- 3 lessons about tech startup unit economics from WeWork’s IPO fallout
- WeWork’s IPO Will Go to Zero After the First Recession
- Demand Will Crater and So Will WeWork
- The We Company’s Business Model Is Destined to Fail
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- The rise and fall of WeWork -Why is WeWork's Valuation Falling? - In Hindi
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3 lessons about tech startup unit economics from WeWork’s IPO fallout
Read any of the many critical takes on WeWork’s now-shelved IPO plans, the company’s recently released financial statements, and news that it was slashing its valuation, and it’ll quickly become clear—the numbers paint a damning picture.
The coworking giant has $47 billion in long-term financial obligations while bringing in only $3 billion in revenue this year. The 10 pages of disclosures on cofounder Adam Neumann, who just stepped down under pressure from board members and investors, and his business dealings included the news of him leasing his own buildings to the company as well as his recently sale of $700 million in stock.
Recode’s Kara Swisher says the overstuffed, over-the-top document was a “good lesson in how not to go public in the age of the techlash.”
But perhaps the numbers that should be more central to the story are those underscoring the rapid and continued expansion of the overall coworking industry.
Last year, flexible space operators accounted for 13.4 million square feet, or 7.6 percent of total office footage leased in the United States in 2018, according to data from commercial real estate firm CBRE. And as of last month, that number has already jumped to 8.6 percent of total office space.
WeWork’s IPO Will Go to Zero After the First Recession
Despite WeWork’s size and media profile—it controls 33 percent of the total working inventory in the U.S., per CBRE—coworking shouldn’t be conflated with that firm alone. The evolution of the industry, especially since the Great Recession, has spawned a number of competitors, many of whom feel they can ride the wave of attention generated by the IPO yet stand apart from WeWork approach to financing and scaling.
“If you read the criticisms of WeWork a few years ago, it was that this was just a trend, a flash in the pan charging for offices near the ping-pong table,” says Jamie Hodari, CEO of Industrious, a national coworking company. “There’s little to no skepticism about demand for this product category.
It’s here to stay.”
Coworking is on pace to grow dramatically, says Julie Whelan, senior director of Americas research for CBRE, irregardless of the performance of WeWork’s IPO (and the problems others may see with the company’s liabilities, governance, and unsustainable burn rate).
While the firm’s big public offering will bring attention and scrutiny to the industry, the success of the industry at large will continue due to in large part to how it offers a response to the changing nature of the workplace.
Demand Will Crater and So Will WeWork
Industrious just announced a new $80 million round of funding and expects to be profitable next year, while another competitor, Knotel, said earlier this week it raised another $400 million.
“The changes to work behavior are happening so quickly, we’re not even noticing them,” says Whelan.
“The way we work now is vastly different than it was 10 years ago, that’s what’s driving this need for flexible space.”
The industry has posted consistent growth for years, and has lots of runway to grow, currently representing just 1.8 percent of office space nationwide. An analysis by JLL finds coworking grew at an average annual rate of 23 percent per year between 2010 and 2017.
Market penetration in major cities is also still very low, per CBRE.
In San Francisco and New York two of the busiest markets, coworking only represents 3.5 and 4 percent of total office space respectively, where many busy Asian and European markets have already hit 6 percent.
Additionally, tertiary U.S. cities, such as Nashville, Austin, and Charlotte all represent huge growth potential, says Whelan.
The biggest challenges in meeting growth forecasts for coworking companies will be a lack of available supply, not member demand, CBRE’s report argues.
The We Company’s Business Model Is Destined to Fail
This, in part, explains why large real estate companies have started their own flexible workspace options, such as Tishman Speyer and even CBRE, under its Hana sub-brand.
“You need to put the individual operator aside here, since it’s clear there’s demand in the market for flexibility,” Whelan says.
“If companies didn’t want it, we wouldn’t be seeing this growth. There’s demand, and there is profit that can be made off of this arbitrage.”
Corporate growth has barely begun
Whelan says there are two big markets for future coworking growth: serving small teams, which benefit from flexible locations, smaller spaces, and shorter lease teams, and working with large corporations, who continue to test the waters with coworking for satellite office or even space-as-a-service models, where a company hires someone to customize, manage, and operate their offices.
“The ability to lease on a short-term basis, with no capital spending, is getting corporate clients to think twice about how [coworking] can be a strategic part of their portfolio,” she says.
This has been a significant area of growth for WeWork.
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The company’s pivot toward serving larger corporate clients—via programs such as Global Access, which lets freelancers work from any available location in the world, as well as custom office management solutions for large offices and corporate headquarters—has given it more regular, recurring revenue.
In May, company reps told Curbed it booked $2 billion in committed contracts with corporate enterprise clients, which make up 40 percent of its membership.
That tally includes 38 percent of the Global Fortune 500. Now, per the filing, that commitment stands at $4 billion.
“Everybody seems aware of how rapidly our industry has grown in the last five years, but what is less well known is there’s a case to made that the rate of growth will accelerate,” Hodari says.
The rise and fall of WeWork -Why is WeWork's Valuation Falling? - In Hindi
“Most major occupiers, Fortune 500, or big Silicon Valley businesses, are still in the last days of their experimental periods with coworking, and increasingly using it for larger and larger teams.”
What happens in a recession?
Much of the criticism leveled at WeWork argues the startup hasn’t survived a recession, and with billions of dollars in lease obligations, it would have trouble weathering the storm.
Whelan says there will certainly be contraction in the market; of the roughly 700 coworking companies in the U.S. operating today, approximately 80 percent of them have just a single location
She also say that while you’ll see employment, as well as demand, drop in a recession, working can also offer unique supply as corporations again debate signing long-term leases. Can flexible office space be a cost-saving move or hedge when employment numbers may be fluctuating?
Whelan believes it’s not a question of if someone can figure out how to make flexible space profitable, it’s a question of who.
“This isn’t a theoretical shift, it’s a structural shift,” she says.
“That’s no matter who’s left five years from now. We need to figure out how you create a model that works.”