'It’s A 100-Year Storm' — The World’s Biggest Workspace Operator On Why Offices Have Changed Forever
Mark Dixon has seen a lot of upheaval in the 30 years since he started his flexible office business: the dot-com boom and bust, the 9/11 terrorist attacks, the 2008 Lehman crash and the rise of competitors like WeWork. But COVID-19 tops the lot, and it is the event on that list he thinks will change the world of work forever.
“I described it to someone recently as a 100-year storm that has affected the office industry as a whole,” the chief executive of IWG told Bisnow in an interview ahead of his keynote appearance at the Future of Office digital summit this month. “When you compare it to other recessions, it’s everything rolled into one. But we’re going from the worst time for flexible offices to a time that will be the making of the industry, because there has been a sea change in how people are supporting their workers and using their offices.”
Dixon has been preaching the gospel of flexible work ever since setting up IWG, then called Regus, in Brussels in 1989. Since then it has grown into the world’s biggest flexible office space company, with 3,400 centres in 1,100 towns and cities around the world. When he talks about companies becoming more flexible and COVID being a catalyst for a new model of hybrid work, he is of course supporting his own interests. And the coronavirus has had a major negative financial impact on companies that specialise in flexible office leases, including his own, as lockdowns emptied offices around the world.
But there is growing evidence that the rest of the world is coming round to his way of thinking at a rapid rate.
IWG has recently struck deals with big global firms like Standard Chartered and the Norwegian division of EY to set up hub-and-spoke office models for the companies, some of the first examples of a model that has been much talked about in real estate being adopted in reality. IWG will set up regional hubs for Standard Chartered and allow the bank’s 95,000 employees access to IWG facilities around the world.
Dixon sees such deals as tangible proof that the world of office real estate has changed forever.
“What became clear in the second half of last year was that lots of companies would stick with hybrid working beyond the crisis,” he said. “Companies are now openly declaring that they are going hybrid.”
He thinks up to two-thirds of companies will adopt a hybrid working model of some staff in a central HQ some of the time and working remotely for the remainder.
COVID-19 forced the hand of companies in allowing workers to work flexibly, but Dixon said now they are actively embracing the benefits. He pointed to a study from EY that found that moving a worker from full-time office occupation to hybrid work could save a company $11K.
“Previously, if a company said they wanted you to work remotely, that wouldn’t have been acceptable,” he said. “But now they realise they can hire better people and save money as well. It is not just benevolent, they are businesses, and they realise that people are more productive and it costs less.”
Dixon thinks traditional office owners are in denial about the change in demand that will persist after the pandemic is behind us.
“Of course it’s not going to be the same as it was before. People will still want to go into offices, but not in the same places,” he said.
IWG’s occupancy has been better during the pandemic in its outposts where commuting time for workers is shorter, while cities like London and New York are faring particularly badly.
“Clearly there will be less demand for offices in places that are hard to get to,” he said. “No one likes commuting an hour in and an hour back each day unless they don’t like their home life. The days of thousands of people coming together in buildings in places like Canary Wharf every single day are over. People might have had 5,000 people coming in, now it will be 1,000 people coming in to collaborate, with the rest working near home, supplemented by home work.”
The lease structure of existing office assets will give owners time to adjust to a new reality, he said.
“It will be a medium burn,” he said. “If people could just get out of their leases then it would be a big bang, but that isn’t possible. But the die is cast.”
Dixon argues that IWG has the scale to be the intermediary that helps all these companies big and small to adopt this new way of working. But he admits the past 12 months have not been easy.
Coming into the crisis, things were looking rosy for the company, and in January its shares were at an all-time high. It was rapidly progressing plans to move from a model of having long leases with landlords to franchising out the name of its brands, which include Regus and Spaces, to operators in different countries and striking more partnership agreements with landlords.
But the onset of the pandemic saw its shares fall by almost three quarters, as stock markets bet that flexible offices, with short-term income and fixed costs, would suffer badly during lockdowns.
The proposition wasn’t entirely wrong, and IWG posted a first half operating loss of £91M from revenue of £1.3B and paid £127M to close down underperforming centres.
“We knew a recession would come, and we wanted to make sure we were well enough capitalised when it did,” Dixon said, though he said it was impossible to foresee and prepare for the severity of the crisis that would occur.
The need to close office locations created tension with some landlords, particularly the decision to put a company subsidiary, Regus plc, into bankruptcy proceedings. The company, registered in the UK-controlled island of Jersey, held around £800M of lease guarantees, and its bankruptcy meant that landlords couldn’t chase the lease liabilities they were owed if IWG terminated leases.
Some landlords have indicated this would hurt IWG in future, as landlords would be loathe to sign new leases with the company, for fear of being burned again. But Dixon dismissed this.
“We’re all grown ups, and this is a transaction at the end of the day,” he said. “People knew it might happen, it’s not like we haven’t done it before.”
The company filed for Chapter 11 bankruptcy protection in the U.S. in 2013 to restructure its lease liabilities.
“It’s just part of the landscape, people understand. And we’ve only rationalised locations where we couldn’t work together with the landlord to get to the other side — in most cases we’ve come up with a win-win situation.”
In keeping with his views about people’s desire not to commute, he said most of the locations IWG has closed had been underperforming, older offices in central business districts. While it has opened some new locations in similar areas, it has also increased its presence in suburban areas.
“In many cases we’ve opened new locations with the same landlords [with whom it had closed other offices],” Dixon said.
The company’s share price has slowly recovered along with the wider stock market, and it now stands at about the same level as July 2019. While fighting fires, last year it also raised £320M of new equity and debt to take advantage of opportunities to expand that COVID might present.
“It can be hard, but while you’re in the middle of the storm you do have to plan for the future as well,” he said.
IWG has taken on the assets of UK rivals that went out of business in 2020, and at the end of last year made one of its boldest moves yet, buying £50M of mezzanine debt lent to London specialist Argyll Club at a discount and using a covenant breach to put it into administration, a UK equivalent of Chapter 11 bankruptcy.
A bankruptcy report filed last week showed the company is being marketed for sale, but as a holder of its debt, IWG is well-placed to take over Argyll Club and its 38 locations if no knock-out bid for it is received.
“I think this year will be the year for distress, rather than last year,” Dixon said, pointing to the fact that many countries have had legislation in place barring landlords from evicting tenants for not paying rent. In the UK and U.S., those moratoriums are due to expire at the end of March.
“That will be judgment day,” he said. “The tide has gone out for a lot of people.”
He chuckles magnanimously when the prospect of WeWork becoming a public company through acquisition by a special purpose acquisition company is raised.
“I bear WeWork no ill will,” he said. “Their thwarted IPO last autumn was the high point for the market; a lot of the froth went out of it after that. They have said they want to turn a profit this year, and if they do it will be the eighth wonder of the world, because it is a tough market out there. But if they do go public, it will be great. We are happy to be the benchmark for the industry, but it will be good to have another benchmark, and to get some visibility on their figures.”
Overall for Dixon, one day, what is now seen as the normal way of working will seem strange to the workers of the future, and telling your children or grandchildren that people used to go into an office five days a week will seem as antiquated as the fact that companies shared computers because they were so big and expensive.
Dixon has been singing that same song, through rain and shine, for the past three decades. Now, a lot more of the world is singing with him.