Health Conditions

Why the Regus and Spaces CEO is doubling down on office space despite COVID-19

June 25, 2020 /

In May, IWG PLC, the U.K.-based company behind managed office brands Regus and Spaces, announced its intention to raise a $390 million war chest. The company said the stock offering would help it expand its footprint of office locations globally.

Pursuing that sort of strategy in the middle of the COVID-19 pandemic might strike many as, well…counterintuitive might be the politest way to put it.

After all, a lot of prognosticators think the world won’t need so much office space in the future. The pandemic seems to have revealed that, for many businesses, working from home works just fine. Plus, many companies have shed staff and won’t need quite so many desks even when they do reopen for business.

But Mark Dixon, IWG’s chief executive officer, says he’s convinced the world will still need offices. In fact, he thinks the world will need a lot more of the kind of flexible space IWG offers. And Dixon, the billionaire cofounder who owns 28.5{ce8ce7cc98bffdc4302011057a79600ea02c464c5536f1477c12acdb8bd79c00} of IWG’s shares, has put his own money on the line too: He’s invested more than $110 million of his own funds in the new fundraising effort.

Dixon says that with the wheels coming off at rival WeWork—the industry upstart that had once threatened to bury veterans like IWG, but may now count itself lucky to merely survive—the industry is ripe for consolidation. In early June, IWG took over a 30,000-square-foot space in Hong Kong’s Causeway Bay neighborhood from WeWork. It was the first time IWG had assumed management of a former WeWork property. It probably won’t be the last.

Last week, Dixon and I chatted over a Zoom call about IWG’s bold strategy. Here’s our conversation (edited for clarity and brevity):

Fortune: Many people are doubtful about the future of the commercial real estate because they think the changes we’ve seen in how people work during the coronavirus pandemic will become permanent. Yet IWG is doubling down on office space. Can you explain your strategy?

Dixon: What is the future of commercial real estate? Well, it is going to change completely, and [the coronavirus] is a catalyst for change. But we are part of that change. Yes, we use commercial real estate, but we do it in a digital way, where we are allowing people to work from anywhere, at any time. We are also distributed throughout the country. We are not all in city centers, or all in one place. WeWork, as you are aware, claimed they were the biggest occupiers of space in London and New York. Clearly that is not something you would want to claim today. You would actually want to say we are everywhere in the U.K., which IWG is, with multiple brands throughout the U.K., throughout the United States. In the U.K., we have more than 300 locations; in the U.S., 1,100 locations. We are in every state, except Alaska.

Fortune: But what about the idea that working from home is going to be permanent?

Dixon: Effectively the whole world changed in a very short space of time. It wholesale and fundamentally changed, in several days. But it’s a change that’s been coming. It was already happening, but it just had off-the-charts acceleration during COVID, and it will stick afterwards. So CEOs, CFOs, are saying, “Actually, it wasn’t that bad. We actually got quite a lot done with this distributed work.” That means decentralized, people working not in one big central office. And that is what changes fundamentally. Forever. Now, it takes time because one of the reasons it doesn’t all change immediately is people have to get out of those big central offices. And that takes time. But they are starting to do it right now. If they can get out, they are getting out. So, this is bad news if you own a lot of real estate in big city locations. It’s good news if you own real estate where people live: suburbs, small villages, and towns. That is where people will want to work some of the time in the future. And in a Zoom- and Teams-based world there is absolutely no need for you to spend an hour of your valuable time, or two, or three, to commute into an office to use a computer and a mobile phone that you have in your bag. It is just madness. So basically, the workplace becomes this hybrid. People can work from home, and people have been doing that. They did it before COVID, they just did a lot more during COVID. So it will be from home. It will be from offices near where they live. And then they go to the headquarters to do important stuff: meet, collaborate, new ideas, business reviews, the stuff that you need to do face-to-face.

Fortune: So you don’t think the office itself is over?

Dixon: The office is not going away. It is changing. It is metamorphizing into a digital thing. In effect, your office is on your laptop and on your mobile phone. Where you actually sit to do work is not about equipment anymore, it is about concentration, lack of interruption; it is about social interaction more than anything else. So if you ask someone, “What would you really like?” They’d say, “Well, I’d like to work from home a small amount of time, and be able to do that effectively. I’d like to have a workplace that I could cycle to, walk to—that would be great some of the time. And I’d like an office in say, London or Birmingham or Manchester that I could go to when I need to collaborate with colleagues.” So, one day a week, one day a month there, but most of the time in a local office. The company gets lower cost. The company gets more productivity, more bang-for-their-buck in the person, if you like. The employee, the team member has a vastly improved life because instead of spending 5,000 pounds in the U.K., on average, on a [commute by rail], they spend next to nothing. They get to see their kids. And the company gets an office in [a small town] for that person, or for 100 people, rather than for 1,000 people in London. That is why it has to happen. It is the economics of the workplace that drive everything. And the economics are proven now in spades with COVID—proven.

Fortune: Why did you do this fundraise?

Dixon: There is one answer to that question: demand. When we spoke to our investors, we said, “Listen, we can see this demand coming.” Now, it’s hard to see it when you are right in the middle of COVID. Just to be clear, this is a very difficult period of time for us as a company—and we are very clear about that, from a short-term perspective. From a medium- to long-term perspective, there is going to be huge demand for workplaces, but in different places. Big companies are saying to their employees, we will give you an office near your house, but they don’t want to rent a separate office there, do they? Because, administratively, that would be horrific. So they want to buy space on a platform that all of their people can use anywhere at any time. That’s what we do. We also have great support and products for people working at home. So, we do home and local already. We just think we are going to be doing a lot more local. And clearly there will be other opportunities. We think the next year there will be consolidation. That is the impact of COVID. In order for investors to get any return, and to get safer returns, which they will be looking for, whether it’s our industry or any other, consolidation is the safest way.

Fortune: In the past few years you have been up against these very fast-growing, venture-backed players like WeWork and Knotel. Do you think they’ve had their day? They were struggling a bit even before this crisis, but the pandemic has dealt them another massive blow.

Dixon: If you were using the words “struggle before this crisis,” that is probably an understatement—and this is both Knotel and WeWork. Books are being written on this subject at the moment. What happened was, this was a phenomenon, which is the lure of the WeWork valuation. Very sensible investors put lots of money into things like Knotel, WeWork, and others in the hope that somehow, the normal rules of economics would be suspended for these types of companies and somehow growth trumps reality. When in fact, with the, let’s say, the veil being drawn aside after the failed IPO last year of WeWork…I am just stating the obvious that it was a huge amount of hype and not much substance, and a huge amount of, just massive capital wastage and destruction. On an unprecedented scale. Lots of people thought, “Hey, we could get 20 times revenue valuation.” And so they invested. But the reality is, this is a tough business, and it is not one, even in good times, for the fainthearted. It has to be operated very well. It needs scale. And it is quite easy to lose money if you are not firing on all cylinders at all times. Now, [WeWork] made it look easy. And even we thought, for a time, “We must be doing something wrong.” We said, “Hold on a second, what can’t we see?”

Fortune: So do you feel vindicated now?

Dixon: No. I get no satisfaction at all. No vindication. I’ve been in this business more than 40 years, and I’ve seen a lot, and I’ve never seen anything like that. My sadness is for the thousands of people losing their jobs and hundreds, if not thousands, of investors losing their money. Vindication? Look, in this market there is plenty of room for competitors. But it is distorted competition that it is hard to understand and hard to deal with. But no, no. Look, it was helpful for a time. It certainly got the name of the industry out there. But a lot will change now. With COVID-19, what people are interested in is good old-fashioned things like cash flow. There is a new reality in the world today that wasn’t there, even last year.

Mark Dixon, CEO of IWG
Courtesy of IWG

Fortune: What about the configuration of offices. How are you thinking about reconfiguring the spaces you manage during the pandemic?

Dixon: Most of our space is configured in small offices. Less than—about half of 1{ce8ce7cc98bffdc4302011057a79600ea02c464c5536f1477c12acdb8bd79c00}—of our revenue comes from coworking areas, open areas. So we are already configured in [a way that works for social distancing]. Just to dispel a couple of myths, in a normal office, you are all working open plan, and you are all sharing the kitchen. So everything is shared in every company office in London or New York. But it is shared by people from the same company, who are not necessarily cleaner—you know, they are just people. But this notion that somehow, it has been proposed many times to me during this crisis, that people mix more in a coworking building or a shared office. Actually the opposite is true. Traditional, single-tenant, single-company offices would have more mixing than we would. Having said that, we’ve done all the configuration changes. We’ve put separation in. Temperature control for people. We’ve got app locators, layers of things to make the buildings as safe as they possibly can be. Both for our teams and for customers. So a lot of effort has gone into that. Limiting the number of people in the lifts. That sort of thing. It is all basic stuff, but it needs to be done. For as long as the COVID crisis is there, you have to do this. And then you just do social distancing everywhere. Quite a few customers have taken extra space to distance their people a bit more and so on.

Fortune: Do you think there will be long-term effects in the way offices are designed? Are we going back to the 1950s, when everyone had their own office with a door?

Dixon: Having an office with a door makes no difference. It is a bizarre idea when you think about it. Even when you have an office with a door, it is cleaned by cleaners overnight, you have colleagues coming in all day. This sort of notion, if somehow I shut myself away in an office in a huge office building—I mean, just stay at home if you are worried. That’s the only way you are going to be safe. And even then, you take a risk that your kids are going to bring it back, or your wife, or your friends. What are you going to do? In the end you have to make a decision: “Am I going to be a hermit, or am I going to live my life, taking precautions?” Yes, we are in the eye of the storm at the moment. I think there will be a prolonged focus, even after the crisis is finished, on cleanliness. The main change is going to be hybrid working. The whole notion of you sort of having a desk in London, and just by the way to caveat this, this probably only works for about a third of the population—maybe even half. But if you are in an advertising agency, you need to be together. If you spend your time all day, every day, with clients in London, you need to be in London. You can work remotely, but you would want to go to London for editorial meetings maybe once a week, once a month, once a fortnight. But this hybrid working becomes the norm. You’ll meet people in two years’ time, and it won’t be unusual to have someone who tells you, “Yeah, I work from home, I’ve got an office I use down the road, and I go into London once a week. My life is infinitely better than it was. I am more productive. I have saved my commuting money, and most importantly I got back 10 hours per week.” And if the company asks me what you’d prefer most of all, they’d say, “Give me the 10 hours per week.”

Fortune: I notice you took over this Hong Kong property from WeWork. But I thought you were arguing that people won’t need big city office space going forward?

Dixon: In the city centers or big city centers, people will require space, but less space. Let’s say you have a 100-person headquarters in London today. In two years’ time, that will be maybe five people in the headquarters, some meeting rooms and collaboration areas, and all the other 95 people are working either from home or near where they live. So you need space in London, but you don’t need as much space. And we can see that already happening. We saw that before the crisis. This is called hub and spoke. You heard Mark Zuckerberg talking about it, and many other companies are doing it. So you get a hub in the big city, you let people work where it’s convenient around that city, but you’ve got to have the beating heart to bring people together. Whether it is a hub in Houston, or a hub in Birmingham, then all the people who live around there can come into the hub, they don’t have go into London or come into Silicon Valley.

Fortune: You have been using a franchise model to expand. Does that help you lower the risk of this expansion, because the franchisees are taking on the risk of finding the right location and the risk of managing that space properly?

Dixon: We run a pretty de-risked portfolio anyway. And that is one of the big differences between us and WeWork, Knotel, etc. We avoid risk. If you avoid risk, you grow more slowly. But franchising reduces some of the risk, yes, but we are doing it to grow more quickly. For us to do more centers in North and South Dakota and the Highlands and islands of Scotland, we need franchise partners to do that. We want to be in every town and city and village and provide a workplace. And we need franchise partners to do that. It is not so much about risk. It is about growing more quickly, it is about having more capital sources, and it is about then having more local management—all three things.

Fortune: There is an increasing emphasis from companies on reducing their carbon footprint. But if you have people spread out in more offices, it might be harder to manage that environmental impact. Are you helping your customers track their carbon footprints across all the space they are using?

Dixon: They are asking us, and we are working on metrics to help them with just that. It was, if you had gone back to the end of last year, it was very high up on the list of things they wanted. Now everyone has met their environmental targets just by having people work at home or close to home. But the impact on the environment is astounding, and I think that will become another driver [of a more distributed workforce]. The environment is a huge driver. That is what people want. Plus, if you are running a company it is just cheaper.

More must-read international coverage from Fortune:

Subscribe to How to Reopen, our weekly newsletter on what it takes to reboot business in the midst of a pandemic.

By  Comments Off on Why the Regus and Spaces CEO is doubling down on office space despite COVID-19