Why WeWork’s Business Model Is Risky | WSJ

Why WeWork’s Business Model Is Risky | WSJ


– [Spencer] WeWork’s IPO is
coming as soon as next month. – Investors might rightly be wondering if it’s a bridge to nowhere. – This is, obviously,
an unprofitable company. We’ve seen a number of these companies come to market this year
with actually mixed results. – A lot of numbers are swirling around, but if you really wanna understand
WeWork’s business model, look at this one, $47 billion. That’s how much the
company is on the hook for in lease obligations leading
up to its public offering. It says a lot about how the company works and why some investors
are eyeing the risks. (pleasant piano and orchestral music) You probably know WeWork,
which recently changed its name to The We Company, as an office space with a specific aesthetic. You know what we’re talking about. The glass walls, plants, cafes, mid-century-style furniture. WeWork’s basic business model
is to lease large spaces, transform them to look like this, and then rent them out to
individuals and companies at a higher price. – [Spokesman] Our software
finds the best buildings in the best locations.
(dramatic orchestral music) Before we even begin construction, we build full 3D models to make sure we’re creating environments
that allow members to thrive. – [Spencer] As of 2018,
the company operated more than 35 million square
feet of space globally, and it currently occupies 528 locations in 29 countries around the world. (dramatic orchestral music) – [Spokesman] Speed is important, because on average, we
open two new locations every single day.
(dramatic orchestral music) – To cover the costs of
the renovations and leases, WeWork charges individuals and companies through four different membership options. For one of the cheaper plans, a member can bring their laptop and sit in a common area
if space is available, and for the most expensive plan, companies can rent out full offices, suites, or entire floors. WeWork also offers a service
called Powered by We, full custom build-outs
for larger companies. So why are some analysts
and investors skeptical? Well, some are concerned
with those lease obligations. When WeWork signs a lease
on a building in the U.S., they commit to an average of 15 years, but WeWork’s members only commit
to an average of 15 months. WeWork’s obligations top $47.2 billion, but its customers have only signed leases on $3.4 billion worth of space. Recently, the company has started signing more long-term clients, but still, with 528 locations, that’s a
lot of time and space to fill. It’s unclear how much
space WeWork needs to fill to break even, but the
company’s occupancy rate fell from 84% to about 80%
in the final quarter of 2018. The company said the drop
was caused by expansion. New offices traditionally
take up to 18 months to fill, but it’s unclear what would happen if suddenly fewer
start-ups and freelancers were looking for workspace, which could happen in
an economic downturn. It’s also unclear what would happen if existing tenants started to default. One place investors are
looking for precedent is International Workplace
Group, formerly known as Regus, a Swiss company with a similar
business model to WeWork. During the economic
downturn in the early 2000s, IWG’s U.S. unit filed for bankruptcy as its revenue fell but long-term
leases remained in place. WeWork has said it’s
flexible business model would help keep it safe in a downturn. The company’s rapid expansion has helped it stay out
in front of competitors, but some investors are
concerned that could change. That’s because WeWork’s business
model is easy to replicate. The company has filed for
some industrial design and furniture patent protections, but anyone with enough cash can lease out industrial office space
and flip it, and they have. A New York-based rival, Knotel, hit an estimated $1 billion valuation following a recent round of funding, and in 2017, Blackstone
acquired a majority share of The Office Group, a flexible workplace provider in the U.K. Investors will have to decide if WeWork’s size and
flexibility are enough to protect it in a period
of economic uncertainty. (pleasant mallet percussion music)

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About the Author: Oren Garnes

19 Comments

  1. WeWork is a Lease for Lease real estate business model or in the UK we call it Rent to Rent. Not ideal for long term investment.

  2. They provide little to no economic benefit. In their own words, may never reach profitability. Questionable business practices (we work bought new name from own CEO for 6 million).

    This company is going to get slaughtered

  3. We were optimistic about Uber's IPO once.
    Can we say History repeat itself or High Risk High Return principle fits here??

  4. Actually basic model of wework is flawed…example, you have 500 dollar, you want to invest this money into some sector, most effective way of investing and it will minimize the risk is ….after investing you should have real asset in your hand….you should have a solid commodity… some land, some stocks, something solid…..simply rent out property or deallocation of property, is very risky for the stack holder…..and risk is not worthed…..that is why you see,,, initial rapid growth(bcoz of rapid expansion)…but now it will become stagnant (this kind of business needs consistent and steady expansion, which will become difficult at this size, there are alot other factors…etc)….and later it will be acquired by some big property firm…..another factor is backfire from public….bcoz when you lease out property….you basically degrade it market value in longer run….bcoz of lack of consistent flow of cash…..and in some cases keep the properties empty… …which is not good business to the surrounding or neighbour area…..hence will face backfire from the public………so on on…..

  5. this is what happens when companies spend money they dont own. The world needs to stop with these practices. If you dont own the money, you dont spend it. clear and simple

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