The modern work environment has evolved and will continue to evolve in the coming years. About four (4) million Americans work from home. The number of small businesses who eschew traditional workspaces is on the rise. As these trends accelerate, the world of commercial real estate is adapting. Enter organizations like WeWork. Started in 2010, WeWork gained significant traction in the CoWorking market within a short period of time. Their business model provides shared office spaces for individuals and small businesses which are highly flexible and on demand.
WeWork’s meteoric rise has now been followed by significant financial difficulties. After proving that the concept of coworking is economically viable, they have also proven that hyper-aggressive real estate investment and predatory pricing may be short term realities. WeWork has had a massive impact on commercial real estate and those who use coworking office space. The question now becomes, how will this impact translate once the dust settles?
How WeWork Operates
As real estate professionals might imagine, the overhead costs associated with a giant coworking organization are staggering. It is estimated that the company currently holds lease obligations of $17.9 billion. That up-front investment presents huge risks for the company with the potential benefits being far greater. An initial IPO offering slated for mid-2019 was canceled amidst a myriad of concerns included inflated company valuation.
WeWork makes money the same way many commercial real estate investors make money: through office space rentals. The primary difference being that most clients who utilize WeWork office spaces are independent contractors, remote workers, or small businesses. These smaller scale, more individualized contracts come with a premium price, but with less guarantee to WeWork’s bottom line.
With all of this in mind, recent reports suggest that WeWork will put a freeze on additional real estate investments and focus on fundraising and fully utilizing their current assets. This move comes on the heels of major financial losses being reported in the early part of 2019. WeWork was valuated at $50 billion in early 2019. These new reports have lowered that valuation to approximately $8 billion.
Typical CoWorking Arrangements
Let’s examine a typical coworking arrangement to understand how WeWork rents spaces to clients. While no two agreements are exactly the same, here are some highlights of a common coworking arrangement:
- Basic coworking terms allow access to office space. At a minimum, coworking promises a desk, wifi, and access to the community spaces. One of the key benefits of WeWork is that their large network of commercial real estate means that members will likely be able to find a WeWork office space in a major city while traveling.
- Meeting rooms are available for rent or in some cases, just by appointment. Beyond just desks and workspaces, WeWork and other shared work environments will typically have board rooms available for an additional rental fee per use or on a long term basis.
- Renting by the suite or by the floor. It is important to note that WeWork is not only for independent contractors and very small companies. In fact, around 40 percent of WeWork members are affiliated with companies with 500 plus employees. Included amongst these clients are Facebook, Microsoft, UBC, and IBM. These organizations have the option to rent full suites, full floors, or even to build out their own custom workspaces.
- Flexibility of access. WeWork offers three primary methods of payments: unlimited access (long term agreement), membership access (pay-as-you-go), and event space (single event only). This focus on flexibility puts the power in the clients’ court.
How WeWork Changed the CoWorking Market
Recent estimates put WeWork as holding a ~69 percent share of all coworking leases in Q3 2019. This number is bolstered by the wide reach of WeWork, who currently holds the number one position in 9 of the 10 largest markets for flexible space growth. The three largest markets for WeWork are also the three largest markets for coworking overall: New York, Los Angeles, and Boston.
So what does the rise of WeWork mean to the coworking real estate market? There are three takeaways which may impact the coworking market:
- Coworking, as a concept, has grown exponentially and can be reasonably expected to continue to move in that direction.
- WeWork’s business model is adaptable and adoptable for other organizations to emulate.
- The collapse of WeWork is a cautionary tale within the coworking industry.
As WeWork continues to lose control of the market, real estate investors are eager to see just how much control they will retain and what competitors will rise to the occasion.
Coworking and shared workspaces are likely here to stay. WeWork has shown both the opportunities and the risks of investing in shared workspaces. It is also likely that the worlds of traditional commercial real estate rental and modern coworking arrangements will blend further and further until the line becomes hopelessly blurred. Coworking is still a burgeoning industry. We are waiting on a company or companies to find the correct formula to take advantage of a demand for flexible workspaces that will remain viable long term.
In the broadest possible terms, the outlook for commercial real estate remains bright. Even individuals with the power to work from home see the value in dedicated workspaces. And as independent contractors and small companies shift towards telecommuting, the real estate game does not need to be left in the dust.