Rooster one day, feather duster the next? Perhaps “ ‘unicorn’ one day, donkey the next” might be more apt in the case of once stellar start-up WeWork and its rapidly fallen-from-grace founder, CEO Adam Neumann.
Just a few short months ago, the US property giant with a vision of becoming the world’s first “physical social network” was mooted for IPO at an estimated value of $US47bn. Roll forward to October and we have the CEO and his consorts rapidly heading out the door, and public float documents in the shredder.
What went wrong?
It started as a great idea. And whilst many thought copycats would flood the market, no-one managed to do it quite so well – WeWork remains the largest private tenant in both London and Manhattan. Yet there were cracks in the model. WeWork has not made a profit in a single year since its inception in 2010:
- Its credit rating currently stands at ‘Junk’ status.
- Overheads are phenomenal relative to revenue, and even with free-rent periods, forward commitments are huge (currently estimated at $US47bn).
- Taking on large tenancies and on-leasing them all is inherently risky if markets decline: small operators are often the first to fail.
Add to this a fractious relationship with landlords. WeWork demanded – and often got – exceptional tenancy terms. Terms demanded were so challenging, many landlords simply walked away. Adopting a model of establishing a new company for each new property – isolating each investment in case of failure – left landlords even more nervous, especially with many WeWork sites located close together and therefore readily consolidated.
What does WeWork’s struggle mean for the rest of the shared office space industry?
General feeling is, not much. Like many innovative sectors, initial growth creates a bubble that bursts, before settling into longer term viability. In most major cities, property is in demand, so landlord returns are not really at risk.
The real lesson is about rate of growth and the sustainability of returns. More established, less flamboyant competitors, such as London’s IWG, continue to thrive – but they aren’t sprouting new ideas before the old ones make money, they boast sound financial structures, are realistically valued and don’t fund a branded Gulfstream jet.