How To Prepare For The Nuclear Bomb That Will Hit Flexible Offices
Mark Dixon pioneered the flexible workspace sector when he founded Regus in 1989, and he and his company (now called IWG) have come through three major financial crises in western economies.
That means the chief executive of the largest company in the field globally is better placed than anyone to assess the prospects of the rapidly expanding sector as those economies move into a late cycle phase.
He told Bisnow you need to be big to survive, shared how to prepare for the “nuclear bomb” of another recession and gave his view on the $20B question of what WeWork is worth.
Alongside established giants like IWG and WeWork, big private equity firms like Blackstone and Carlyle have been moving into the flexible workspace sector, and Dixon feels big beasts will prosper ahead of niche operators.
“It is a business where you need scale,” he said. “Your clients want operators with national or international coverage, so they can put 1,000 people in different locations if they need to. You can’t do that with traditional real estate companies, as even the biggest have a much smaller footprint than us.”
The need for scale sets flexible workspace apart from other property types.
“If you look at the hotel sector you have operators that might have one or two hotels and they do fine, but this is a volume business and it will be hard to survive with just one or two or even 10 locations. It’s now a mainstream product.”
The sector has major expansion ahead
Dixon said he is operating in an increasingly competitive market, but the growth path of the flexible workspace sector as a whole means there is more than enough business to go around. He pointed to a report from JLL, "Workspace Reworked," which said the flexible workspace sector accounts for less than 1% of global office space, but estimated it could grow to a third or more.
“Overall the real estate industry needs to change to become more customer-focused, and give companies the flexibility to grow if they need space for two people or 2,000,” he said. “Companies like our own help investors in real estate make that change.”
Growing quickly is hard
London-listed IWG recently unveiled a profit warning, saying its profits would be significantly below market expectations, in the region of £160M to £170M ($213M to $226M). The company cited several factors, like Brexit and natural disasters such as recent storms in the U.S. But it also said it was undertaking a period of rapid expansion that was driving up costs but not yet helping profits, and this was likely to be mirrored across the industry.
“We’ve been growing more quickly, and it is the same for everyone in our market,” Dixon said. “Growing costs money and that has had an effect on the numbers. But we will carry on growing this year and next.”
Spreading risk is the key to not getting killed
Regus’ U.S. division went into Chapter 11 bankruptcy following the dot-com crash, and Regus had to buy it back.
Dixon said the lessons learned have made the company alter its strategy to avoid the key problem of the flexible workspace sector — leasing space for long periods and then selling it for short periods can create a liability mismatch if the business starts performing badly.
“The challenge is you know there is going to be another cycle but you don’t know when. You need a nuclear bunker so you’re ready — you don’t know when the bomb will drop but you can prepare for it.”
Partnership has been IWG's key to staying strong through ups and downs.
“We partner on everything in terms of working with investors to manage the liabilities of our leases. You share the risk, and it means you share the profits and the upside is less but on the downside you are protected.”
Is WeWork worth $20B?
Dixon was diplomatic but gave a considered view on WeWork’s valuation, strategy and impact on the sector.
“Would you buy shares in it at a $20B valuation? They are about 1/24th our size. They are doing many, many things, and it can be easy to lose your focus. I am sure they are very good at what they do but this business needs a lot of capital and it can be very easy to make mistakes when you expand quickly. It looks good when things are going well but it doesn’t look so great when they aren’t. But they are great for the industry and long may they continue.”
Brexit’s effects are bad but more localised than you might imagine
Dixon said Brexit had played a big part in the profit warning the company issued, with its London centres not performing as well as anticipated.
He said Brexit would have a detrimental impact on London, but this impact would not be hugely widespread.
“London was a gateway for companies looking to enter the EU and it won’t be that anymore,” he said. “But the effect is quite localised to the City and Midtown area, and that is where we are also seeing a lot more competition. The rest of London and the rest of the U.K. are not seeing much effect at all.”