The Innovators: Ernest Lee
In this series, Bisnow highlights people and companies pushing the commercial real estate industry forward in myriad ways. Click here to read Q&As with all the innovators Bisnow has interviewed so far.
Members of the real estate sector are beginning to accept that, even after this crisis has truly subsided, the way Americans interact with workplaces may well be altered forever. Office properties, cities and the businesses that hum alongside them are now all bracing for changes.
At international hotel brand citizenM, there is widespread acceptance that business travel as we once knew it will be changed forever. And that acceptance has come with the confidence to push forward opening new hotels and growing its portfolio to 21, with spots in London, Glasgow, Amsterdam, Rotterdam, Paris, Copenhagen, Zurich, Geneva, New York, Boston, Seattle, Washington, D.C., Taipei and Kuala Lumpur.
The confidence comes from the belief in a new kind of business traveler, citizenM Managing Director of the Americas Ernest Lee told Bisnow. With more people making use of remote and hybrid work models, he predicts a jump in people traveling to gather at their workplace locations when, in the past, they would have lived close by. Plus, Lee is expecting self-employed digital nomads will increasingly look for places to work remotely in foreign cities.
To that end, the company launched two new subscription products last September in an attempt to prepare the business for seismic shifts in the market. With a corporate subscription, companies pay a flat fee to get unlimited monthly access to hotels for employees, along with three overnight stays at a fixed price. The second option, aimed at remote workers, allows individuals to purchase a "global passport by citizenM," which allows people to stay for up to 30 days at various citizenM hotels around the world.
Lee told Bisnow the idea was born out of the company’s “fight-or-flight mechanism” and an immediate attempt to stay relevant.
Bisnow: This year has been unbelievably brutal for the hotel sector. What approach did citizenM take in terms of its North American operations and the day-to-day running of those?
Lee: The first immediate thing that we had to do is we had to make sure that we had the full responsibility and care and oversight of our employees and our guests. And so that was crisis management 101: making sure the basics — health and safety, and communication channels, were open and clear, and doing what we had to do to make sure that everybody was alright. [Then] you go into the second mode, which is you have to make sure that your finances are in shape enough to weather you through this storm.
And then the third is, that's when you really get into 'OK, now that we've got those sorted out, how do we reorient ourselves as a company?’ And this one is so different from prior recessions because of the number of fundamental and secular changes that we believe will come out of this crisis. For us, the most glaring one is the impact of how the future of work will alter our business.
Our business has historically been one that has been predominantly business travel-dependent. And when we are all sitting here — like we are now on Zoom, and every company around the world is operating with ease and success, virtually, and have made preparations and comments that lead to some sort of makeup shift and how they're set up and how they decide to co-locate in the future — that forces us to think, not just out of opportunity but out of necessity.
One of the biggest shifts that we did was we immediately decided to put ourselves into that scenario. If there's a chain reaction that's caused by how workforces are set up in the future, either because of the increasing likelihood of remote work or remote hybrid work, what is the second-order effect of what that means for population shifts? Workforces get further distributed and spread out, and what is our role in that?
So we immediately created a few products that we felt catered to this increasing transient and nomadic behavior that we believe we will see from employees, future entrepreneurs, and self-employed and small-to-medium-sized businesses.
Bisnow: How quickly did you arrive at the fact that there was a real fundamental shift taking place in the way that businesses are going to be traveling the future and the connection between work and your operations? Did you have a period of time where you thought, 'Yeah, this is going to pass?'
Lee: Definitely everybody goes through stages. First, you get smacked in the face, and you have no idea. You have to sort of quickly orient yourself and just take care of what's in front of you. But I would say the beginning of the summer of 2020 is when we really, really had the time to spend with a lot of our contacts within either the corporate travel metric space or the corporate real estate space.
And we were just in a research mode. We were just trying to understand what their views were and what their perceptions were of this crisis and how it would likely manifest itself into their day-to-day work. Through just countless interviews, at that point, it was just anyone's guess what the outcome of this was going to be.
That’s when we were trying to put two and two together as to, ‘OK, what does this actually mean for travel?’ So I'd say the middle of 2020 is when we started to have it sort of click.
Bisnow: So what basic facts are you operating under right now? That business travel will never return to its pre-pandemic levels? Or that it’s just going to look different? Obviously, you can't predict the future. But there are some fundamental facts that you need to make decisions. Where would you say you and citizenM are at right now?
Lee: There's a quick realization and acceptance that business travel is permanently changed. To what percentage or what areas will go down, I don't think we have a clear conclusion on what that looks like.
But there will likely be decreases in business travel as we know business travel, in terms of the typical salesperson traveling to a market, management consultants coming in four days a week — that will undoubtedly be changed and go down. That said, we believe and our thesis is that, while there will be permanent changes in business travel as we know it, there will be a number of new use cases that step in to fill and replace that void.
One of those use cases that was not present before the pandemic is this whole notion of people now living further apart from their offices and having to now visit their companies, which they never had to do previously because they were typically living in the same city. And so now, what is now probably going to go down from, call it external travel — service providers meeting clients, typical roadshow-type stuff — is going to be replaced, partially or a large part, by this new internal travel use case.
Bisnow: So for example, the headquarters is in New York, but it's half the size that it used to be, but we're bringing everyone to New York for a week to do brainstorming, work on ideas ...
Bisnow: Sort of like a conference style, but that was not happening before.
Lee: No, because most of these employees used to just live in the same city as their office. We are strong believers and proponents that the distribution of these workforces will now lead to a rise in corporate travel needs that is now internal instead of external.
Bisnow: How are you preparing for that? Is there a difference in the types of offerings and the types of hotels that you are going to be building and creating for the market? Because on the one hand, you would think, 'Well, it's just a room that you stay in.' There's not that much difference between if it were a sales person traveling to meet with clients.
Lee: Yeah, I think that the primary change is not looking at it as we did previously, which was much more of a commoditization: A room's a room, a lobby's a lobby, and you differentiate on services and loyalty systems into much more like a consumer product.
So the biggest change is now thinking and being of the belief that there will be a certain repetitive and consistent cadence that occurs, because you're going to be visiting your colleagues in your office that much more frequently. And in order to meet that demand, we said, 'We need to really look at ourselves like a consumer product.' And in order to meet that consumer product, we decided that the best way to change our makeup in, not so much the physical product, but the business model of the product.
So it was going to an “invest-in-subscription” type of business. So one of the offerings that we launched last year was something called corporate subscription, which was a fixed-price bundle where you had three nights a month, including some meeting space credits as well as coworking credits.
That was just so you would never get priced out of a city; you'd always be in a city for a fixed price. And you'd always have that reliability and consistency.
Bisnow: So that's for employers to say, 'We want to be part of this subscription service,' not individuals, or is it individuals as well?
Lee: Both. So it could be for, if there's an office manager, they could purchase it on behalf of their employees. Or if you're self-employed or you're an individual employee and you have a stipend, then you could consume it directly.
But it's really to give them the peace of mind that they are never going to have to look on a website and see that a hotel night is $500 a night because the entire city is sold out. And always know that they have a bed to sleep in and always know that they have a building to walk in where people know their name and recognize them.
Bisnow: And this is an entirely new concept that didn't exist before the pandemic?
Lee: Hotels were like the airline business: We were in a highly dynamically priced model. When the city is doing well, everybody jacks their prices up. When the city is not doing so well, you discount your prices. But for business travelers, you're typically traveling all the same time. Think about all the times that you travel for work before 2020.
You know, I would go into San Francisco and not realize that there's a conference in town, and there's no hotels available. And then all of a sudden, I look at a crappy hotel, and it's $800. Like, that's not a very fun way to travel. So allowing for that consistency, allowing for that reliability and predictability is something that we found necessary in order to meet this new use case.
Bisnow: So you are locking in the price, and it doesn't matter when it is?
Lee: Locking in a price and a bundle, yeah. So being able to understand that you always have, not only a room to sleep in but also have meeting space to use and coworking. It's almost like we mashed up the advantages of having a coworking membership and a hotel stay into one monthly subscription.
Bisnow: Isn't that kind of cutting you out of the benefits of, as you said, supply and demand? Wouldn't that mean that you won't get the benefits of, 'There's a big convention in town,' therefore, you won't get the benefits of the swinging market?
Lee: No, we certainly understand and went through the cost-benefit analysis of what this means to us. For us, we want to be a different type of business coming out of this, one that is less transactionally oriented, relying on, call it 1,000 different customers and into one that's much more loved and has much more loyalty with 100 different customers. And we believe that over the long term, that level of consistency will make up for the sacrifice and opportunism that you would have in, you know, those one-off periods.
Bisnow: So it's kind of like reliability and steady cash flow.
Lee: Yeah, a steady cash flow and a customer base that's really loyal to you.
Bisnow: And how has it been received so far? It's a relatively new option. Are there many people that have signed up and made purchases?
Lee: Yes, so we haven't really pushed the corporate subscription all that much just because it's directly linked with the return to office. So that one's a little bit more touch-and-go at the moment.
But the reaction that we've had from corporate real estate professionals and corporate travel managers has been quite strong. They believe that this is a product that meets the future of where they're sort of assembling and positioning their workforces. So to us, there's proof of concept and there's validation in the market, at least anecdotally.
Bisnow: How did you come up with this idea? I mean, considering how stressful the past year has been, obviously, the entire world has had to quickly shift plans and reshape ideas. How do you kind of think of an idea and bring it to fruition when the industry in which you're working is so deeply strained?
Lee: We couldn't sort of think of the idea at first, because we were so preoccupied with other things, but once we did have a moment to breathe and sort of got ourselves together, we did view it at a certain point as existential. In the early part of the pandemic, we asked ourselves, like, what do we have to do if a significant percentage of business travel doesn't come back? How do we need to innovate and alter our product in order to come out of this at least in a decent fighting position?
So I wouldn't say that this was necessarily driven out of opportunism; it was out of a pure sort of fight-or-flight mechanism. And this was our version of fighting back and figuring out a way to really differentiate ourselves.
Bisnow: Do you think it will change the design of your hotels, the locations of your hotels and the types of acquisitions you might try and make?
Lee: I think geographically, what we see is at least with the large companies, everybody's getting out of this like singular HQ mindset, and much more into not even like a hub-and-spoke, it's like hub-and-hub. You look at the large tech companies and you look at the large Fortune 50 type of employers, a lot of them were actually doing this previously, but just because of talent acquisition challenges, a lot of them have come to the conclusion that they are not going to have a mother ship anymore.
It's going to be four or five mother ships around the country, and that's how we're going to get set up. And I think from a geographic standpoint, we need to be very much the same, right?
We need to focus much less on areas of just pure agglomeration and technical density and much more into having a lot of different options in a lot of strategic regions. And for us, that's something that we're very conscious of right now, is to make sure that we at least have some offerings in as many spread-out places as possible. To me, from a product standpoint, the way that we need to evolve is being able to accommodate a far greater number of behavioral needs in our hotel under one roof.
And so, to me, the rhythm of a hotel, in the past, at least business travel hotels is, everybody checks in between 3 and 6. They're out at their client dinners, and then they all come back and have a nightcap. Then they'll sleep, and then the gyms are busy and then everyone empties out.
There's gonna be a lot more distribution in terms of how people consume the hotel in terms of the number of hours and then also who consumes it between guests and locals. I'd say there's probably going to be a little bit more of a mishmash between how locals also consume the hotel, using the lobbies for coworking much more, for having meetings or the hybrid in between. [It's going to be] much less a very strict schedule of peak periods late at night and early in the morning.
Bisnow: So for example, the citizenM on the Lower East Side, it's got the lobby, right? But it's got that bar downstairs. When I went there on a weekday pre-pandemic for a meeting at 11 o'clock on a Friday, it was busy downstairs and relatively quiet in the lobby. Is that kind of what you mean will change in that it's going to be a 24-hour beast?
Lee: To me, and if we pull off our product correctly, the heartbeat of the hotel should be pretty consistent throughout the day. And no more of these giant spikes, and also have a little bit more of an equitable balance between locals and guests and cover a wide variety of needs. So to me, when I say a wide variety of needs, it means less just being a pure place just to sleep but a place to also work and meet. Obviously, the basic hotel stuff, but also the social aspects as well. And really being able to cover this wide range of uses and behavioral tendencies under one roof.
Bisnow: Do you expect there are going to be cultural differences between Europe and North America? And how do people use it? Or is it fairly similar across the board?
Lee: To me and to the management team, the socioeconomic issues that are leading to this are applicable in the various regions around the world. So what I mean by that is, this use case is not just an American thing. The use case is also in the U.K. It's in continental Europe because they all have the same issues as us.
Housing prices in London have soared because that's where talent is typically agglomerated, and with those riches you also get the not-so-nice things, which is, you get a wealth gap. And you also get not enough housing production in order to absorb all these other things. And therefore, they are also looking at remote work as a solution for how do we create a little bit more of an equitable society coming out of this. So I don't think it's an American thing. I don't think it's a European thing. I think it's more of a big-city thing.