Commercial Basis’ explores how technology, branding and demographic preferences are shaping office and retail real estate in New York City. As these forces break down the barriers from where we live to where we work and shop, Lead Commercial Specialist Alex Cohen will assess the impact on real estate values and opportunities.
WeWork, the co-working office space firm founded in New York in 2010, now has a valuation of over $16 billion dollars based on private equity and venture capital funds raised. This valuation is comparable to the market values of Vornado and Boston Properties, two of the largest and most established REITS (real estate investment trusts). Unlike these landlords, WeWork owns no real estate. WeWork generally leases office space for long lease terms and builds out and subleases office and open desk space for contract terms of one month to a year. What explains WeWork’s ability to raise money based on this presumed sky high valuation?
- While we can assume WeWork’s initial market valuation if the company were to go public today would be $16 billion (or higher), there is no guaranty this valuation would hold up over time. For example, Groupon had a $17 billion valuation when it went public in 2011 and today has a market value of a fraction of that amount.
- Like some observers and analysts, I see WeWork as a “disrupter” that has created a new paradigm for the workplace – similar in impact to Airbnb, which owns no hotel rooms but is currently valued more than Marriott, and Uber which owns no cars but is valued at more than the market capitalization of Hertz and Avis combined. Like Airbnb and Uber, WeWork is capitalizing, in part, on the dominant impact of PDA technology and millennial preferences for how we live, work and play.
- The US (and multinational) workforce continues to shift from full time employment to contingent jobs, such as freelancing, temping, contracting or part time jobs. Currently 40.4% of the U.S. workforce has a contingent job and this is expected to grow to 50% in ten years. WeWorks greatest success is in curating appealing environments for these “unaffiliated” workers (or members) and for the small and growing firms they create.
- Without advertising or other marketing WeWork has achieved average occupancy rates of 98% for facilities open more than six months and typically achieves 40% profit margins as the density of a WeWorks office is nearly twice that of a typical dedicated office space. WeWork’s combination of flexibility (including the ability of its members to easily grow or shrink occupancy without capital investment), free drinks and snacks and a zeitgeist of collaboration, community and innovation have built a uniquely successful brand identity, largely through word of mouth of its members. WeWork leases space in older and loftier buildings and employs organic finishes and an overall chic industrial aesthetic that contrasts with the typical slickness and monotony of most corporate office space.
- WeWork currently has 70 spaces already under lease including several over 250,000 square feet, and its funding may allow it to grow by more than 150 centers per year (across the U.S., Europe and Asia) if a recession does not tamper with employment growth in the 24-hour, millennial-heavy markets the firm targets. In 2014 and 2015, WeWork was the largest lessee of office space in the United States. WeWork’s growth dwarfs that of all its competitors except for the office suite firm Regus, which has not been able to shake its outdated generic corporate office aesthetic. Limiting larger corporate occupancies (firms like Apple, Microsoft and Merck) to no more than 20% of its total membership, WeWork often turns away tenancies for lack of space.
Photo credit: WeWork