I can't help but think there's some real estate play that everyone is missing.
They buy long term leases and sell short term leases, which they can mark up for 1) the optionality provided with a short term lease 2) the optionality to rent just as much as you need 3) additional amenities provided 4) and potentially to respond to local market changes (which aren't reflected in the long term lease.)
That's actually pretty straight forward, and it remains to be seen if it's profitable.
And yet, I feel I'm missing something. That there is some sneaky real estate arbitrage (or maybe a tax effect) that turns this from risky to genius.
To me, WeWork seems like a business model that works great when the economy is growing and terribly when the economy is shrinking.
I assume the the draw of selling a 10-20 year lease is that it mitigates the business cycle risk for the property owner (there are other advantages but this would seem to be the main one). This allows the building owner to cut prices for the long-term lease relative to a short-term one.
Thus, when the economy is booming and businesses need space, WeWork looks fantastic--real estate arbitrage! ... And then when the economy goes into a recession, WeWork is stuck with a long-term lease that you can't exit and a dearth of subtenants that destroys your revenue stream.
WeWork has only experienced the former on its short life so far. I'm interested to see how it manages the latter.
I wouldn't exactly call WeWork class A. It's a glass filled cramped place. I much prefer our Regus office compared to the day I spent testing WeWork. Too much visual and auditory distraction.
Here in Berlin I wouldn't call WeWork with their out-of-order elevators, constant ongoing construction works which block the 2 remaining elevators, plenty of construction noises, failing power provision and broken door handles a class A place to work at.
They have 84% occupancy, but revenues are still less than 40% of costs? Whatever they are doing ain’t working.
Especially when “WeWork said it has reduced capital expenditures through steps like a 20 percent cut in the cost per desk, or space one member occupies.” That sounds like a typical end of life trend for failing startups, reduce the value and quality of your product to desperately try to stem losses.
I work remotely for a startup and can get reimbursed for coworking space if we want it, but I’ve never been tempted. Why work in a noisy, distraction filled shared space when I can be far more productive working at home alone, with zero commute?
>> I work remotely for a startup and can get reimbursed for coworking space if we want it, but I’ve never been tempted. Why work in a noisy, distraction filled shared space when I can be far more productive working at home alone, with zero commute?
I have a family of four and work from home. When you work remotely you can buy outside of expensive big cities where you can get bigger spaces cheaper.
I have a family of four, work from home sometimes, but find it hard to have kids respecting your workspace because you're "home" after all, so why not barge in? My wife has trouble with boundaries too on that issue. It's a normal problem for people who don't "get" IT/WFH. You're home so.... we can bother you, right?
Lots of people have these problems. It's super common because the idea of working from home and being unavailable is inherently pretty odd for those who don't quite get how context-switching is an extreme productivity killer.
I'm offered it fully paid. I just don't see why. I'm sure to some it is important. But I have a basement office that's a ten second walk to my wife and son. The commute in the morning is also phenomenal.
They explain it a littler further down by saying that they are incurring a lot of costs right now for offices that will bring in revenue in 2019. In other words they blame it on balance sheet imbalance.
Normally this accounting problem is solved by capitalising those expenses and then matching them against future revenue. Otherwise every company that made investments would have the problem where investments in the future were affecting this years' profits.
Does anyone know where the original filings can be found? Is this in EDGAR somewhere (I'm outside the US)?
Looks like they sold non-registered bonds to institutional buyers. So not on EDGAR. They have a website where you have to submit name/company to get access, which is linked to in the below.
It will be interesting to see what happens to WeWork's revenue when VC funding starts to dry up. From what I can tell, a majority of their income is simply a wealth transfer from VCs to WeWork via startups. As the startups get less funding, it will be interesting to see if WeWork can draw enough customers.
WeWork is essentially a financial engineering play: they convert few large long-term leases on buildings to many small short-term leases. This is a very similar business to banks issuing 25-year mortgages with monthly repayment - it’s called “maturity transformation”. If their customers disappear, WeWork is still on the hook for those long-term leases. Buildings like to work in 20-25 year timescales, I think very very few tenants would stay in a WeWork that long.
Where do you see coworking as a concept in the next decade? I haven't used WeWork but I've been a customer of plenty of different coworking spaces. I've had complaints with all of them, but they still beat working from home as far as productivity goes - for me at least.
I do feel that most coworking spaces, WeWork included, get the entire concept fundamentally wrong. They all market their "networking" opportunities and "hip" work spaces.
Do serious workers eveb want that? All I need is a quiet office where I'm left alone to work in a private cabin. I couldn't care less for the artisanal coffee or funky furniture.
I do hope there is a coworking competitor that gives me a no nonsense, quiet place to work in
I'm on the other side. Most coworking spaces I've tried are too quiet. Not enough interaction. If I wanted to be left alone, I could just stay home. It's the human interaction that's keeping me sane.
If I were to rent an office as a freelancer, it would be for two reasons.
One reason is to establish a routine where I wake up, put on my work costume, leave the house, and go to a place where I shall be productive each day. Normal office "hi, how are ya"s would probably add to the authenticity, but constant chatter would be distracting.
The other reason is to have a professional environment to invite clients. If the place is full of people lounging in beanbag chairs, sipping coffee and yakking, then I know a nice coffee shop that would be a lot cheaper.
1. Vanity: Impress clients with a cool lobby / conference room (WeWork's free beer and ping-pong tables often does the job well, especially when folks are used to cubicles)
2. Focus: A space to sit quietly without distraction; open office space totally fails here, and I'm pretty people listen to music while working in these environments solely to cancel out the noise of others.
3. Collaboration: Having smart people around you makes you smarter. This work in a traditional office, but I've been to a few WeWorks where I was pretty uninspired with the people around me. It was not that they were dumb, but that they worked in industries so far off from my own (fashion v. law) that we had almost nothing to talk about.
I've run my startup for quite some time. I normally rent fancy conference rooms at hourly rates or go to trendy restaurants for #1 (they're expensive, but better/cheaper than getting a monthly plan). I learned to focus at home for #2 (takes some time to get used to). By far, #3 is the hardest, but literally every person I hired was in a different state or abroad, so having a physical office wouldn't have helped unless I forced them to move.
They all market their "networking" opportunities and "hip" work spaces. Do serious workers eveb want that?
We have a good idea what a "serious" WeWork looks like already: Regus. WeWork occupies what seems to be a bit of a weird niche: they are almost as casual as taking your laptop to Starbucks and they seem to go out of their way to provide distractions from work too, whereas the Regus experience is just like having a more-expensive version of a real office. It's a private area, you have the key, dedicated network connectivity, support from "the building" when you need it. I see companies use Regus to bootstrap themselves into a new city while they hunt for real space for example, and Regus seems happy with that as a use case, whereas WeWork would like you to stay there.
Right now the gig economy is very fashionable and WeWork is riding that trend but this is too tied up with both fashion and politics to make the future of it very clear. Are people really going to want to spend their entire careers in a giant Starbucks, what happens if the tax code changes to make freelancing unattractive (e.g. IR35 in the UK)? What if WeWork becomes the corporate behemoth and people do go back to actually hip independent coffee shops, or coop work spaces? What if some technological development starts to favour large companies again? Armies of freelancers are fine if you are building websites but could you make a biotech or a space firm or green energy firm or whatever out of freelancers in cow-orking spaces? I dunno.
> they are almost as casual as taking your laptop to Starbucks and they seem to go out of their way to provide distractions from work too
I tried my first WeWork here in London a month ago, and this is exactly how it felt to me. Maybe that mixed with a college campus vibe. Definitely not a place to go if you want to get serious work done.
WeWork wouldn't be profitable on a private cabin model, as lovely as that sounds. Pitching the open floorplan as a "networking" perk is just a necessary evil, or good marketing, depending on how you look at it.
I have worked from a few WeWorks and copies thereof in Berlin. Most of the floor area is private offices, and the tenants tend to be quite enterprisey. Think Daimler, Deutsche Bahn, etc.
For the usual startup, WeWork is way too expensive.
> For the usual startup, WeWork is way too expensive.
Why do you say that? What are the alternatives that startups have?
Here in Tel Aviv at least, if you're a 5-10 person startup, you can either take the painful, long process of renting an office, which is both expensive in its own right, takes a lot of your time, and has a serious issue - you don't know what size you need!
The alternative is to go to WeWork, where you can start working almost immediately, have everything taken care of for you without thinking, and have peace of mind that you can scale to more offices within the WeWork as necessary (unless it's at capacity, but there're usually vacancies).
I'm not saying this necessarily a good business model for WeWork, but for startups, it's a great deal.
For the 5-10 people phase in Berlin, there is also the option for other coworking spaces that are cheaper. For startups that go through an accelerator here, there is also often the option to have a place in their (private) coworking spaces at okay rates.
Beyond 10 people, most startups here realistically don't have that explosive growth in employees, so you can rent an office 3x your current size, and still come out cheaper than WeWork. In the mean-time you can sublet the empty space to other smaller startups on a quarterly basis until you need it yourself.
I realize that in other cities, the situation might be a different one, but at least in Berlin there are very few startups that have the luxury to of a "fuck profitability"/explosive growth strategy, which are realistically the ones that can afford a WeWork for more than a few months.
I used coworker.com to find my current coworking space. From a quick glance there's 13 private office coworking spaces in Tel Aviv listed there. Whilst a lot of them are different in what they offer, finding one that suits your needs and is cheaper than wework shouldn't be too hard.
/unsponsored advert
I think the larger coworking spaces will have to excel on their consistency, ease of getting setup and cutting of costs from their economy of scale without becoming a RyanAir seat shrinking company. Whilst also not feeling like a traditional office.
Here in Tel Aviv at least, if you're a 5-10 person startup,
The uses cases for "5-10 person company" and "gig economy freelancer hanging out at the WeWork in hope that some networking will lead to a big break" are different, I'll wager.
> They all market their "networking" opportunities and "hip" work spaces. [...] All I need is a quiet office where I'm left alone to work in a private cabin.
I think targeting co-working spaces at people interested in "networking opportunities" increases profitability, because they are much more likely to accept open floor plans.
> I do hope there is a coworking competitor that gives me a no nonsense, quiet place to work in
It has been available for ages and is called Public Library.
In the UK, libraries are anything but quiet places. The best you can hope for is a 'quiet area' which is just above or next to the free creche and kids play area.
This in addition to loud conversations and general poor behaviour from other library users which is rarely challenged by staff.
Agree. I work out of the London Moorgate WeWork sometimes and as you said, a lot of the companies in there are banks. For example, Citi Bank occupy a large space on my floor.
In NYC, my purely anecdotal experience is that it's mostly startups. That said, when walking around talking to companies, it can be difficult to tell the difference between a 5-10 person "startup" and a 5-10 person profitable small business. Most don't just volunteer their cap table.
Or when the tech bubble or retail leasing bubble pops in the next recession. Considering who they are targeting as customers, it could be a very painful 2 or 3 years depending on the severity of the recession.
Also, when the execs of a money losing company is wasting time with vegan activism rather than turning a profit, I suspect it's future isn't too bright.
Not a single mention on the valuation of their properties, the regular metrics regarding real estate (initial yields, WALT - not sure if that's directly applicable though) and their cashflow projections. For real estate there are many measures that seek to disambiguate things like "costs come upfront".
And remember, for real estate several billions is quite small potatoes. Fifty or less not too large office buildings sets you back a billion. The market (at least prime European that I see) is overly competitive right now with markets accepting gross yields of 4% and funds making target yields by increasing leverage. Interest rates come up, valuations come down, unless you've got the cashflow locked in via long leases. That last part of the game, I think WeWork will lack. They surf the economic cycle, instead of evening it out long leases.
Edit: in reading other comments they are not owning buildings but doing term swaps. In that case they are on the receiving end of a whole lot of risk. 84% occupancy is fine, but in this market that is not too high. Most commercial funds will be a lot higher right now and they have the incentives on investments better aligned with longer contracts. How WeWork thinks to weather an economic downturn beats me.
At least in NYC, many commercial leases are 20 or 30 years. I imagine WeWork gets similar terms. In highly appreciating markets (London, NYC) towards the end of such a long lease (the last ten years or so), the lessee is paying well under market rate, and the lease becomes an asset rather than a liability. So if office real estate continues an upward trajectory for a decade or so, they can easily weather a downturn if it occurs in the later part of their lease term.
If it happens in the next 3-5 years, it’ll probably be catastrophic for them.
The language here indicates they think they are growing a "platform". I guess i don't really get how a global network of WeWork sites will add value to their clientele. Are they expecting people to want to join WeWork over a local competitor because they know if they go to city X for business there will be a WeWork office available for them? Is that really worth a lot to their clients that they will pay a premium for it?
If you're still experimenting in a local market, or just don't need that many staff - then going with a provider that provides a known set of features in random countries could be a lot more favourable than trying to find decent local coworking spaces or short-term rentals in each country.
Having been exposed to some of the inane bullshit that you get from coworking spaces in some countries, having a known-good factor could be very valuable.
We've had police turn up to the coworking space in one country and inform us that it was an unlawful occupancy. The police gave us until the end of the day to get all our stuff out. This was while we had important partners/clients in for meetings. Moving our 20-something people in that office out within a few hours was a nightmare, and basically killed a week in productivity, not to mention lost business opportunities/etc.
One coworking space had hundreds of people, but only a 100MBit residential internet service hooked up to a bunch of home-grade wifi access points, and eeeeeveryone was running torrents, and the coworking space didn't care to police their network at all (not that they could, they didn't have any IT staff).
We have people in a WeWork space in one country, and while it might not be fantastic, there's slightly less bullshit there than in other locations.
Reddit's former General Manager, as well as their former head of Community, have both worked for WeWork for a few years now. Their job has been to build community, through events, blogging, networking activities, etc. So yeah, they are trying to build a community that is sticky. That way, when you leave one company and go to the next, you'll go to your next company and request that they pay for you to stay at the WeWork you're already in.
Interesting. There are that many companies paying for their employees to work at WeWork? (instead of home or coffee shop - makes sense though if they're more productive)
Are they expecting people to want to join WeWork over a local competitor because they know if they go to city X for business there will be a WeWork office available for them?
Yes, that's one of their primary, explicit selling points.
Is that really worth a lot to their clients that they will pay a premium for it?
Yes, that's one of the major reasons people use WeWork instead of local office space rentals.
>> Yes, that's one of the major reasons people use WeWork instead of local office space rentals.
A lot of it also seems to be the typical startup hype. I've seen many companies choose WeWork even though they only have 1 single static office space because it's the hip choice, even though they could easily spend half the money for twice the space and privacy.
I don't know if it's worth a lot, but it's worth something. One of my remote teams gives optional access to coworking spaces because we know that some people hate working from home.
WeWork turned out to be more expensive than ad-hoc desks in other cities, though.
The answer is definitely in the data, it's just obfuscated at this point.
The question really boils down to unit profitability. If their 'already built out' offices are positive cash-flow businesses, than all this working capital expense makes sense. If not, no.
I don't really think there's much of a platform effect, rather, brand, and that people know they can go somewhere and get what they expect for their offer.
It's a decent concept given the degree of churn in businesses these days, and everyone wants at least a decent place to hang their hat during the day.
When we were there, there was supposed to be some kind of network of WeWork-resident and WeWork-adjacent businesses, like that you'd get your health insurance through a TriNet deal brokered through WeWork and stuff like that. It wasn't a serious offering and had nothing to do with why we took the space (reason: cheaper than the market, with better terms, until we were big enough to make an office cost-effective), but I suspect that's part of the "platform" WeWork hopes to build. It won't work, unless they make a bunch of ambitious acquisitions.
WeWork is just a gamble on real estate. There are probably instruments with very similar upside and risk as WeWork.
VCs, probably not familiar with the world of real estate, aren't able to see this. They think they're investing in something new, but it's really the same old stuff in a new package that they're paying a premium for.
They could start to save some money by getting rid of their photo system at the entry. Not that it works, you can just bypass it by holding your hand in front of the lens.
I find it interesting that WeWork managed to market itself as being different than regus when it's in reality just a slightly different version of Regus.
They buy long term leases and sell short term leases, which they can mark up for 1) the optionality provided with a short term lease 2) the optionality to rent just as much as you need 3) additional amenities provided 4) and potentially to respond to local market changes (which aren't reflected in the long term lease.)
That's actually pretty straight forward, and it remains to be seen if it's profitable.
And yet, I feel I'm missing something. That there is some sneaky real estate arbitrage (or maybe a tax effect) that turns this from risky to genius.
Or maybe I'm just hoping there is.