When WeWork doesn’t work – what next for the property sector?
The WeWork story was an easy one to fall in love with.
Last year I moderated a Property Council of Australia event at which WeWork presented – and I’m not too proud to admit that I was quite taken with what the co-working disruptor was selling.
On face value, WeWork ticked a lot of boxes. Already the biggest private tenant in London, Manhattan and Washington, it was establishing a foothold in Australia and was soon to set up shop in Perth.
It seemed to offer something for both sides of the office leasing equation. For businesses, big and small, WeWork promised flexibility that traditional office tenancy didn’t, like the ability to scale up or down as circumstances changed, and leases that might lock them in for only months. For landlords, empty office blocks suddenly had a multinational tenant, often willing to pay above the market rate for long periods of time.
There was also something decidedly fun about WeWork – a promise to establish a sense of community at the office through shared space and funky facilities. Heck, WeWork offices in New York at one stage even offered unlimited tap beer for workers (eventually cutting that back to four glasses per person per day late last year!).
But the one thing WeWork appears to have been lacking – and which has been laid shockingly clear in recent weeks – is a business plan that would allow it to turn potential into something approaching profits.
Some of the numbers involved are hard to get your head around. While WeWork’s global revenue last year doubled to $1.8 billion, so too did its losses – tipping the scale at $1.9 billion. According to the Financial Times, WeWork lost $210,000 per hour in the year to March.
More recently, hopes for a $47 billion IPO initially gave way to a valuation closer to $10 billion, before the public offering was finally shelved altogether.
Meanwhile, founder Adam Neumann departed amid a flurry of controversy about his personal life and question marks over the control he exerted over the company and WeWork’s business structure.
All of this has made for fascinating reading in the press, but somewhat lost in the shuffle has been the question of what happens to all the building owners if the WeWork bubble totally bursts.
According to New York University Stern School of Business professor and renowned author Scott Galloway – who gave a very interesting interview to New York magazine – there is a real possibility that WeWork will have to file for bankruptcy.
Oddly, this may not result in real ramifications for WeWork in its totality, as it’s been reported that the company could have been split into separate, geographically-orientated special purpose entities which can declare bankruptcy in their own right.
But for WeWork’s landlords, the ramifications are likely to be more problematic.
Many of them have undertaken substantial improvement work on their buildings on the assumption they had a tenant (WeWork) for the next 10 years. Finding replacements is unlikely to be easy, nor is it likely to deliver the same type of yields.
And the nuances of the WeWork tenancy framework – the flexibility around size and duration that attracted so many sub-tenants – can’t just be seamlessly wound back into more traditional real estate models.
There may not be major shockwaves in Perth and Brisbane, where WeWork has only two and three current tenancies respectively, but in Sydney (10 properties) and Melbourne (five) a collapse would be more keenly felt.
In Manhattan and London (both 50-plus properties), the impact would be significant.
However, in the Perth market, the withdrawal of WeWork wouldn’t mean the end of co-working opportunities.
Spacecubed led the way, opening Perth’s first co-working space back in 2012, with others joining the field of play as demand for flexible space grew.
Last month, Amsterdam-based Spaces opened its 3000sqm Spaces The Wentworth on levels one and two of the old Wentworth Building in the Raine Square precinct, with features including a business club, cafe, lounge area, guided meditation and yoga classes in addition to office space.
Last week saw Dexus plant its flag with the launch of Dexus Place at 240 St Georges Terrace, with the country’s biggest owner and manager of commercial real estate devoting Level 16 of the Premium grade asset to flexible co-working space – offering a business lounge, event spaces and “dynamic desking”, with the latter giving businesses the option to take a desk by the day, week or month.
The premise of WeWork offered so much promise. While the future for that company may be clouded, what is clear is that co-working is here to stay.
Ruth Callaghan is Cannings Purple’s Chief Innovation Officer and a leading media strategist with more than 20 years’ experience in corporate communications in the property space and in journalism. Contact Ruth.
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