WeWork has become the largest private occupier of office space in Manhattan, London and Washington, D.C. since the co-working platform launched eight years ago, and it has approximately 300 locations in 23 countries.
And while WeWork’s number of locations, memberships, revenues and valuation have all shown dramatic growth, the company’s losses have also mounted. This has led to split opinions on the company’s business model and future viability, and some of those were voiced at two recent real estate conferences in Toronto.
CenterSquare Investment Management chief investment strategist and portfolio manager Scott Crowe told an audience at September’s RealREIT conference that he loves WeWork and uses it in several cities. However, he believes its market value is overpriced.
Crowe thinks that disruptive and technology-dependent companies like WeWork may not be able to access the type of capital they are now in the future. Such companies aren’t going away, as they’ve changed the way people think and work and will continue to evolve, but there could be some contraction at some point soon, according to Crowe.
Private equity market supports WeWork
“As long as there is capital out there to fund WeWork, it doesn’t really matter if they’re cash flow-positive because they can still come in and disrupt the real estate space,” said Joshua Varghese, the portfolio manager of CI Investments’ signature global asset management division.
“They’re offering 100-per cent leasing commissions to agents to take tenants away from other buildings. They can do it because they’ve got these parent funders that are there. It’s a fine line between not being profitable enough to keep up and maybe eventually going bust and having the right capital to keep you going just enough to disrupt the entire sector.
“Regardless of what we think of WeWork’s valuation and its business model, I think there are key takeaways in terms of what’s working with its model and how we can take it and apply it to the existing real estate industry.”
Tom Dicker, vice-president and portfolio manager for 1832 Asset Management L.P., believes WeWork has a value proposition because its users are so passionate about it. He too, however, thinks that the company is overvalued.
“WeWork, to me, is the poster child for excesses in the private equity market. You’re taking a very capital-intensive, real world business model and confusing it with FAANG (Facebook, Apple, Amazon, Netflix and Google) and treating it in the same way.”
Creating value for WeWork
Barbara Gray, veteran analyst of structural disruption for Pennock Idea Hub, said WeWork isn’t a real estate play, despite signing long-term leases in a lot of locations, but a human capital play similar to LinkedIn. She works out of a WeWork location in Vancouver and claims she’s twice as productive as she was working from a coffee shop for several years, and that if fosters professional relationships and supportive communities.
Gray thinks WeWork should look at ways where it can take a percentage cut from brokering business relationships, since that’s where she believes much of its value is created.
“I think it’s an exciting time for real estate companies that own that footprint and own that user and are willing to invest properly into further leveraging their business beyond just leasing space,” said Varghese of existing property owners adopting aspects of WeWork’s model.
At September’s RealTrends conference, WeWork northeast general manager Dave McLaughlin said many clients just want to focus on what they need to be successful, and real estate isn’t one of those things.
“What WeWork does is we just make it easier for them to take space, sometimes on a monthly basis, sometimes on a little bit longer commitment, based on where they are right now.”
WeWork has started to outfit its spaces with sensors so management can better understand how they’re being used. If it’s not the way it was intended to be, the space can be reconfigured.
McLaughlin said WeWork is allowing landlords to be more agile while enabling end users to have more flexibility. Technology is helping drive this, he added.
“We’re taking 1.5 million square feet of space a month. It’s a very big number. The way we do that is we built this bottom-up technology system for how we review leases, how we move through diligence, how we manage construction. It is all technology-enabled.”
The office market is hot in Toronto, Vancouver and other cities where WeWork operates, and McLaughlin said the company will be even better positioned when things take a downturn since tenants will likely want to sign shorter term leases.
“We certainly don’t look forward to a dip but we also know that day will come. We don’t have a lot of anxiety about that. We think that our proposition is actually even more compelling in that environment.”
McLaughlin believes there’s still a lot of room to grow for co-working spaces, and he thinks that WeWork can partner with building owners to make that happen.
Flexible working could boost economy
Regus, a WeWork competitor, expressed a large degree of optimism in the future of co-working space when it commissioned a study that was conducted by independent economists, surveyed 16 countries and was released on Oct. 30.
The analysis revealed that a predicted boom in flexible working could contribute approximately $486 billion to the Canadian economy and $13.22 trillion to the global economy by 2030.
The industries in Canada projected to grow the most from flexible workspace by 2030 are professional services (21.2 per cent), business support services (20.8 per cent), public administration (17.7 per cent) and information and communication (8.9 per cent).