It’s hard to talk about budding subscription players, without mentioning a nine-year-old company, that at one point in 2019, was on the verge of a $50 billion valuation. WeWork, the SoftBank-backed community workspace company started by two visionary founders in 2010, at one point, occupied more Manhattan office space than any other company, renting 5.3 million square feet in Manhattan, and knocking the previous title holder, JPMorgan Chase, off its throne.
WeWork, was the hottest brand in coworking, spreading through the commercial real estate Zeitgeist like a virus. That is, before the actual virus hit. In 2017 alone, the company opened ninety buildings across the globe. As of Spring 2019, WeWork locations numbered over 600. The company had attracted over 260,000 monthly paying members since inception. In certain cities, WeWork was close to 100 percent occupancy, with prospective members waiting for vacancies. However, as the global pandemic has plagued much of the world, WeWork’s value proposition and its future looks dismal.
Since March 2020, many of WeWork’s members have left their offices in favor of work from home options. Both Adam Neumann, and Miguel McKelvey have departed the company they founded in the wake of a full restructuring. The co-working giant has announced plans to close locations, including its first-ever space at 154 Grand St. in SoHo. Moreover, WeWork is hoping to get out of 115,000 square feet of space at Madison Avenue space that it committed to only two years ago while at the same time, attempting to dodge a class-action lawsuit from investors over its botched initial public offering. It’s a far cry from the WeWork we once knew; a brand that had nearly perfected what a co-working space should be.
WeWork’s business model isn’t unique. In fact, the idea to create shared space for profit was brought to the mainstream in 1989, when Mark Dixon launched Regus, a company that offered tenants community office space complete with maintenance, staff, and a flexible lease term. When Regus went public in October of 2000, it was valued at £1.5 billion and was considered the first large-scale shared office space pioneer. But, like many first movers, Regus fell into unforeseen business ditches. Namely, the first big dot-com bubble burst, which saw many tenants vacate Regus offices around the world in favor of more affordable options like home-based set-ups and coffee shops. The parallels to the current recession look all too similar. After a near collapse, Regus did re-emerge from bankruptcy and remains a formidable player in co-working. Yet, the fate of the industry going forward is dependent on a black swan; the Coronavirus, or better, the speed of an effective vaccine.
WeWork’s MO, much like that of Regus, is to sign long-term leases, renovate, and then rent out desks and closed-door offices to members on a per-month basis—taking enough margin along the way. On the consumer side, the no-lease, subscription-based model provides WeWork members with a low-risk option to get access to office space for as low as $500 dollars a month.
Critics of WeWork suggest the company is now facing a similar fate to that of Regus. And in many respects, the flag raising is warranted. At the beginning of 2019, WeWork had about $34 billion of lease obligations, was nowhere near profitable, and was shown to be losing about $2 billion a year. This was before its mass member exodus as a result of COVID-19.
WeWork has spread some of its corporate risk across different entities. Rather than holding each property under WeWork’s main corporate entity, the company has used corporate shelters, which it calls “special-purpose entities,” to isolate the parent company from a possible blow-up. The firm had also inked some lease deals that split profits 50/50, where incumbent landlords paid for the build out in the hopes of revenue share upside. Moreover, the firm did diversify its member base in recent years. Initially, 95 percent of WeWork occupants were start-ups (the segment most likely to fail in business), but the pie is now sliced three ways—only a third can be called start-ups, while the balance is equally split between small-to-medium-sized businesses, and corporate-enterprise-level clients like Shopify, Microsoft, HSBC, Samsung, Lyft, and Facebook – a client list that presumably will weather the economic storm without tossing aside lease obligations.
It’s hard to believe that at one point, investors who were willing to put money into WeWork at a $40 billion valuation, a number that put the worth of each of the company’s members at about $156,250; by comparison, Regus’s members carried a value of $11,000 pre-pandemic. If we look at WeWork’s customer base, we can say with confidence that the company deeply understands who it’s serving. Millennials (one key customer segment), are socially conscious, environmentally responsible, and hate the idea of commitments, contracts, and lock-ins—which explains their contempt for leases peddled by commercial landlords. As for Gen X, another big WeWork consumer cohort, a recent study claimed that 67 percent of Gen X leaders are effective in “hyper-collaboration,” and value the freedom to innovate and the flexibility to manage their work/life balance. Will these segments return to the co-working world now that many have managed to create a safe working environment from home? The WeWork value proposition is all about community, collaboration, and social connection – a triad that is completely antithetical to controlling the spread of the virus. Forget 2020, and maybe even 2021 for a moment. The bigger question is; will it ever make sense to go back to co-working?