- Some analysts are viewing WeWork as more of a real estate than tech company. The coworking firm listed its risk factors in a recent SEC filing as it gears up for a possible initial public offering.
- WeWork outlined the risks of unexpected increases in labor and materials costs, lease negotiations in new markets, and the time-consuming process of compiling paperwork to recoup remodeling expenses.
- WeWork also noted its overseas expansion could increase risks of potential labor issues, and also introduce lease terms that differ from those in the United States.
- Read all of BI’s WeWork coverage here.
WeWork parent The We Company’s recent S-1 filing provided the clearest look yet at the coworking giant’s impressive growth and wide losses. WeWork highlighted its tech credentials and scalability— it used the word “platform” 170 times in the filing — but some analysts are viewing it as more of a real estate company.
WeWork, which boasts a $47 billion valuation and has laid the groundwork to go public this fall, said in the filing it has “disrupted the largest asset class in the world—real estate.” But it also laid out some old-school real estate issues it could face in leasing and then re-renting office space.
Tech companies going public with wide losses are far from unusual recently – just look at Uber, Lyft and Pinterest. Meanwhile, WeWork competitor IWG, a much older company which has roughly the same number of workstations globally, has a market cap of around $4.8 billion.
Adam Neumann, WeWork’s CEO, told Business Insider earlier this year he believes the company will survive a recession, and potentially even thrive. Nine-year-old WeWork has not yet been tested through a big downturn.
In the filing, WeWork said there is potential upside to a recession: lower real-estate related costs, based on an average 10% decline in construction costs for U.S. non-residential buildings during the last recession.
As of June 30, the company had some $428 million in outstanding construction commitments — which include binding construction and contracting agreements.
But in the risk factors discussion its S-1, WeWork also said that a downturn could result in it losing customers. Small and mid-sized businesses, as well as freelancers, could be “disproportionally” hurt, the company said.
WeWork enterprise customers make up 38% of total membership and service revenues as of the six months ended June 30, meaning the remainder is still largely tied to those smaller customers.
City concentration risks
WeWork’s urban concentration, which it said magnifies the risk of local conditions, is similar to that of older rival IWG (previously Regus) before the dot-com crash. Regus had concentrated its business in cities, following the tech workers and companies that fueled the economy’s growth.
Following the dot-com bubbles, Regus lowered costs by renegotiating and restructuring its lease agreements and added more locations outside of the largest cities.
Big tenants bring issues of their own
WeWork’s focus on adding enterprise clients already brings it closer to looking like a traditional landlord, even if WeWork is paying for the space every month. Enterprise clients, though more expensive to snag and to remodel office space for, sign longer-term leases that WeWork says can make its business more secure. The S-1 shows no change in the company’s push to sign more of those deals.
Big enterprise members can make up a large chunk of a particular location’s revenue, and WeWork noted that some of its offices are filled entirely by just one big customer.
Should one of those big customers be slow to start on their membership agreements, miss payments, or declare bankruptcy, that could slash WeWork’s operating cash flow from those locations, the coworking company said.
And filling vacancies after a big member leaves is also expensive. WeWork has to customize space to the needs and desired aesthetic of a company, and the spending per workstation can be higher than for smaller companies.
WeWork also noted that big customers often use third-party brokers — it expects to keep using brokers to add new enterprise customers, and expenses tied to broker referral fees may grow also.
And WeWork said it expects to use discounts to help lure longer-term commitments, which could have a “significant” impact on financial performance.
Lease negotiations, paperwork
WeWork said its ability to negotiate tenant improvement allowances — where the landlord pays the company for money spent on renovations – could be impacted as it keeps growing in markets where those arrangements are less common.
WeWork opened its first international office in London in 2014, and now more than 50% of members are international.
And in order to recoup those kinds of development expenses, WeWork noted that it needs to compile paperwork like invoices from their contractors, which it said is a time-consuming process.
The coworking company is also “actively pursuing” alternatives to “pure” leasing setups, and looking at other arrangements including management deals and participating leases, where the landlord handles build-out costs.
WeWork noted it has limited experience with negotiating these kinds of alternatives.
Its lease renewals can also be tied to “upward-only” rent reviews, where the rent for the next period is the greater of the existing lease and the going market rate. And that could be more of an issue in places where initial lease terms are shorter.
In the U.S., WeWork’s initial lease terms are on average about 15 years. But in overseas markets like Europe, Latin America, China, and Japan, local norms means the company may need to enter into shorter-term leases, WeWork said in the filing.
The problem of growth: decentralization
WeWork’s plan is to expand to new cities and acquire more spaces where it already has a presence. It said that would mean investing in “local infrastructure”, which includes spending more on IT, marketing, operations, finance and other functions.
Growth can bring a similar challenge to traditional tech companies, but WeWork’s strategy is different from tech companies that grow local infrastructure to continue to build or expand the products they already offer.
WeWork is looking to “decentralize and localize certain decision-making and risk management functions,” and allow different locations to increase their autonomy.
The problem of growth: new locations are expensive
While WeWork isn’t building many new locations from scratch, it renovates space in buildings before their own customers move in.
WeWork said it does not have long-term contracts with its contractors or suppliers, and is exposed to any unexpected increases in labor or material costs.
And it noted delays in opening can be costly — WeWork said that it typically opens new buildings at the beginning of the month, so a few-day delay can turn into a month-long one.
Real estate laws and regulations
Growth in new locations means the company also has to navigate patchworks of local regulations.
WeWork said that includes: “local labor laws, tax laws, environmental regulations and rules and regulations related to occupancy of our locations,” as well as local codes on things like design, construction, and safety.
Capital is the only barrier
WeWork also flagged the potential risk that competitors could beat them at their own game when it comes to real estate.
“Some of our competitors may also be better capitalized than we are, have access to better lease terms than we do, have operations in more jurisdictions than we do or be able or willing to provide services at a lower price than we are,” WeWork said in the filing.
WeWork noted strikes and work stoppages as another potential risk. For real estate and hospitality industries, labor relations are a regular feature of the game.
WeWork noted that some of its workers outside of the United States are represented by labor unions or workers’ councils, or may push for that in the future.
Labor issues can plague the intersection of hospitality and real estate, the place where many of WeWork’s lower-wage employees work. Thousands of Marriott employees around the nation went on strike last year for weeks, eventually winning concessions from the hotel chain. In 2010, unionized doormen around New York almost went on strike.