How Will Co-Working Perform In A Crash? Blackstone-Backed The Office Group Has Been There And Done It

It is the question that dominates the conversation about the flexible workspace and co-working sector: What is going to happen when the next crash comes?

Flexible workspace companies were the biggest takers of office space in London in the first half of this year, and are continuing to expand almost exponentially.

That may be all well and good when the economy is still growing and the real estate market is pretty benign, but what happens when there is a recession, new businesses are not forming or taking expansion space, and these companies have long-term lease liabilities but short-term income? Is it Regus all over again but on a bigger scale?

Charlie Green has an insider’s view. The Office Group, the shared workspace firm he started with Olly Olsen, has been running since 2003, and so was a relatively new company when the worst financial crisis since the Great Depression hit in 2008. It survived, and the firm’s experience will be instructive in how the sector can prevail when the next inevitable downturn hits.

This insight into the sector is the reason why earlier this year Blackstone bought a majority stake in the company in a deal that gave it an enterprise value of £500M. With Blackstone’s backing, The Office Group is looking to double its London footprint of 1.3M SF in the next three years, take on bigger buildings and expand internationally for the first time.

“This business is all about creating long-term income from shorter-term commitments,” Green said during an interview at The Office Group’s Smiths Building in the West End.

“Our revenue dropped 12% at the beginning of 2009, but by September it was back up to previous levels. Income does drop, but if you have the best buildings in the best locations you can adjust your pricing, still make a margin, manage your way through and ride out a downturn.”

Green said the way employment changes in small firms during a recession does allow shared workspace firms the chance to maintain a viable business — but this requires hard work and creativity.

“You need to be present and to manage your buildings,” he said. “What you have to remember is that in a downturn companies don’t just suddenly stop working or start working from home. If you have a company that employs 30 people that needs to let half of them go, you take the space they were in and split [it] into two offices and put another firm that has done the same thing into the other half. You do the same thing with all of your other spaces.

“If you have good buildings that are flexible you can do that. During the last downturn our occupancy didn’t drop.”

He said details like buildings with plenty of natural light are key, and that some new office buildings being developed are not right for co-working companies.

“The one thing people don’t ever want to compromise on is a window, so some of the spaces being taken by people in buildings with deep floor plates might be quite challenging to manage in a downturn.”

As for the sector as a whole, Green thinks only a small part of it would be significantly challenged by a recession.

“If you look at the macro position, we are in the middle tier, so people will leave us and go into the very cheap space that is available. But they will be replaced by people who leave the very expensive top-end stuff. There is a risk to that five-star offering but that is only a very small slice of the market.”

He uses Brexit as an example of how resilient the sector could be.

“On the Friday that the result came in we were on a bike ride with some of our clients, and everybody was pretty bummed,” he said. “On the Monday we started to monitor the number of enquiries compared to the year before, and they were actually up. In times of uncertainty people still need flexibility.”

Green and Olsen came from the real estate and serviced office world, and have grown the business from a single 5K SF building in Islington with 70 members to 34 buildings in London and two outside London, some owned and some leased, with 16,000 members, a figure that will grow to 22,000 in the coming months as new buildings open.

“We started off challenging the serviced office concept, now we think we’re challenging the traditional lease,” Green said. The mantra as to why the sector is growing so quickly touches on the familiar themes of technology, flexibility and design.

“Technology companies have changed the way people think about how companies grow. If you start a company and want to grow quickly you need flexibility, and you don’t want to be tied to a five- or 10-year lease — it's anachronistic. They want to work in places that give them flexibility, community, are beautiful and well priced.”

Blackstone clearly believes in the growth story of the sector, and in The Office Group’s ability to capture and profit from that growth. The acquisition instantly made the U.S. private equity firm the third-largest player in the London scene.

“If you look at the competitive environment, you’ve got WeWork, British Land, Carlyle, Tedi Sagi, all in this sector. It is going to grow, but it is going to get more competitive. We wanted to continue to improve and to grow, we’ve had brilliant support from [previous owners] Bridges Ventures and Lloyd Dorfman, but to grow we needed more muscle. Blackstone was one of the few companies we thought could give us the support and backing that we need.”

Green said the ambition from here is to double the footprint in London in the next three years or so and begin expanding internationally, with Europe rather than the U.S. the obvious first step.

“We’ll be selective in London, but we’re one of the top operators in the city and we want to maintain that position. The sort of buildings we’ve taken in the past have typically been 20K SF, but now we’d looking at 50K to 100K SF. We like to take whole buildings if possible but we’re happy to take floors as well, as we have done at Derwents White Collar Factory.

“We will look at the rest of the U.K. where we can find great buildings in growing cities and Europe makes sense as a next step because of the ease of access and the strong knowledge of markets and local teams Blackstone has there. It’s not about competing with anyone or taking over the world.”

If the co-working and shared office space sector as a whole can weather the next economic crash like The Office Group did the last one, dire predictions about a bubble will prove to have been greatly exaggerated.

And if The Office Group can hit its expansion targets, Blackstone will have established a dominant position in yet another sector of European real estate.

Hear Charlie Green and other leaders in the sector talk all things office at Bisnow's Big Office Bash later this month.