IWG Сan't Grow Fast Enough, Seeks Canadian Partner: CEO
25 Oct 2019 - IWG plc, the biggest operator of co-working offices in both Canada and the world, is seeking a partner or partners for its Canadian operations to help it accelerate growth in the country.
The company aims to set up a master franchise agreement in Canada with potential capital partners, said Wayne Berger, CEO of IWG Canada and Latin America, in an interview with RENX.
“There is a greater need and demand for flex space, beyond the capacity that we can actually invest in and then continue to grow,” Berger says. “The demand we’re seeing (from clients in Canada) continues to outstrip the supply.”
Berger says the valuation of the Canadian business, financial model and packages to be sent to potential investors are being finalized. IWG hopes to go to market during the next few weeks and have the Canadian master franchise agreement in place by the end of the year or early 2020.
Master franchisees in Japan, Taiwan
It would be similar to exclusive master franchisee agreements Swiss-based IWG reached earlier this year in Japan and Taiwan, he said. The Japanese deal with TKP Corp. gives TKP use of IWG brands, while IWG receives a fee for providing services such as international sales, marketing, infrastructure and technology support.
IWG sees the Canadian partnership as an opportunity for investors “that want to partner with the company that is best-in-class in the industry,” Berger said.
“It gives a partner the opportunity to invest in a high-growth industry and achieve exceptional returns on their investment.”
Berger notes IWG has grown threefold during the past five years and now operates three million square feet of the estimated five million square feet of flexible work space in Canada.
IWG has 133 locations across the country under its Regus and Spaces brands, compared with 48 locations and a million square feet five years ago.
A recent JLL study predicts 30 per cent of commercial space in corporate real estate portfolios will be flex by 2030.
Flex space currently represents about 1.8 per cent per cent of commercial space in Canada, Berger said.
IWG also launched franchisee program
“Just growing from 1.8 per cent to five per cent would be exceptional and that would require obviously a significant amount of capital.”
(A newly released GWL Realty Advisors study on the evolution and future of co-working found that overall Q2 penetration of flexible office space, as a percentage of overall inventory in Canada’s three largest markets, reached about 3.25 per cent in Vancouver, about 1.75 per cent in Toronto and about 1.25 per cent in Montreal. It cited CBRE numbers.)
Berger said a franchisee program IWG launched last August in Canada remains in place, despite its move to find a master franchise partner.
“We think this would be an opportunity for a master franchisor to actually work alongside franchisees,” he said. The master franchisor would collect fees from the franchisees.
IWG is seeking partners with the organizational and financial capabilities to open a minimum of five locations, no smaller than 10,000 square feet, over a two- to three-year period.
The initial investment would range from $750,000 to $1.9 million per location and there is a one-time $50,000 franchise fee per location.
Berger said IWG has been attending Canadian Franchise Association shows across the country and has garnered interest from a number of potential franchisees.
WeWork woes not impacting IWG
He also noted recent setbacks at competitor WeWork are not having any negative impact on IWG.
Japanese tech conglomerate SoftBank Group Corp. on Tuesday night announced it was taking control of WeWork and providing it with up to $8 billion US to keep it operating.
WeWork’s issues “are more related to a business model versus any type of industry issue,” Berger said. “What we’ve seen is the industry is continuing to grow at an accelerated pace.”
He said IWG, which has been in business for 30 years, has weathered two recessions and is “very pragmatic” in its business model. IWG now operates more than 3,300 centres in 120 countries.
A significant percentage of IWG leases are “partnership agreements” with landlords. This arrangement, Berger said, helps the company invest more capital into expanding at its locations while managing risk on the lease side.
Five brands offer variety of choices Having a diversified brand strategy with five brands offering different designs, sizes, locations and price points has helped manage costs and give clients choices.
In Canada, IWG currently operates the Regus and Spaces brands, with 113 Regus locations, eight Spaces locations and 14 additional Spaces locations under construction.
IWG is considering rolling out the lower-cost HQ brand in Canada and is hoping to introduce its first No18 location in the country next year, Berger said. A lease for the first No18, “a highly aspirational, lifestyle type of work environment,” should be finalized in the next few months.
There are no current plans to introduce the high-end Signature by Regus brand in Canada.
Berger said traditional industries in Canada are increasingly considering flex space to add flexibility and alleviate the financial capital required in signing long-term leases.
Companies of all sizes are “looking to move toward an asset-light world,” he said. The “workspace-as-a-service movement is really picking up speed.”