Saving WeWork will be hard work

Frenetic growth under the company’s founder, Adam Neumann, may weigh it down for years

 

Even as WeWork was scrambling to secure a financial bailout last week, Sebastian Gunningham, one of its co-chief executives, made time to oversee the opening of Dock 72, an immaculate shiplike building on the Brooklyn waterfront that houses one of the company’s newest shared working spaces.

As Gunningham posed for a ribbon cutting with the building’s owners and a city councilman, WeWork’s expansive offices loomed over them – an embodiment of how the company overextended itself and now must try to make money after nearly burying itself in losses.

WeWork’s 220,000 square feet of space at Dock 72, about a third of the building, is far from full. The common area, offering spectacular views of Manhattan, was bustling on the day of the ribbon cutting. But it was sparsely used in the days before and after.

Some firms are moving in, but most of the private offices that WeWork aims to rent out to businesses were vacant Thursday. WeWork said the space was over 30 per cent occupied, roughly the industry standard for openings.

“It’s definitely pretty empty,” said Jurrien Swarts, who moved his startup, Stojo, which makes collapsible cups, into Dock 72 from another WeWork space in Brooklyn.

Including Dock 72, WeWork is expected to add about 10 million square feet of new office space to its bulging property portfolio in the United States and Britain this year alone. These locations, often built out at great cost, highlight the knife-edge economics confronting executives who are trying to save the company, which this week received a last-minute lifeline from SoftBank after being forced to scrap an initial public offering.

Frenetic growth

The frenetic growth under the company’s founder, Adam Neumann, may weigh it down for years and hamper the attempts to remake WeWork, which until recently was widely considered one of the world’s most valuable startups.

Those efforts will be overseen by Marcelo Claure, a top executive at SoftBank, which agreed on Tuesday to take control of WeWork and invest and lend the company billions of dollars. That is on top of the $9 billion that SoftBank has already put into WeWork, enabling the breakneck expansion under Neumann.

SoftBank now wants WeWork to slow its growth, focus on its core business – leasing office space, refurbishing it and renting it to “members” – and devote its energy to major markets like New York and San Francisco. At a meeting with employees on Wednesday in Manhattan, Claure said he would focus on profits over growth.

He also said there would be layoffs, but did not say how many, according to four people with knowledge of the event. One WeWork employee leaving the office said she was on her way to a job interview. Several senior executives besides Neumann have already left the company or have said they were on their way out.

Claure, who was appointed WeWork’s executive chairman, must decide what to keep and what to excise. But stabilising WeWork will not be simple. Documents for the company’s initial public offering showed that WeWork was racking up huge losses and burning through billions of dollars a year.

One big reason for those losses is that WeWork is on track to add 9.9 million square feet of space this year in the United States and Britain, according to data from CoStar, which specialises in commercial property information. That is more than three times the space in Apple’s spaceship-shaped headquarters, and it is well more than the 6.3 million square feet WeWork added last year.

Dublin deals

In Ireland, WeWork remains Dublin’s biggest provider of “flexible” offices, with 425,000 square feet and a commitment to take a further 165,000 square feet. But the company this week pulled out of two deals for office space in Dublin, and walked away from discussions at a preliminary stage in relation to a third building in the capital.

Only two weeks ago, WeWork withdrew from talks with Hibernia Reit in relation to space at another docklands office building – Central Quay.

The retrenchment as the parent group battles for survival saw WeWork walk away from Clerys Quarter, the office development on the site of the Clerys department store in O’Connell Street, where it was due to take all 96,595 square feet.

Separately, it pulled out of a deal for 47,000 square feet of office space at Hibernia Reit’s Forum Building in Dublin’s IFSC.

Elsewhere in the city, The Irish Times understands that a potential plan by WeWork to rent a second block at Ballymore and Oxley’s Dublin Landings scheme will not proceed, with discussions ending at a “preliminary” stage.

A study by Goodbody analyst Colm Lauder last week said the group was paying €26 million a year to Irish landlords and will have commitments for up to €290 million over the next decade on the basis of the first potential break point in the contracts.

The company has offices in Charlemont Exchange, North Wall Quay and Iveagh Court and 5 Harcourt Road. And it recently announced that it was taking space in Central Plaza, the old Central Bank of Ireland headquarters on Dame Street in Dublin, which is being redeveloped by US property player Hines.

Community

The emphasis on community appeals to many WeWork members. Entrepreneurs say working in one of the company’s locations can offer the prospect of collaborating and meeting new investors and customers. Swarts, the Dock 72 tenant, said WeWork had been a huge help to his company. Through his participation in WeWork Labs, a service for startups, he obtained a $75,000 investment from the company’s venture capital arm.

“I feel no small amount of appreciation, gratitude and loyalty for what the WeWork ecosystem has created for the company,” he said.

But it is not clear whether even WeWork’s busiest locations are solidly profitable. In its securities filings, WeWork did not disclose the financial performance of its older locations, which would have had the chance to fill up and, in theory, prove themselves. International Workplace Group, one of WeWork’s biggest rivals and a publicly traded company, does provide such details.

Making money in the “shared space” business involves ruthless cost management, and a measured approach to growth, industry executives said. WeWork’s critics say it has had neither. While the company creates attractive spaces, these people said, it has spent too much doing so and will struggle to achieve average industry profit margins.

Mark Dixon, chief executive of International Workplace Group, likens WeWork’s approach to running a hotel where room service is free. “You might have a full hotel, but you just cannot make any money,” he said.

If some locations are hopelessly unprofitable, WeWork could try to leave them before the end of the lease. But if the company does that too often, landlords will grow skittish about doing business with it. In addition, building owners have financial safeguards against WeWork walking away, like guarantees from the company, letters of credit and security deposits. At the end of June, such protections totalled $6 billion, according to WeWork’s securities filings.

In a statement, a WeWork executive said that given enough time, his company’s prime office spaces would be successful. “Location and market maturity play a significant role in driving building occupancy and profitability, which we are highly focused on under our new direction,” said Nick Worswick, global head of sales at WeWork. “We look forward to delivering an even better workplace experience for our members.”

Streamlining

Indeed, having more streamlined operations could lead to considerable savings. With the departure of Neumann, whom SoftBank agreed to hire as a consultant for four years at a cost of $185 million, WeWork may no longer veer into projects that distracted staff and cost the company money.

Under him, WeWork set up a private school in Manhattan, WeGrow, which was run by his wife and which the company plans to shut down. It also recently scrapped a plan to expand its residential offering, WeLive, into Seattle.

And new management may save money simply by not engaging in costly acquisitions. WeWork paid $43 million for Spacious, a small coworking company, this year, according to deal documents reviewed by the New York Times. Spacious’ expenses far exceeded its revenue, according to financial statements.

The company might also have to do away with another expensive business practice – offering deep discounts to lure tenants. Jamie Hodari, chief executive of Industrious, a rival coworking business, said Neumann had tried hard to tempt his customers away. In 2017, Hodari said, he flew to Atlanta with Neumann on a corporate jet – a luxury that few startup executives enjoy. During the flight, Neumann asked to speak to him alone, Hodari said. What came next seemed as if it had been ripped from a made-for-TV drama: Neumann told him that he was going to “bury” Industrious, Hodari said.

First, Neumann said he would offer a year’s free rent at WeWork to Industrious customers, according to Hodari. If any stayed at Industrious, he would offer them two years’ free, and if any remained after that, the free period would go up to three years.

Hodari said that just under 5 per cent of Industrious customers had left, and that he had easily filled their space.

“That was a scary day,” he said. “It was a really bad strategy. It suggested to customers that it was a discount brand.” A representative for Neumann declined to comment.

WeWork may still need to offer deals to get people to sign leases, especially if the economy weakens. A recently opened location in downtown Atlanta had few members present during two visits this week. And another new WeWork, in Moscow, was about half full.

Three members at Dock 72 said they had gotten discounts when signing up. WeWork offered 15 -20 per cent off the rent, one said. (The company’s published rate for use of “hot desks” at Dock 72 is $475 a month; private offices start at $930 a month.) Kenford Peli, the chief executive of a small consulting firm, moved in as soon as Dock 72 opened, leaving another coworking company in Manhattan. Peli said he was looking forward to the chance to meet potential clients and partners. He said discounts WeWork offered were also attractive.

“It was so sweet that we immediately moved,” Peli said, declining to provide details. – New York Times

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