A Ray of Hope for Office Buildings

[Don Konipol]

International Workforce Group (IWG) by far the largest provider of FLEXIBLE workforce space, recently introduced a new model.  Whereas in the past they either owned the office building (minority of the time) or leased office space long term at a fixed rent, they now are making serious inroads with a platform that PARTNERS with the landlord, in a rather interesting way.

The owner of an office property signs with IWG as a licensee.  IWG provides the management, marketing, and the network of clients worldwide that may need office space - rented from 1 hour to annually depending on client needs.  The landlord pays for and owns the improvements / buildouts necessary to meet the standards of whichever IWG owner company (Regis, etc.).  The resultant profits are split between the land lord and IWG.  

With so many well located offices having 40% - 70% vacancies landlords are signing up in droves.  But now we are beginning to see something else.  We are receiving loan requests from investors with purchase contracts for small but well located office buildings where the sole tenant lease has terminated and the property is 100% vacant.  The purchase prices are VERY LOW  - sometimes 20 - 25% of what the property would have sold for pre Covid.  In their loan proposal is a contract with IWG and a projection of cost to build out.  So, they are purchasing the property with the sole intent to turn it into flexible office space.

Some of these smaller properties anticipate 100% of rentable area will be “flexible” office space.  Others, anticipate (hope) that by initiating significant activity with IWG on a large portion of the property the remaining office space will become more “rentable”, or an alternative use (storage, conversion to residential, etc.) will become a viable option. 

What do you see as the risks , rewards, feasibility, etc of this investment strategy? Is this something you personally would be interested in investing in? What type of ROI would you need to consider this type of investment? What experience with flexible office space, if any, do you have?

If this is truly areal risk adjusted return opportunity, I’m ready to make a significant investment.  But, I value other viewpoints, experiences and opinions.