NetGain has become identified with the cultural community because that’s where we started, in the arts. However, we quickly discovered that the challenges facing arts organizations were troubling organizations in other fields of non-profit management, as well as in government and the corporate sector. Soon, our work broadened from the performing and visual arts to include a zoo, a national park, Aboriginal heritage sites, community colleges, business incubators and accelerators, and, my favourite example, an ophthalmology clinic at the base of Kilimanjaro in Tanzania.
There is a presumption in the consulting industry, and in the non-profit community, that the best advice comes from the expert who has spent the longest time in the field. So, you see highly specialized consultants whose experiences are registered entirely in a single industry. That becomes their main qualification – years of learning how things are done in preparation for a consulting role which must invariably contemplate change. Likewise, non-profit organizations tend to hire from among their own. A gallery will look for executives working for other galleries and a day care manager will be sought from credentialed candidates who have done their time changing diapers and wiping noses.
This is strange tendency because it ignores the transferability of management experience between enterprises, industries, and sectors, as NetGain has experienced. It is also detrimental because it retards the pace of change in the non-profit sector by favouring managerial and consulting talent that relies on past practice to prepare organizations for the future. This inhibits innovation and change, as was argued in our previous post.
Kenichi Ohmae, who for me is the Yoda of planning, reduces the life of all organizations in the corporate, government, and charitable sectors, to three parts: people, money, and things. He argues that all three must be in balance to seize opportunities in an everchanging competitive environment. The problem of insufficient funding is familiar to us in the non-profit world, but, as Ohmae points out, it’s difficult to optimize a plenitude of resources when there aren’t enough talented people to make best use of extra money.
“Things,” in Ohmae’s terms, cover everything else, including land, facilities, equipment, inventory, raw materials, etc. Chief among these, both in finance and operations, is land and facilities – real estate. Every enterprise, even a distributed network of home office workers, has a place or has places of work. The costs are born somewhere on the P&L statement, even if we delude ourselves by making them invisible.
In a hot real estate market, every enterprise must contend with this volatile cost element. But it’s not just cost. Space affects the quality and efficiency of an organization’s performance. More isn’t necessarily better, but people exist in space, so some is always necessary. The right kind, the right amount, in the right place, at the right cost, is difficult to secure and maintain in cities like Vancouver, Toronto, Calgary, or Waterloo when the factors of cost and location are subject to rapid changes in the intensification and cost of real estate development.
My point is that this cuts across economic sectors and industries and affects enterprises of all sizes. While our tender, little cultural clients feel buffeted by the changes around them, we’ve seen blue chip law firms drain out of towers bearing their names because of structural changes in their industry. Moreover, firms like RBC and SunLife Financial have opted to move their offices from the Financial District into more efficiently designed buildings which reduce the square footage required to house their employees.
Challenges like these are what make sector agnostic consultants like us valuable. Alert to the lessons learned in one enterprise, we are more likely to consider a new approach to a familiar problem in other areas.
These ideas of innovation across sectors and industries converge in my mind when I read about the MaRS Discovery Centre’s search for more space in downtown Toronto. So too, in 2015-2016, NetGain hunted for and negotiated new space on Sterling Road for the Museum of Contemporary Art, and, in 2012, we prescribed a model for the City of Toronto’s Economic Development and Culture division to secure new work space for its business incubators. In other words, we’ve been trying to help clients to meet their work space needs, in the right place, on the right scale, and on the right terms, for years. The rapid growth of cultural industries and the tech sector in Toronto, combined with intensification of residential land use in the downtown, has made the need for space all the more acute for our clients and for the regional economy as a whole.
We’ve written about our ingenious clients, Akin Collective, and their ability to turn low-cost, short term commercial leases into 30,000 square feet of affordable and well serviced space for their 300 artist members. Yet, as with MaRS, and with any enterprise that needs lower-than-market-rate work space in an out-of-control market, Akin needs more space. And, if you ask public and private sector economists, Toronto would benefit from more MaRS, more Akin, and more from other groups like them.
The limiting factor is space. Real estate. And the irony is that there is plenty of it. It’s not in the usual places and can’t be accessed by the usual means, but that’s the puzzle that NetGain is helping clients to solve.
Remember that the Wynne government’s investment in the MaRS expansion in 2014 was treated as a scandal. Now, the building is fully occupied, and the government financing is almost all paid off. And, there is a growing wait list of senior and start up corporations, all innovators in R&D and venture capital, trying to commercialize the best ideas coming out of our universities, hospitals, tech labs, and institutes, which means that MaRS will need to expand.
Artscape took this challenge on for its clients in the arts 25 years ago. Lately, like MaRS, they have sought to build what they need, taking an equity position in their projects, which is then leveraged as seed funding for future projects. While this succeeds in delivering space that is affordable to some clients, it prices out a great many others whose careers or companies haven’t progressed far enough yet. The creative industry ecosystem, like the innovation ecosystem, needs more than its Artscapes and MaRS; it needs more inexpensive space for entry level practitioners to develop raw skills and ideas.
With Akin, we have seen a new model emerging that can provide relief in a tightening real estate market. Call it, “stable impermanence.”
For many artists and entrepreneurs, flexibility, location, and price are much more important than security of tenure and high grade fixtures, finishes, and furnishings. Short and long term leases can be used to secure rough space, which can be inexpensively improved to the standard required by tenants. The result is work space that truly fits the enterprise.
Years ago, we studied an example of this in Manhattan as part of a best practice study in business incubation. What we saw was an aging office building, owned by the Episcopalian Archdiocese of New York, badly needing renovation. The City of New York, then under Mayor Bloomberg, had identified five areas of economic diversification to reduce the vulnerability of the financial service industry after the 9/11 terrorist attack, so business incubation had become more of a priority. The City agreed to renovate a floor of the building for an incubator that would be operated by NYU Polytechnic for a period of five years, rent free. It cost the city a few hundred thousand, but accommodated dozens of promising start ups, which yielded hundreds of jobs, and millions of dollars in wages and taxes, according to the tracking data. After five years, the Archdiocese was so pleased with the deal that they offered the City space in another building nearby.
After all, what entrepreneur wants to spend more than a year or two struggling in a business incubator to prove a concept, refine a business proposition, and attract financing? Likewise, what aspiring artists or designer cares about the permanence of studio space when their hope is that their circumstances will change, and they’ll leave to pursue new opportunities in other places? As long as groups like Akin keep replenishing available space as leases expire, their members can enjoy a sense of security without the obligations of ownership or conventional leases. Since the supply of aging buildings is endless, there is no reason for there to be a shortage.
Isn’t the same true of some social enterprises and community services? I’ve seen day cares operating for decades in dismal church basements. Parents choose them because of proximity and quality of care, neither of which is specific to a particular facility. If a day care organization moved around the neighbourhood every five years, or sprouted multiple locations in bright, clean, underutilized commercial buildings in the community, wouldn't families continue to use them? The cost of buying and operating a building is the second biggest day care expense category after staffing and is a key factor in how many day cares there are, where they’re located, and what they cost to run.
The same may be true of food banks and community kitchens, satellite libraries and after school programs, safe injection sites and yoga classes. Rarely is one established in an absolutely perfect location and structure, and rarely do they remain in one place forever. Putting them in the right neighbourhood or district, in vacant or underutilized commercial space, and moving them as necessary after a period of years, can make them all more viable and affordable, and can improve a community with little or no sacrifice. What works for artists and entrepreneurs can work for other kinds of enterprises that need work space at below market rates.
Of course, it would be disastrous to put every aspiring artist, entrepreneur, and social enterprise into the hunt for commercial real estate bargains. They haven’t got the time or the expertise to succeed at this. But they can avail of help through organizations that already do this, or they can collectivize to build this capacity. And there is a lot that governments can do to make it easier on everyone.
Some dexterity is required to help support these organizations and broker the right deal for the right space. Not all are as adept as Akin. MOCA Toronto’s former Artistic Director, David Liss, claimed to have looked at 40-50 possible locations over a two year period during which the organization’s lease with Urbancorp expired. When his board asked NetGain to take on this challenge, it took three months to reach agreement about MOCA’s needs and to ensure that they could be met at 158 Sterling Road. It took another six months to negotiate the terms of a non-binding memorandum of understanding, and a further six months to produce 28 drafts of a 120-page lease for 50,000 gsf. However, in contrast to the conventional model, this avoided years of additional work in land acquisition and development, site plans, approvals, and construction, and saved tens of millions of dollars in capital fund raising. In both the short term leases of Akin and the 20-40 year lease of MOCA, the practice is demanding but evolving.
As the pressure on inventory rises with the growth of Toronto’s economy, the most vulnerable organizations are the first to be displaced. Some go to other towns and cities near to major markets, but, as we will show, there is plenty of capacity to absorb them into the hidden and underutilized inventory that has accumulated in government and corporate real estate portfolios. And, for organizations that can function outside the urban core, there are overlooked opportunities in nearby communities that really need and want creative and innovative workers and other entrepreneurs.
Still more to come....