Now that the commercial real estate market is on the mend, will tenants flock to the convenience of flexible office space? Regus Group is betting they will. The London-based firm — which already was the world's largest operator of executive suites — has acquired competitor HQ Global Workplaces for $302 million, tripling its U.S. empire of leased centers to 6.6 million sq. ft. of office space.
Quiet-period rules restricted Regus and HQ Global executives from discussing the merger, which was expected to close in late August. Regus communications director Stephen Jolly did say that the merger was motivated by HQ Global's healthy U.S. portfolio, which is 80% occupied.
“Regus now has concentrations in the key U.S. markets as more people are talking about office outsourcing,” says Jolly. “And we should also benefit from around $20 million worth of savings over the next 12 months based on the merger.”
The acquisition comes only one year after both companies surfaced from Chapter 11 bankruptcy. Regus, a publicly traded firm, gorged on U.S. office space in the late 1990s as dot-com tenants filled its suites. The run ended badly in 2000 when dot-com leasing demand cratered, leaving the company awash in empty suites.
Last year, Regus reorganized its U.S. business under Chapter 11 bankruptcy protection. By cutting its fixed costs, Regus recorded earnings before interest, taxes, depreciation and amortization (EBITDA) of £3.8 million in 2003, compared with a loss of £22.9 million in 2002. It also reduced its number of leased centers from 61,228 worldwide in December 2002 to 55,618 by the end of 2003. The closings boosted the occupancy rate of its U.S. portfolio from 60% to 78% over the same time period.
Experts agree that one giant player is more likely to thrive in the market than two rivals. “These two companies were undermining their own healthy price practices, but now Regus is clearly the 800-pound gorilla of the industry,” says Scott Rae Buono, president and CEO of business center operator YourOffice Inc. of Orlando, Fla., a firm that offers alternatives to home office users.
Two trends bode well for Regus. First, national office vacancy fell 34 basis points during the second quarter to 17.67% — the largest quarterly drop in four years. Companies also are increasingly leasing space in executive suites. A recent CoreNet Global survey of corporate real estate executives predicts that office outsourcing will increase dramatically by 2010.
But challenges remain. “When the market is moving up, these suites are a slam dunk for profits. But within the past six years, the market became saturated with suites,” says Susan Sonley, assistant vice president at Grubb & Ellis.
Tenants already have roughly 111 million sq. ft. of vacant sublease space nationally from which to choose — and that space typically leases at a deeply discounted rate. Jolly acknowledges sublease space will continue to pose a challenge for Regus.
Sublease space tends to be cheaper than direct space, but in many cases it's also unfurnished or unwired. Conversely, the typical Regus business center is roughly 25,000 to 50,000 sq. ft., with quality office furniture, T-1 Internet access and furnished reception areas in a trophy building.
Adds Sonley of Grubb & Ellis: “As long as the national sublease market stays as strong as it is, there will be serious competition for executive suites.”
Business Centers: At a Glance
There are roughly 4,000 business centers in North America. The typical business center:
consists of shared office facilities that are fully equipped, staffed and furnished;
includes common areas that are shared by other clients;
is primarily used by start-ups and other small businesses;
is typically 10,000 to 75,000 sq. ft.; and
costs between $500 and $2,500 per month on average to rent.
Source: Regus Group PLC, HQ Global Workplaces, Office Business Center Association International