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A WeWork office in Herzliya, Israel.
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WeWork, home to freelancers and startups, is taking coworking corporate

New financial results show the global office space empire increasingly focused on custom offerings for big business

Every week, we get one step closer to the WeSingularity. The sprawling WeCompany, the recently created parent company of coworking giant WeWork, continues to expand and seems poised to enter every single aspect of its customers’ lives.

What other postmodern corporation, serving more than 400,000 members in 27 countries, has made investments in office space, retail, housing, preschools and college campuses, food startups, and a wave generator for inland surfing?

Early in the WeWork’s existence, co-founder Adam Neumann described his ambitions for the startup as a “physical social network,” something WeWork seems to embody more and more with each new addition to its mission.

Though the company has maintained its you-can-make-it-if-you-hustle-harder ethos, WeWork has also become increasingly focused on large corporate clients, not just the freelance creatives for whom kombucha on tap is a desirable perk. At a time when WeWork’s core business is rapidly expanding—the company recently became Manhattan’s largest office tenant last fall and wants to grow its 10,000-person global workforce by 6,000 new employees in 2019—it’s also continuing a strong pivot toward servicing corporations.

The Nashville WeWork Tower near the Cumberland River downtown.
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The strategy, which includes building and managing entire offices for Fortune 500 companies, is akin to Airbnb seeking out the business-traveler market. WeWork made a name for itself flipping C-class office space into cool hangouts for budding entrepreneurs, and it has moved up the value chain right at the moment when corporate America is hungry for flexible spaces and more engaging offices.

“This represents a shift in real estate from a simple commodity to a consumer product,” says Scott Homa, senior vice president of U.S. office research for JLL, an international commercial real estate firm. “You used to go into the market looking for a warm, lit shell you could occupy in nine to 12 months. Now, it needs to be a much more immediate, consumer-friendly, consumer-centric product.”

WeWork has long been criticized for its large debt load; Vanity Fair called it “a $20 billion house of cards” while the Wall Street Journal said it was “fueled by Silicon Valley pixie dust”. The company has also been taken to task for its extensive number of long-term leases, leading many to accuse the “insanely overvalued” startup of simply playing office space arbitrage. When lead investor Softbank downgraded a significant investment from $16 billion to $2 billion, many read that as a sign of WeWork’s weakness.

It’s also true WeWork has yet to become profitable. Its final 2018 financial results, released yesterday, show that annual revenue more than doubled, to $1.82 billion, even as losses nearly doubled to $1.93 billion. The company would argue, as any good startup (and many of its peers contemplating IPOs) does, that this is due to a rapid—and healthy—period of expansion and investment, one expected to continue as investor confidence has meant the company has $6 billion cash on hand and a valuation of $47 billion. WeWork and coworking at large are also rapidly growing, and in many ways, shifting toward a more sustainable, less risky core business model.

Many see coworking and office space evolving, in tech parlance, toward a space-as-a-service industry.

“As fast as the industry has grown over the last two years, it’s easy to underestimate how much faster it will be in the next two years,” says Jamie Hodari, CEO of Industrious, another coworking-space operator that works with big companies.

“Every Fortune 500 company is in the midst of testing this out. Now that companies have really experimented with coworking, measured their outcomes, and seen how it works with a small team, over the next few years, they’re going to double down. This is an outsourcing industry. Companies really should just hand this off to a third party.”

Dave Fano, WeWork’s chief growth officer, believes that, in the long-term, companies won’t own and operate their own headquarters. Big firms will still want a splashy office in the urban core with a sign on top of the building. But why would you deal with the hassle of management and set-up, when WeWork and its competitors can achieve economies of scale and deliver a better experience for less money?

Bigger business, smaller risk

WeWork’s corporate pivot gives the company more stability through guaranteed revenue, as well as more funds for long-term expansion, which it’s been investing in high-end spaces in New York and London. It’s gaining scale in a way that many other coworking companies can’t match.

For instance, a large corporation looking for a new headquarters in Los Angeles needs office space that may eventually hold 1,000 or more employees. WeWork now has locations that measure 300,000 square feet or more, or take up entire buildings, and can service thousands of employees.

For small entrepreneurs looking for a coffee shop replacement, a few days a week at a WeWork is flexible. For massive global corporations, a three-year lease is considered flexible, compared to the standard decade-plus contract to take over new space.

“We’re an elastic solution for real estate,” says Fano. “We offer a strategic advantage on both ends.”

WeWork’s Chelsea HQ
WeWork

Enterprise clients, defined as clients who work for a company that employs more than 1,000 people, now make up 32 percent of the WeWork’s membership, and the company recently launched a service for mid-sized companies that is expected to attract 70,000 members by year’s end. The Powered by We spaces, a white-label service where WeWork runs a branded office for a specific corporate client, have grown considerably. The company now runs more than 220 such projects for firms like Sprint, UBS, IBM, Airbnb, Amazon, and Standard Chartered.

New corporate clients have significantly shifted WeWork’s lease portfolio; as of September 2018, the average agreement with a new tenant is 21 months, up from an average of 7 months in 2017. These agreements are also beginning to impact the company’s bottom line, and make what many see as a VC-funded expansion spree more sustainable. As of the fourth quarter of 2018, WeWork now has a $2 billion revenue backlog, due in large part to corporate clients. According to business analysts at CB Insights, “If [WeWork] continues to add co-management deals that cater to large corporations, it has a strong shot at living up to its sky-high valuation.”

“If they participate in delivering an end-workplace experience, it’s like going from being a butcher to being Peter Luger [the famed New York steakhouse],” says Industrious’s Hodari. “You’re moving from delivering a raw product to delivering the finished product.”

WeWork has already positioned itself as an option for remote workers and sales teams, and has become an important office provider for the diverse domestic workforce of companies like Expedia and Microsoft.

Now, with more and more locations across the globe, WeWork wants to do the same for global consultancies and multinationals. WeWork’s new Global Access product, which gives a member access to desk space in any WeWork location around the globe, has already signed up “tens of thousands” of workers since being introduced last year (the company declined to be more specific). That growth is in line with overall international expansion, which grew to 43 percent of total company revenue in the last quarter of 2018, up from 28 percent in the first quarter of 2017.

“We’re a very physical business, so we kind of get measured in this physical way,” says Fano. “But we truly want to be a global, account-based platform. And large, global enterprises love the idea of kind of one-stop shop. We’re trying to think of the lifetime value of these kinds of accounts.”

Corporations have been reluctant to discuss how much they’re turning to WeWork to provide longer-term spaces and bespoke offices, beyond the shared public spaces we typically think of when we think coworking. Pinterest, the social media juggernaut set to go public later this year, is a big user of WeWork space, but beyond confirming that they “work with a number of real estate providers, including traditional leases, coworking spaces and hybrid solutions,” a spokesperson didn’t have anything more to add.

The scale and service the company hopes to achieve comes at a time after corporations, many of which have dipped their toes into the coworking pool, are about to dive-in headfirst. Liz Elam, founder of Global Coworking Unconference Conference, says that both AT&T and Verizon have readily adapted coworking.

The growth of coworking is exceeding that of the office space market in general, according to JLL’s Homa, because it’s not merely cannibalizing space, but offering such a compelling proposition that less traditional office space is being built. Large corporate accounts make up 30 to 40 percent of industry revenue.

“These operators are providing market efficiency in a way that we haven’t had in the past,” he says.

WeWork’s coworking space in Salesforce Tower in San Francisco.
WeWork

Industrious’s Hodari says it shouldn’t be surprising that corporate accounts have become such a big part of the coworking market; half of his clients are larger companies. It’s roughly the same split as the American workforce at large. And WeWork wants to serve everybody.

From the building to the block

As WeWork’s membership base grows in top global markets—19 cities currently boast 5,000 or more members each—the company is beginning to look at another avenue for expansion, offering services beyond just a single building or office.

Fano calls it “programming at the urban scale or neighborhood.” As WeWork reaches critical mass in places like Lower Manhattan, the question arises: What additional services can it add beyond simply providing space? Can WeWork start providing programming and cultural events? The acquisitions of MeetUp and Flatiron School, which focuses on coding, points to more investment in this area.

WeWork’s investment in data analysis and design technology to maximize existing space is well-known. An in-development booking feature for meetings works like airline ticketing: every night, an algorithm looks at all of a building’s planned meetings for the following days, and then re-arranges every gathering to maximize spatial use across the entire location.

But the company’s scale, and copious amounts of data, have inspired the company to look past offices and think about neighborhoods and placemaking. Last week, they hired designer Di-Ann Eisnor and Dror Benshetrit as part of a larger future cities initiative.

“We now are starting to have enough scale and data to really understand neighborhoods, and what is it about them that makes them more conducive to work,” says Fano. “I’m reluctant to use the word urban, but we’re definitely talking about densified, working neighborhoods.”

It starts with picking locations. According to Shiva Rajaraman, the company’s Chief Product Officer and technology lead, the company has proprietary deal-tracking software that evaluates potential buildings and helps determine membership prices for new locations. Spaces are evaluated with the company’s proprietary One-Click Pricing Tool, which uses the large WeWork data set to help the company figure out the right value for a specific location on opening day, based on factors such as accessibility to transit and other locational data points.

At WeWork’s 85 Broad location in Lower Manhattan (disclosure: Vox Media’s New York City office is in the same building), the company has opened a private coffee shop and a large meeting room that’s been used by financial firms for large meetings of up to 100 people. Fano says he doesn’t want to oversell it; it’s really just a large meeting room. But the concept has much larger implications.

With the density of spaces WeWork has in Manhattan, opening service like meeting space and coffee shops lets the company “diversify its experiential offerings.” Fano describes it as an elastic physical platform. Not everyone can just set aside an entire floor for a quarterly conference, but they can potentially access one with a WeWork account.

“We can help you identify your purpose, or fulfill your purpose, as a company or an individual,” says Rajaraman. “There’s probably a series of services that really depend on having physical space to achieve that.”

Do clients drop WeWork in a downturn?

The potential impact of a downturn, comes up as a consistent critique of WeWork’s business model. With numerous leases lasting a decade or more, how will the company respond if tenants suddenly find coworking to be an unaffordable luxury? Will it be over-exposed in the event of an economic downturn?

Recently, it was suggested by the New York Times that WeWork was, in effect, too big to fail. If the economy goes south and tenants leave, it can simply renegotiate leases, since landlords won’t want to push out a guaranteed moneymaker.

“Adam Neumann is charmingly, refreshingly open about his plan to fuck everyone,” real estate developer and writer John McNellis tells Curbed.

(“People are going to say what they want to say,” says Fano. “We’re a company with integrity, that’s pure speculation, and I don’t think we’ll do that.”)

But, as WeWork moves up the value chain in the office world, graduating from freelancers to providing Fortune 500 headquarters, its liability, too, is changing. With more corporate clients signing multi-year leases, WeWork has more revenue on the books that’s harder for big companies to renegotiate, according to JLL’s Homa.

With greater frequency, WeWork is becoming less of a middle man and more of a partner. With management agreements, WeWork doesn’t take a lease on a property, it gets paid a fee to manage a space owned by a traditional landlord. This arrangement, which the company has used extensively in China, Latin America, Europe, and Southeast Asia, has strict rules on foreign ownership of real estate and limits long-term liability.

McNellis calls this the Four Seasons model, because of the similarities between this setup and that of management deals negotiated for hotels.

“If they can move more space to this system, suddenly there’s a viable company here,” he says. “If WeWork says, ‘OK, we’ll take 50,000 square feet of your half-a-million square foot building, you put in the work, and we’ll manage it for a certain fee every year, plus a certain amount of the gross,’ then they don’t have to take any risk. And it makes sense for the landlord, because they get cash today, right?”

Fano says the company is constantly trying to be more aligned with landlords and try new management structures. The company just signed its first such deals in the United States in Detroit, with developer Bedrock.

With the expected demand for corporation-leased coworking spaces only expected to grow, more companies are entering the space, including landlords and real estate funds like Company, Blackstone, and Brookfield. CBRE, the huge global commercial real estate firm, will soon launch a sub-brand, Hana, focused on coworking. Hana’s first location is slated to open in Dallas in mid-2019, followed by a global rollout strategy that will seek to hit the top 25 global cities, with a focus on the U.S. and United Kingdom.

“CBRE manages 1 billion square feet of office space today, 2 billion if you count corporate facilities,” says Andrew Kupiec, CEO of Hana. “It’s a natural extension of what CBRE is already doing for owners and occupiers.”

Elam, the Global Coworking Unconference Conference founder, says there will only be more of this kind of joint venture between landlords and corporations seeking more coworking space. But the network WeWork has established with its global access program, and the expertise that comes with years of operation, may be hard to match.

“It looks super-easy from the outside, but as somebody who’s operated in my own space, this is not simple,” says Elam. “This is adult daycare,” she adds. There are a lot of personalities, a lot of feelings hurt. I know everybody thinks it looks easy. I’m here to tell you, it is not.”

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