Real Estate

Office space/IWG: welcome to the Empty Quarter

Future working patterns spawn doctrinal divisions worthy of a theological conference. David Solomon dismisses working from home as an “aberration” unsuited to the go-getting culture of Goldman Sachs. Jamie Dimon at JPMorgan believes a hybrid model can succeed. Office landlords are praying Solomon is right.

Most signs point the other way. On Monday, IWG warned that a recovery was taking longer than expected. The owner of Regus, a provider of flexible office space, said ebitda earnings would fall again this year. Investors fled, sending London-listed shares down by more than a tenth.

That erased gains chalked up over traditional office landlords since November. The market had counted on providers of flexible space — including US fallen angel WeWork — winning in the post-pandemic landscape. The theory is that employers will trim fixed overheads in favour of variable offices.

But vast floors of excess space may depress prices across the industry for some time. In London, office space availability is at a 20-year high.

Like any good property pro, IWG boss Mark Dixon refuses to let the dire outlook dent his optimism. He expects a strong recovery next year, helped by partnering with building owners. That, he says, reduces the risk of mismatching short-term revenues and long-term lease obligations. IWG aims to manage two-thirds of its business under these partnerships within three years.

That provides only partial insulation from a correction in office rental yields and property valuations. A mass return to office working is needed to arrest the slide in prices. This is unlikely.

Instead, the hybrid office-and-home model espoused by Dimon is gaining traction. In the UK the proportion of office workers who would never work from home has halved to about one-third since the pandemic, says YouGov. 

Space reductions initially estimated at about a tenth of supply look too bullish. The figure jumps to a quarter in the UK once hybrid working is taken into account, says Barclays. The same surveys suggest three-quarters of employers support working from home in some form.

Company bosses have plenty of incentives of their own to back the improved quality of life many employees would reap from greater flexibility. Shaved costs and smaller carbon footprints are just two. Hybrid working is here to stay. The steep valuation of IWG shares, trading near all-time highs of 35 times 2022 earnings, lacks the same permanence.

The Lex team is interested in hearing more from readers. Please tell us your views on the outlook for commercial property in the comments section below


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