Progyny’s playbook is not necessarily typical of a new class of technology-enabled health care companies building in the city amid the growing prominence of hybrid or remote work. These firms are making thoughtful decisions about how much space they need and for what purpose.
Matt Coursen, executive managing director and market leader for the mid-Atlantic health care group at commercial real estate services firm JLL, said what he sees more often is digital health companies scaling back on their office space, which makes Progyny an outlier.
“We are seeing digital health companies give back space, shrink their footprint, do away with their office entirely. I think across the board, [software-as-a-service] companies, technology companies are shedding office space en masse,” he said. “I have multiple clients that have closed all of their real estate offices, all of their offices, period.”
Coursen said this is happening partially because leaders have realized, over the course of the pandemic, that being together in a physical office space might not be necessary for workers to be productive. In addition, setting up a hybrid work model can be difficult, he said.
Creating a policy for a mix of in-person and remote work is “new ground” for many firms, and there’s not enough evidence yet to suggest that one model is definitely more effective than another, he added.
“A lot of these companies are flying blindly when it comes to figuring out what the next normal is for their workforce,” Coursen said. JLL’s health care group consists of hundreds of clients whose transactions are valued at $300 million annually.
After human capital expenses, Coursen said, renting an office space is often the second-largest expense on a firm’s balance sheet—sometimes representing 10% of its budget. Shedding rent has become a crucial strategy during a period when many companies are struggling with inflation and the Great Resignation, he said.
Breaking a lease can be very expensive, but some companies have made that choice, Coursen added, rather than keep the office. Others choose to sublease their space to another company.
Many digital health firms will take “less” space instead of pulling out of leases completely, said Bill Hartman, a vice chairman at real estate firm CBRE. That could be because of the increased reliance on telemedicine since the pandemic began, he explained.
Coursen said he knows of even brick-and-mortar clinics that now dedicate whole rooms of an office as space where a physician can practice telemedicine—but still rent the room.
“To the extent companies can operate culture-consistent in a virtual world, they’ll likely look to do that,” Hartman said.
Life science firms differ
The decisions digital health firms make can be quite different from what life science companies—for which rental activity in the city more than tripled in the third quarter of this year—decide to do. Life science firms need laboratory space to push their research and development further.
Like life science firms, more traditional health care companies’ real estate business is also booming, Coursen said. Those businesses depend on brick-and-mortar locations, such as collections of urgent care practices, and JLL works mostly with that branch of the sector.
“The retail model is really the inverse of the digital health wave,” Coursen said. “They are spending money to roll out clinics and physically occupy space as close to the consumer as they can. That business is growing.”
Meanwhile, for digital health firms at earlier stages of growth, space has become an important part of fundraising and calculating expenses.
“In the past, with startups, office space was just a given—it didn’t get a lot of thought,” said Jon Gordon, general partner at HC9 Ventures, which recently closed its first fund, at $83 million, to invest in health care software and services. “Now they are thinking about what space means, and what does it mean to be a company if you’re not in the same space.”
Better benefits
For Yuvo Health, a technology-enabled firm that creates administrative and managed-care solutions for federally qualified health centers, the acceptance and benefits of remote work became central to its spending plans.
Because the company was founded in 2021, Yuvo did not inherit a 10-year lease or a fully local workforce, said Cesar Herrera, its CEO and co-founder.
“Certainly that was part of our mental math as we thought about how we needed to scale,” Herrera explained. “To know I don’t have to put $30,000 a month to rent and pay $200,000 upfront to outfit a space, that enabled us to be more flexible in bringing on more employees.”
Similarly, compensation packages are bigger than they would have been. “We aren’t burdened by the effects of rent,” he said.
Coursen echoed that cutting out rent enables companies to “keep their people” and potentially add on bigger bonuses or better benefits.
Yuvo convenes in a space at a Flatiron coworking building. The startup’s 30 employees can come there when they have important reasons to collaborate, rather than just because it’s required.
The coworking space is even more important for Yuvo’s partners, who are full teams from the health centers that come in for events and training. When that happens, Yuvo simply rents large meeting rooms for the hours or days they are needed.
“We’re not holding events every day,” Herrera said. “It would be a waste of space to just have it for us.”
The company plans to expand to 50 people by the middle of next year, using the same real estate footprint.
Although Progyny itself needs neither lab nor clinical space, the firm’s high-growth stage has led it to prize the connections and face-to-face interactions among employees and has left open the option to take over two more floors in the building.
For Coursen, whether the city’s digital health firms will continue these trends is unclear.
“I don’t think it’s this big scary thing where office buildings are never going to be necessary,” he said. “But I do think for the here and now, it’s going to be a hybrid-first, remote-first situation and we’ll see what the data says.”