Written by Laurent Dhollande, CEO
WeWork’s bad press since their IPO fiasco is raising new questions for commercial office asset owners & managers:
- Is the WeWork story symptomatic of the Coworking industry?
- Should I take a pause before pursuing a coworking operator to move into my building?
- Is coworking inherently more risky than other uses?
- Should I develop my own coworking operation?
The answer to all four questions is an emphatic NO. Here is why:
1) In 2018/2019, coworking was responsible for 40% of the net absorption in large metropolitan areas in the United States. Coworking has been, by far, the fastest growing segment of tenants in the last 5 years. As an Asset Manager/Owner you want a piece of that business.
2) Large Enterprise Users are embracing coworking in a way they did not in the past. They already represent 25% of the demand for coworking today (vs. single digit 10 years ago) and that growth is accelerating. As a result, both JLL and CBRE are projecting that coworking will represent 20% to 25% of the use of commercial office space within 10 years (from less than 4% today). As an Asset Manager/Owner you want to service the needs of these large Enterprise clients, directly or indirectly, otherwise you may be left out.
3) WeWork was essentially poorly managed, as we learned after the IPO collapse. In the pursuit of exponential growth to justify a rapidly increasing valuation at each equity round, WeWork subsidized pricing, made questionable investments, diverted focus away from its core competency, presented opaque reports on its performance and strategy, and let its founder/CEO engage in questionable conflicts of interest. How is that for starters? These critical flaws were masked by the smoke & mirrors of a charismatic founder who did have the merrit to coalesce SoftBank and other equity investors to believe in his vision of the workspace. That vision included a design formula of WeWork spaces, and of the business and social communities they fostered, that was not without merit. The inorderly implementation of that vision is what ultimately went out of whack.
See this Life After WeWork article for more details. In the end, WeWork could no longer justify the colossal operating losses that these practices led to. Moving forward with a new management team and a new strategy, WeWork may become a more credible player, but not for some time. They first have to demonstrate profitability and transparency (i.e. a 180 degree shift from where they came from). It won’t be easy, operationally and culturally, but given some time, it may happen. Meanwhile, it would be reasonable for an asset manager to be extra cautious in the face of a WeWork partnership or tenancy.
4) Many Flexible Office and Coworking Operators are profitable, and have a solid track record. For example Pacific Workplaces has been profitable for over 16 years, and successfully weathered two recessions. We are not the only ones. A word of caution: raising money from private equity was easy in the last few years and WeWork was not the only operator with a questionable business model. This is not unusual for any new exploding industry. Many creative ideas end up falling flat on their face, but these spurts of creativity lead to new business models that eventually win the day. The coworking industry is going through that maturing process right now.
5) The WeWork episode will place a premium on well managed companies. How do you establish who they are? Look at their profitability and track record over at least 12 years to gauge how they fared in a full economic cycle. Unlike a high-tech firm, or even a law firm that can go out of business overnight, coworking operations of multi-location operators tend to stick. Or if they don’t, it’s typically because they were absorbed by a bigger fish. They do not typically provide strong collateral, but the best collateral is their operations themselves, often with hundreds of members who pay faithfully every month and don’t easily leave. Ask for the average tenure of their members as a way to gauge how well managed they have been. Pay attention to Google, Yelp, and Trustpilot ratings. It’s important because coworking is a service business, and, provided a large number of reviews, it is very difficult for anyone to artificially inflate the ratings. You will notice significant differences across operators. See this comparison of Pacific Workplaces and Regus average review ratings as an example (scroll to the bottom of the page to view the comparison chart).
6) Managing the user experience well requires having developed a deep experience in community curation and event management. Landlords and property managers can be very good at managing buildings, but managing customer experience is an entirely different ball game. As a Landlord, don’t try to do it yourself, but rather partner with operators that can perform the stuff that is beyond your core competency. It is easy to break down a large empty space into small private offices, team rooms, open coworking areas and meeting rooms; throw in furniture, a decent technology environment, and to provide access to the space under flexible terms. But that’s not enough. Without customer support, well thought through design, and community curation adapted to the profile of each member, the coworking space can quickly become a flat commodity. You will notice significant differences between operators. Providing community events & curation that go far beyond throwing a weekly happy hour party is important. Ask for the operator’s calendar of events. Successful operators know how to do this well, which ties back to high retention rates (and higher profits).
7) How to structure a deal? Once you identify the right coworking partner for your commercial asset, you can consider different options, including:
- Management Contracts, if you want to retain total control of the operation
- Joint Venture or participating leases, if you want a share of the upside
- Traditional Leases
Remember that coworking operations can be very TI intensive. A standard lease provides turnkey TIs. The operator will also likely ask for 6-10 months of free rent on a 10 year lease to help with the ramp-up of the operation, and will typically get it in most markets. This means that whether you sign a traditional lease or not, you are making a significant investment in the coworking operation. This is why we recommend you do consider creative deals that involve a share of the upside. Even if you represent a REIT, and are limited with the amount of service revenue you can generate, deals can be structured in a way that you can get a share of the upside without breaking any rules. Also remember that the TI investment in a coworking operation requires more capital upfront from the landlord than many alternatives, but less capital over the life of the tenancy. In Lisa Picard’s own words: “That business model is efficient. I’d much rather invest $100 of TI upfront on a 10 year lease, than $50 every 3-years on a more traditional tenant.” (Lisa is the CEO of Equity Office). Given the significance of the investment, choosing the right partner matters a great deal.
WeWork was a bad apple, but their story is no indictment of the entire industry. Life in the coworking industry goes on. See the “Life after WeWork – Now What?” article for an interesting reflection on the mega coworking trend that will be unaffected by the WeWork fiasco. Coworking growth is at an inflexion point and may experience an even greater rate of growth due to the fast growing demand from Enterprise customers that value, not just flexibility, but also freedom of choice for their distributed workforce, and a deep user experience that a well managed coworking concept will give them.
If you are interested in contacting Pacific Workplaces, send us an email at [email protected]
About Pacific Workplaces
Pacific Workplaces (PAC for short) are great flexible offices and coworking places, with a wide range of part-time and full-time furnished office spaces including virtual offices, private offices, open coworking and mini-suites, in a shared infrastructure environment, with curated communities that maximize networking opportunities and serendipity. Members have access to meeting rooms, coworking areas, business lounges, VoIP telephony, phone answering services, IT support, admin support, an online legal library, and preferential access to a network of nearly 1,000 touchdown locations worldwide, under a pay-per-need hosted model PAC refers to as Workplace-as-a-Service. Most of the PAC centers are located in Northern California and all are operated by PBC Management LLC under the Pacific Workplaces, Enerspace Coworking, and NextSpace brands.