The world’s largest serviced office provider has suffered along with others during the pandemic, but in an interview with PropertyEU, its global CIO Tom Sinclair explains where the company is going next.
Like many in the global real estate industry, International Workplace Group (IWG), the flexible office giant with 3,400 locations across the world, has been hit by the downward smash on demand that Covid lockdowns have precipitated.
Unsurprisingly, as the world’s largest flexible office provider, IWG has endured much negative press in the past 12 months.
It has ranged from reports of US bankruptcy filings to IWG shutting underperforming ‘Regus’ premises it operates in older central business locations, and criticism from some UK landlords as it ‘threatened them with bankruptcy proceedings’ while looking to renegotiate leases in order to cut the rental costs of space it operates.
There have also been reports that some Regus customers have tried to turn the tables on IWG by employing law firm Aria Grace to use the company’s own argument against it to get out of lease agreements.
On the other hand, over the same period, IWG raised $390 mln (€321 mln) for a war chest to expand its global footprint, and at the end of 2020 the company said it went ‘from strength to strength’ across the globe, opening 144 new centres. Also, in an article about the future of work, founder and CEO Mark Dixon said the company was ‘aiming to expand’ its network. Furthermore, in February this year it made an investment in struggling women’s coworking operator, The Wing, in a sign it will indeed be expanding more.
Tom Sinclair, global CIO of IWG, agreed to speak with PropertyEU in January about the business, the profound impact of Covid-19, as well as the opportunities that lie ahead for the world’s largest serviced office company.
Speaking from his home in Gloucestershire in the UK, the amiable executive’s starting point is very telling as it points exactly to where the company is expanding: ‘The business in Gloucester is absolutely flying!’ he says. ‘Not only is our centre here full in terms of paying customers but the actual attendance has been something like 65% which is amazing in the midst of a national lockdown and the “work from home” guidance.’
Regional and suburban focus
The regions and suburbs are exactly where IWG wants to be, not just in the UK but in other countries as well.
This is because very central city locations such as in London have seen customers fall away sharply. Sinclair observes there are ‘some very tricky questions’ for London in particular as to how all the space is going to be used going forward. ‘Also, there are some exciting questions and answers for the regional business.’
Sinclair’s role at IWG is wider than that of the traditional CIO. He manages a global real estate team of around 100 people and 3,500 sites. ‘Whether that is a lot or a little in terms of heads can be debated; it might be the biggest team in the world doing this. There are 3,400 sites to look after, but we remain a very ambitious business in terms of rolling out these networks.’
He adds: ‘Our network in the south of England, for example, is good but it is not good enough yet and that is exactly what we are trying to improve.’
Sinclair notes how many competitors entered the flexible working space arena following the last crisis, in 2008. They included the poster child, WeWork, of course, which says it has 800 locations worldwide – just a quarter of the number that IWG operates. IWG has taken over three WeWork premises in Hong Kong after the latter ran into financial trouble (see box).
Says Sinclair: ‘No other company has shared or shares the vision of ensuring customers have access to a national and international network of sites like we do, with the added advantage to corporates who can use our global membership programme. As we come through this crisis, we are in a totally different position to anyone, anywhere.’
IWG says that the trend of flexible working – hybrid models of splitting time between the office and home –was present before the pandemic. ‘It is just that Covid-19 has accelerated everything by 10 years, and this is how people are thinking about buying space, and this is really exciting for us.
‘There has been a tonne of competitors entering the space, but they discovered it was not that easy to make money. What landlords have discovered is that if you are going to work with an operator, it needs to be an operator who is fit for survival on a strategic basis and not just in a bull market. The competition has kept us evolving but it has been pretty hard to comprehend the amount of competition. We were the largest on the way into the crisis and by far and away the largest on the way out. From that perspective, this is probably the most exciting time in the history of our business.’
As the Covid-19 crisis swept across the world, IWG experienced difficulties along with many others in the real estate market. According to Sinclair, demand might have fallen by as much as 30-40% in major markets such as Manhattan in New York, for example. And, just as demand fell in Manhattan, so it also fell in central London, Paris, Madrid, Amsterdam and practically all of the major cities around the world.
Meaningful reset in CBDs
Of the CBD properties, he says: ‘We are seeing a pretty meaningful reset in these markets. We need to make sure the price we are paying for rents fairly reflects the market value. Landlords need to understand that too, because if we are not paying the right price, we cannot successfully trade our businesses for the long term. I think most landlords have understood what needs to be done to fix the problem where there is one.’
IWG has been in the news for ‘unleashing mayhem on landlords’ as it sought to renegotiate rent terms and threatened them with insolvency on £790 mln of Regus lease commitments at a reported 500 properties.
But Sinclair provides an interesting explanation and different perspective on this ‘reset’ with landlords. He says they have recognised they need flexible workspace in their own portfolios, and some have actively sought out IWG to be that partner. The traditional IWG approach was to lease space from a landlord, fit it out and supply it to customers on a range of membership options and lengths of time. But this has been changing.
Explains Sinclair: ‘What we are seeing now is landlords increasingly interested in this trend. They need this amenity in their portfolio, and the economic benefit. So, we are growing much more in partnership with landlords. That will likely mean some variability in the rent and profits paid to them so that they share the risk. Certainly, this is what the more forward-thinking landlords want.’
The pace of demand and enquiries even from the more traditional institutions is where the company sees a ‘step change’ happening. ‘It is very, very exciting. What’s interesting is the number of landlords that have been able to reset the way we are working with them, switching from the traditional lease model into these kinds of partnerships. The crisis has accelerated those trends. A huge amount of work has been done over the last year, and we are much further down the line than we were. It has been constructive.
‘It is fair to say we are a large part of the way through these conversations. By the end of Q1, we can start to really look forward to getting back to the day job and continued growth of the network.’
Which will be a big relief. As people were forced to stay away from the office, so physical occupancy collapsed. Sinclair says the company is seeing that demand return as the world comes out the other side of the crisis. But it depends on the country.
Asia was first in, first out. But some parts of the world are seeing the fallout from Covid-19 dragging on for longer. The UK – IWG’s largest market – is still in lockdown and the company continues to see significant weakness in major conurbations. The picture in Continental Europe is more diverse.
Pushing the franchise model
In contrast to the CBDs of major cities, IWG is seeing ‘super strong’ demand in the regions – perhaps up by between 75-100%. The way it wants to expand its portfolio into regional locations is via franchises. This is not new to the company, which has previously followed this approach in its 30-year history. But it is back, and while the franchise push has been going on since before the crisis, it has been accelerated. ‘This is really the next leg of growth for us,’ says Sinclair.
IWG receives a million enquiries per year and is present in 120 countries. Although it has a team of 100 property people, it is still not able to grow fast enough from a human and capital resources perspective. So, the solution is to attract franchisees. This model used to be a way for IWG to open in far-flung markets, in the Caribbean for instance, and parts of Africa.
‘IWG is a stunningly cash-generative business and we are busy across 100 countries now, but to meaningfully grow the business would require significant amounts of capital,’ says Sinclair. ‘So, there was a realisation two to three years ago that it was much smarter to partner with franchisees to accelerate growth.’
Rights to territories
In some cases, this means smaller entities buying rights to territories of between five and 10 locations. At the larger end of the spectrum, it could mean selling and franchising with much larger partners with greater firepower for entire countries. Two-and-a-half years ago, IWG sold and franchised its business in Japan. It did the same in Switzerland, also with partners who wanted to own the whole territory. ‘You will see a lot more of that again as we emerge out of Covid,’ says Sinclair.
Filling in extra locations in certain towns and regions is a commonsense way to deepen the IWG network and to tap into non-major city CBD demand. Sinclair admits entrepreneurs could set up their own network and bypass the need for IWG as a partner, but that would be to miss the fact that this business is about scale. ‘Often people also underestimate what it takes to manage and operate this business.’
Challenge and opportunity
IWG already has different brands for different price points and style of premises (see box) and there is already evidence of large corporates buying into the flexible hybrid model of working that Covid-19 has accelerated. For example, Standard Chartered and EY in Norway recently agreed to set up hybrid hub-and-spoke offices with the group.
The pre-eminent challenge to IWG is what Sinclair describes as ‘the time it takes for is to unlock various markets’. He elaborates: ‘So long as there are restrictions on people to physically go into an office, that is a short-term challenge.’
And the opportunity?
‘Covid-19 has been a crisis, but it has forced a five- to 10-year acceleration in the way businesses think about working, which has played into our hands. There is no question how people will work going forwards. It is a question of who is well placed to service that demand, which is a very exciting place for us to be. We are the market leader by a very wide margin.’
Thomas Sinclair
Tom Sinclair is group CIO of IWG plc, the listed operator of more than 3,400 sites globally that provide flexible workspace under various brands. He joined the company in London in March 2016 after working as a financial analyst at Fidelity International for three years, and prior to that as a fund manager at Neptune Investment Management.
IWG plc brands
IWG, which stands for International Workplace Group, was created in 2016 as the listed entity and holding company for multiple brands. Its shares are listed on the London Stock Exchange. It operates 11 distinct office types, the best known of which is Regus. The others are Spaces, HQ, Signature by Regus, No18, Basepoint, Openoffice, BizDojo, and Stop@work.