Last month, just days after The Office Group co-founder Charlie Green announced he was stepping down from the business he set up 20 years ago with Olly Olsen, the pair accepted the lifetime achievement award at the Flexible Space Association (FlexSA) Conference in London.
Immediately afterwards, the company’s chief executive Enrico Sanna took to the stage for the keynote interview, conducted by BE News editor Liz Hamson. After thanking Green and Olsen for their contributions, Sanna revealed how the merger between TOG and Fora is going, talked frankly about the future of the flexible office sector and explained why he thinks more needs to be done by the sector to address ‘the sins in the past’.
Here are some selected highlights from the interview:
The merger between TOG and Fora completed in September. How is the integration going?
If you had asked me last summer what I thought the biggest challenge to the merger would be, I would have said hitting the financial targets, because people get distracted. But actually, the business is so solid and so well run by an amazing management team. What I underestimated was how many conversations you need to have with people. We are almost 700 people. There is also a lot in the background, technically, that we still need to achieve. We’re going to announce the brand soon, which everybody asks us about. But the focus on customers, on people and our employees was dominant in both companies, so that has been an easy transition.
What about the technical challenges?
The two platforms and two business models are slightly different. We’re very excited about the choices we can give to our customers with our 70-plus buildings, but bringing together the tech platforms – setting up one accounting system, one building system, etc – and then connecting them has been quite challenging. We have basically been working on 187 different projects to bring these two together.
Charlie has now stepped down, 20 years after launching TOG. He and Olly are synonymous with the brand, but you’re the CEO. That’s a change in itself. What further changes can we expect?
I have his phone number, so he’s not going to escape me… and I know where he lives! Olly and Charlie have done an amazing job to establish The Office Group and we’re very proud of the name, the legacy and history. But it’s now about the clients and the people and looking forward. It’s not just about leveraging our skills, it’s about how we position the company for the future, and the challenges of the future are very different from the challenges of the past. We have an amazing platform and we are so well positioned to [respond to] those challenges.
What are those new challenges and what’s going to change?
I think the biggest challenges everybody’s facing is: how does the return to work play out? We’re greatly positioned, but many of our clients still don’t know exactly what requirements they have. Through the platform, the value proposition and the tech, we need to really capture that. The other challenge is that we are the most interesting sector in the office space, but as a sector, we have committed some pretty bad sins in the past and we need to clean up. That’s what the sector is doing. One area we are now leading on is sustainability. A good example of this already in action is retrofitting existing office buildings to ensure they are future proof. This will be critical to attracting capital, as we emerge from the low interest rate environment.
We also need to return to profitability. Economic headwinds and rising interest rates mean that cheap money is no longer available and won’t be available for a long time. I think we’ve got to go back to profitability and we’ve got to go back to demonstrate that through the cycle, we can make money. We’ve got to go through a cycle. Only if we go through a cycle can we demonstrate to the world that we can come out of it better than before and be profitable in the long run. We will then establish ourselves as a real asset class that people will invest in, and I am confident in our ability to do this.
It hasn’t helped that the poster child of flex space, WeWork, has had some very well-documented issues. Are they symptomatic of a wider industry problem?
Structurally, I have always felt uncomfortable with the mismatch of the long lease and licences. We have 20-plus years of experience and have demonstrated multiple times that you can ride the cycle and you can be a profitable business, but that can’t be said about everybody. So I think there is a mismatch there. Fora has been built on a freehold model since the beginning, and I always felt that that relationship was a better relationship. This idea of partnering with landlords is a much better alignment of interests.
The best model is the hotel industry, which has been able to move to management agreements and partnerships, although in the US, as usual, there are much better capital markets, so a much better structure than Europe. But they have done it for 40 years, by being profitable and by returning the capital and the cashflow they had promised to those landlords. We should definitely get on the same trend. In a normal seven to 10-year period, you need to be profitable.
How realistic do you think it is that a hotel style model will be adopted across the sector?
I’m fairly confident that the capital markets will get there, but we need larger companies. It’s all based on data and data sets, so by having larger players that have a lot of data and multiple years of experience, you can consistently go to the bank. You can dream of an ERV to a 20-year lease, but the reality is our cashflow profile is so much better, and we have 22 years to show you that in that building, we make money all the time. This idea of the lease is a bit outdated. We put too much faith in the Excel spread sheet rather than what’s actually happening on the ground.
What’s investor sentiment like at the moment?
Pretty terrible, because offices are not getting a lot of good press – you should write some positive stuff about us! That said, it’s important to note the clear distinction between the older, more traditional office space, which is seeing a downturn in demand, and high-quality, sustainable buildings or Grade A office space, where appetite amongst investors and demand among tenants remains strong. Capital markets are very much led by the US, and in the US, offices have been in trouble: the return to work has been more challenging. So I don’t think anybody is very interested in the wider sector right now. There is also some bad press around lenders, which doesn’t help, but I don’t think this is reflective of the whole market. There is a lot of stuff that we are fighting, but I think we’re a really good sector. We’re doing all the right things. I think operational real estate is the future. As I explain to landlords, it’s like, we go to the gym every day, we’re committed and we’re just better athletes. I think the real challenge that we’re solving is actually how to get really involved with our clients, and more and more of our clients like that. So, I think we’re going to remain positive, we’re going to continue to be really good at what we do and we’re going to be profitable.
Where do people get capital?
We’ve got Blackstone and Brockton, so that’s pretty easy because of our good relationship and long history with both investor groups.
I mean the rest of the sector. What’s your advice to other players?
If you think about the capital stack, it’s really hard to price debt today, because interest rates haven’t settled yet. If you can’t price the debt, it’s impossible to price the equity, and we are mostly equity funded, because there is not a lot of leverage finance in our sector. We have got to wait for that to settle. It’s not the best time in the world to go and raise capital unless you want to be taken to the cleaner, because you won’t like the valuation. I think, therefore, it’s all about cashflow preservation, and being smart about which building you pick up.
We should have been in a better place with the capital markets this summer. It won’t happen. But towards the end of 2024, I think the market will open up. We’ve got to be patient and we’ve got to continue to do a good job.
The flex market currently accounts for around 8% of the office market. How big could it get?
We could be anywhere between 20%, 30% or 40%. It depends on what you call flex. I’ve been saying for a while that below 10,000 sq ft should be all ours. We [should] have tremendous growth, but the goal is not just top-line growth, it’s also profitability. Naturally, this growth will slow down, but it’ll be better growth.
How big an opportunity is the hybrid working trend?
I think it’s an amazing opportunity. We shouldn’t be shy. It’s our job to create the best workspaces possible and deliver the best experience for our customer.
What are they asking for now?
They are saying: ‘Help, I want my employees back.’
How many days a week is the norm?
When you look at the data over the past three years, the diehard people love the office, and they’re back three or four days, but there’s been a long tail of people that were coming in once a month, once a week. They’re now coming in more often. So I think the average will slowly increase. Fridays are pretty much dead and even before Covid, they were kind of dead. But I think the door is opening for people to go to four days. The point is that people are still going to work in other places than our offices or their offices, so we’ve got to create a really good experience, and it’s got to be super easy.
What about ESG?
It’s so important to us. There’s rightly been a focus on the E, but I think the focus also needs to be on the S, because we play a major role in a lot of communities and we can make a difference there. We also need to be very mindful that when we refurbish or build buildings, it’s pretty painful for people around us, so I think we’ve got to emphasise both of those, not just the sustainability point.
The Black & White Building has rightly been acclaimed. Will you deliver more buildings like this?
Yes, if we can, absolutely. The Black & White Building is really a testament to Charlie in particular. It’s an amazing project. It has been super well received, both by investors and clients.
What else is coming up in the next three to five years?
We have a presence in Germany, with five buildings there, and we’re very happy about our presence there, so we’ll continue to look actively in Germany. London is our home market, so at the right time, for the right location and building, we’ll continue to be active here. Let’s not forget, we’ve also got a pretty good regional portfolio with Bristol, Leeds, Cambridge, Oxford and Reading, so we’ll continue to look at some of those [markets]. And we are having a lot of interesting conversations with landlords, partners, and we’ll continue to be active on that front.
But I never believed in growth at all costs. I made this point back in 2016, when I started Fora. We built 22 locations over a six-year period, which was the right pace for us. I think it is about having happy clients, happy employees and happy investors. If you get those right, [growth] will come.
You must have some targets?
We do have targets, but we’d rather not talk about those!
What about the number of sites? You currently have 72 buildings.
We could say 100, but I don’t think that that defines us. I’d rather have 30,000 really happy clients, which is the number, and 700 really happy employees and also, I do care that Blackstone and Brockton still like us!
What about landlord partnerships? What are your aspirations there?
After freehold, the best next step for aligning interests is through partnerships. We’ve done it 14 times, so we have a lot of experience, and we add so much value to buildings, whether we’re the sole operator, or more importantly, when we are, alongside other tenants, on long leases. It is unreasonable to me for landlords to expect that we’re going to take all the risk. I think it is absolutely the best model. That is why it has worked in the hotel industry for 60 years. It’s just a better alignment. So I’m a big fan of it and will continue to push on it.
What other advice do you have for operators?
Let’s not show up with a business plan that you know deep inside is not achievable, because after two or three years, they will kick you out. You’ll be out and your brand will be out, which is not good for your brand, but more importantly, you’ve hurt the entire sector. We really need to continue to over-perform, to recover, to establish ourselves as a proper asset class. When that happens, the capital will flow and the growth will come. It will be amazing. But it comes through really hard work, and we’ve got to have reliable performance.
What are your hopes, fears and expectations for the next few years?
No more pandemics, please. I’ve only been part of this industry for six or seven years and I’ve seen a lot of great companies growing. I mean, we’re so much better than the average office, right? My hope is we continue to push the boundaries and we continue to demonstrate that. My fear is that the macro-outlook continues to be pretty bad, so my fear is that we’re not done. There’s so much against us in general, but not just us: everybody who’s an entrepreneur, who is trying to build a business. So my hope is that gets settled. In the meantime, we’ll continue to work really hard to be the best at what we do. Then as we look forward, I think we’ll be in a great place. You’ve got to read through the moment and continue to think about the forward. My expectation is that we will turn out to be an asset class, there’ll be capital flowing and [the markets] will appreciate our ability to generate profits on a consistent basis.
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