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WeWork, Past, Present and Future!
Whether it’s the potential for recession, expected post-coronavirus vacancies in office buildings, a reticence by employees to take elevators to a high floor or, simply the competition presented by other coworking spaces, WeWork’s survival strategy is fraught with risk.
On-the-other-hand, many of these same issues may also be the reason why the WeWork model will actually work. For example a company downsizing their leased space, may still want to offer employees the periodic potential for an office environment without the tome constraints of a lease obligation.
Bill Conerly, a Senior Contributor to Forbes, opines in the article ‘WeWork In The Covid And Post-Covid Coworking Race‘…
WeWork’s chairman says that the company is turning around. Mass layoffs and other cost cutting measures, as well as selling off parts of the business, will bring positive cash flow to the company in 2021. Marcelo Claure told this to the Financial Times.
The Covid-19 pandemic’s wide-ranging effects has led many company executives and workers to reconsider where they do their work, and WeWork could well be the beneficiary, with the right capital and valuation. But competition is easy in this area, so we will have a horse race.
To understand WeWorks’ business model, think of a large grocery store chain. It buys bananas by the ton and sells them by the pound. If the bananas don’t sell promptly, they never get sold. WeWork is like that. It leases office space by the acre and then sublets by the foot. But if there’s no tenant for the space this week, the sales opportunity is as rotten as a brown banana.
WeWork’s business model contains more risk than Kroger’s, because it signs long-term deals for its space. A supermarket chain can cut back on its purchases of bananas when it sees demand going down, but office leases are typically fixed for years. Recessions pose major risk to WeWork, as we explained after the company’s IPO failed last autumn. In an economic downturn, tenants will leave the coworking site or downsize space usage, due to falling employment and cost-cutting. The business model still makes sense, so long as the company has reserves adequate to tide them over the soft periods. The risk is no greater—and probably even less—than other companies very sensitive to the business cycle, such as capital goods manufacturers and contractors.
Other companies already compete in this market, including Spaces (owned by Regus, a global property company). Office Depot/Office Max repurposed some of its retail floor space for coworking. Plenty of local companies also compete for business.
WeWork has scale rivaled only by Spaces, enabling them to secure corporate accounts. A major company with people located around the country, or around the world, would most likely prefer one coworking supplier than a myriad of local suppliers.
The Covid-19 pandemic puts WeWork and its competitors in a very favorable position. Businesses have learned that their employees can work remotely, but not everyone wants to work from home, or can be effective there. Many people like to go someplace where other people will be. Once health is more secure, lots of employees will want to work in an office environment. It may not be an open office, but a cubicle or private office will enable socialization at the coffee pot.
The Zoom experience shows us that some people don’t like to turn on their cameras. Although they are criticized for being rude, many of them prefer not to show a cramped, cluttered apartment or fixer-upper house. They may have family members who wander through the work area. These people may jump at the chance to go to a local coworking site. And local is more valuable than ever before. Heading downtown on the bus or subway risks infection more than a local commute in a car or on a bicycle. Going to the downtown office provides less value to the company when many colleagues are working remotely, either from their homes or their neighborhood coworking sites.
The future has a greater variety of work locations, even within one company. Some people will head into a central office. Others will take a 5-minute commute, by foot, bicycle or car, to a neighborhood coworking space. Others will work from home most days, but not all. Teams will, eventually, gather in person, but not every day. Once-a-week meetings and work-togethers will make sense. Having a dedicated space for that once-a-week meeting wastes money, so a coworking supplier will provide great value.
The proper valuation of a coworking company, though, will reflect ease of entry. Anyone who can sign a long-term lease can enter the business. Used desks and tables are cheap. A global network will be costly to build out, but small coworking firms can serve local companies by providing more flexibility.
The range of possible arrangements is wide. A downsizing corporation might turn over some of the space it has long-term leases on to a coworking manager. The primary tenant might reserve some space for Monday meetings, but allow the manager to rent out the space to other companies.
Networks of local companies may serve national or global clients. These will probably start small, with independent coworking businesses referring clients to colleagues in other cities. Consolidated billing will be an easy add-on.
WeWork has the head start in the coworking race, but look for more competition in the Covid and post-Covid world. High valuation of any coworking company makes little sense, but they can be good, solid businesses.
Bill Conerly – I decided to become an economist at age 16, but I also started reading my grandmother’s used copies of Forbes. After degrees including a Ph.D. from Duke and three years as a professor, I found my calling in the business world. I began as a corporate economist (PG&E, Nerco, First Interstate Bank) and then entered consulting, helping business leaders connect the dots between the economy and business decisions. I wrote “Businomics: From the Headlines to Your Bottom Line—How to Profit in Any Economic Cycle” to help corporate executives and small business owners understand how the economy impacts their companies. Side trips on this journey include co-authoring a high school economics curriculum, “Thinking Economics,” and earning the CFA designation (though I’m not an active charter-holder). I’m the longest-tenured member of the Oregon Governor’s Council of Economic Advisors and chairman of the board of Cascade Policy Institute. My friends and fans love their monthly fix of economic charts, a 60-second scan of the economy.
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