WeWork: London's Soon-To-Be Biggest Property Renter Makes Massive Bet On Office Market Despite Brexit

The rationale for creating WeWork, the eco-friendly serviced workspace provider, was simple as co-founder Adam Neumann explained to the New York Daily News.

“During the economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two. What separates us, though, is community.



It wasn’t a bad idea since the company was recently valued at $20 billion. The first WeWork location was established in New York’s fashionable SoHo district (above) in 2010. Only four years later, Wikipedia notes that WeWork was the “fastest growing lessee of new office space in New York”. The company currently manages office space in 23 cities across the United States and in 21 other countries including China, Hong Kong, India, Japan, France, Germany and the UK.

WeWork’s growth has been little short of stratospheric, and investors have included heavyweight financial names such as JP Morgan. T. Rowe Price, Goldman, Wellington Management and Softbank. As Bloomberg reports, WeWork is about to repeat its success in New York and other cities by becoming the largest private lessee of office space in London. However, some old-school property developers are predicting that WeWork’s break-neck expansion is ill-timed.

A seven-year-old U.S. startup is set to become the biggest private tenant in London just as the U.K.’s economic outlook worsens. Three years after entering the British capital, WeWork Cos. has signed leases that will make it the city’s No. 1 private-sector user of office space, according to data compiled by CoStar Group Inc. for Bloomberg. The rapid growth makes WeWork, valued at $20 billion, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.

“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015. “In the present uncertain market many people are hoping that the WeWork model works -- but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalized business, but if the cycle turns down, then the model looks vulnerable.”

As the chart below shows, WeWork’s expansion is occurring after the bull market in London office space is more than two decades into an upturn.



The company currently has 17 locations in London, with two more about to be opened, as shown on this map of the city. The majority of the office space is in the eastern part of the city, in and around the City of London.



The addition of the two about-to-open properties and another ten in the planning stage - one of which is the 620,000 square foot 12-building campus of Devonshire Square which the company is negotiating to buy outright from Blackstone Group (for $785 million) - will catapult WeWork into the number one position in London.



In short, WeWork is making a massive bet on the office market in London in spite of the risks posed by Brexit. From accounts filed by WeWork’s UK business, Bloomberg learned that the company has committed to £815 million ($1.09 billion) of rent payments in the future, of which £231 million ($309 million) is due over the next five years. Income in 2016 was £61 million ($81.7 million) and the company posted a loss of £11.1 million. Some anecdotal evidence unearthed by Bloomberg raises concern.

WeWork’s most basic membership plan, which allows access to the company’s offices two days a month and use of the firm’s app, starts at $45 a month, according to its website. The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers fees of as much as 20 percent for bringing in tenants, double the industry norm, people with knowledge of the matter said. WeWork’s standard broker payment is 10 percent, another person said.

WeWork is exposing itself to a classic case of liquidity mismatch. This is normally associated with the banking sector and banks being caught out in a crisis from borrowing short to lend long. In the property sector, the equivalent is borrowing long to rent short. Bloomberg reports the contrasting view of one of WeWork’s competitors, which shuns this strategy.

Jamie Hopkins, CEO of WeWork competitor Workspace Group Plc, said he prefers a business based on purchasing the properties the company rents out as short-term offices. “Buying long-term leases and selling short ones at a profit is not a model we are comfortable with at all,” Hopkins said in an interview. Owning its buildings gives Workspace “much more flexibility in terms of pricing if we need it,” he said.

Not surprisingly, WeWork sees things differently and Bloomberg relays its take.

While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments. WeWork has secured deals with firms including International Business Machines Corp. and Amazon.com Inc. in its U.S. business and is seeking similar deals with blue-chip tenants in London.

Some companies have as many as 600 people in WeWork sites, McKelvey, the chief creative officer, told Bloomberg in an interview in July. “Our approach appeals to companies of all shapes and sizes,” he said, discussing a plan to expand rapidly in Latin America. The chief creative officer also described WeWork’s approach to growing quickly.

“To build out locations is a challenge,” he said. “But we came out with a very sophisticated platform of how we manage that whole process and it allows us to run it like a software development process, and it gives us a lot of confidence in our ability to execute.”

In WeWork’s defence, Softbank invested $4.4 billion in the company, which is what established the $20 billion valuation. While that is reassuring, the story behind Softbank’s investment is bizarre and doesn’t inspire confidence in WeWork’s prospects.

Before the deal was announced SoftBank Vice Chairman Ron Fisher -- who led the investment -- met with executives at IWG Plc, a competitor with a much lower valuation and more than 10 times as many sites, people with direct knowledge of the matter said. The meeting was held to better understand the temporary office business model and address the investor’s concerns over WeWork’s valuation, they said.

IWG, in its former incarnation as Regus, filed for bankruptcy protection for its U.S. business in 2003 after it expanded too rapidly in the dot-com boom. IWG has a market value of just 1.8 billion pounds despite having nearly 3,000 locations worldwide compared to WeWork’s 235. More recently, the Swiss company has seen the value of its shares drop almost 40 percent since Oct. 19 when it issued a profit warning, citing in part weakness in the London market.

IWG is “the same business, the returns are the same and there is no difference -- there’s no alchemy in it,” CEO Mark Dixon said in an interview about half-year earnings, comparing his company to WeWork.

Some old hands in UK real estate are pointing out how WeWork’s expansion across London is merely transferring risk, not reducing it. Indeed, by bidding up for office space, WeWork is taking on the risk previously in the hands of landlords, since it needs to rent out the office space. The CEO of the UK’s largest REIT, Land Securities, noted “You are effectively transferring risk from a landlord to an intermediary, that space still needs to be let out.”

Meanwhile, the jury on WeWork’s rapid late-cycle expansion is still out and we sympathise with the tone of the feedback reported by Bloomberg. Either WeWork is going to blow-up, or it’s the work of genius. If  pushed, we’d probably side with the former.

Despite the risks, WeWork has its backers in the London property market. “I hear people say it is going to blow up any minute now, but they have got major investors,” Tony Gibbon, founder of broker GM Real Estate said at the Bisnow event. “People question the valuation but so what, it is a considerable scale and it is a trend that isn’t going to disappear.”

“There are clearly risks associated with the speed of expansion of WeWork,” Toby Courtauld, CEO of London office landlord Great Portland Estates Plc, said in an interview. “It is probably too early to call whether that’s a systemic problem or in fact is a fantastic call by them.”

Comments

Endgame Napoleon Yukon Cornholius Fri, 12/08/2017 - 12:56 Permalink

Speaking of call centers, where inside salespeople often engage in a lot more unproductive bullying and absenteeism than making call after all after call after call to meet the sales quotas, not that meeting quotas does you much good in most of these unprofessional-to-the-max workplaces, where social-life issues, like being a fellow back-watching mom, dressing up for the Halloween dress-up day or participating in the baby-mommy-look-alike-bulletin-board-decorating contest, are more important than generating new business or retaining accounts.

You could do outside sales and be free of the idiotic, crony absenteeism gangs. But it is often just straight commmission. Many people lack the spousal income to provide a steady stream of money and the house to do all of that calling in. Many are now forced to live in multigenerational housing or with a bunch of roommates in the the case of young, unattached people.

But that place does not look at all friendly to that type of sales work. It is an open space, where, no doubt, the people engaged in quiet, contemplative work would object to the repetitive and dogged amount of noise required to successfully cold call, much less the even noiser calls to service the accounts. There is a reason why they often do it onsite.

Given what most freelancing projects pay, it is also hard to see how people justify paying rent for such a space. One of the things that offsets the low, sporadic pay of freelancing, with its twice-as-high SS taxation rate [15.3%, not 7.65% (like employees)] is the savings of working at home, including the lack of a commute expense and the extra clothings cost. That is part of the consolation for the low, irregular pay and higher tax burden.

Still.

Although these are counted in FAKE statistics as “jobs,” many, many, many onsite jobs are just part-time, churn or temp jobs, where the vast majority of workers have unearned income from spouses, ex spouses or monthly welfare and child tax credits up to $6,318. Their unearned income from government or spouses covers their rent and groceries, with a big infusion of cash at tax time to reward them for womb productivity instead of the quarterly tax burden that the self-employed often endure.

Hence the popularity of freelancing for those who are not paid by government to have sex and reproduce, regardless of the feasibility of covering their major bills that way. Since most of the so-called jobs do not cover a full range of household bills, either, WeWork can probably get quite a few new people who do not know the score signed up each month, hoping for an alternative.

In reply to by Yukon Cornholius

Laowei Gweilo JoeTurner Fri, 12/08/2017 - 11:23 Permalink

WeWork coming into Vancouver pretty strong, and they're looking to take on their second large space even before anyone is in their first large property space because Amazon came and snatched most of it up on a ... 2 or 3 year lease until their new building is. now they're going after the top floors of the 100ish year old Hudon's Bay building.I think it'll do well here because the combination demand for start-up or small business spave and comercial lease affordability. But it's really a city by city thing. They're trying to expand awfully fast.

In reply to by JoeTurner

Catullus Fri, 12/08/2017 - 11:24 Permalink

I toured a WeWork this week. It’s a cult. But it’s not a bad model
for consultants

My first question in my mind was: “if you can work from a couch in a common area, why can’t you just work from your couch in your house? Why is this on my p&l?”

Then “ok. Here are all these people in this place. They don’t work with each other. Just next to each other. What happens when one of them starts sexually harassing a co-locational non-employee? Is someone else’s employee going to approach me in my office about an off color joke about blondes? ‘Look, lady, you’re not my employee, get out of my office’”

My 50 something year old west Texas buddy who went with me: “uh oh. This looks like a freaky sex club”

Philo Beddoe Fri, 12/08/2017 - 11:35 Permalink

Reply to Catallus above. “if you can work from a couch in a common area, why can’t you just work from your couch in your house?Well, it is hard to walk around with a $5 coffee and spend half the day bullshitting with your cat. 

taketheredpill Fri, 12/08/2017 - 11:35 Permalink

WeWork has exposures to:Office rent price cycle (Short-term)Shift to Gig economy (Long Term)They have expanded as rapidly as they have because of the second trend, not the first.  So they should be able to weather a property downtrend, less of an issue for them. Maybe. 

To Hell In A H… Fri, 12/08/2017 - 12:26 Permalink

I'm currently helping a friend look for office space in London, in a project I'm involved in at the periphery and the market is fucking crazy. Today most of these offices are owned outright with no mortgages etc, so they don't have to drop rents etc.Luckily the project I'm involved in can afford to buy their own building with room for expansion in mind. You try finding a substantial 3 or 4 floor Town house type/old library building in the Westminster and surrounding region of London to staff at peak 60 people with a budget of £28 million. The building is for a Think-Tank. so you need room to host debates, political speeches etc. £28 million won't buy you shit, renting is dead money.

I Write Code Fri, 12/08/2017 - 16:10 Permalink

WeWork is still private, so maybe they sold one share to some sucker for $20 and they have a billion shares.  So what.  They are buying long term and selling short term, the perfect formula for disaster.And if their basic business is selling pretend offices to unemployed millennials, I doubt its future.