How WeWork changed the office game forever.
Over the past few weeks, WeWork CEO Adam Neumann has become everybody’s favorite punching bag, as the media accuses him of everything from delusions of grandeur (supposedly he wants to be “president of the world”) to greed and duplicity.
It is said that “the bigger they are, the harder they fall” and that makes this story more tantalizing than some of our other favorites: the Fyre Festival and Elon Musk’s tweets. Under pressure from the board, on Tuesday Mr. Neumann agreed to step down as CEO.
We’ll let others convince you whether Neumann is a genius or the devil, and in the meantime, we’re going to focus on what the WeWork story could mean for the New York City real estate market (because that’s what we do at Compound).
Firstly, you should know that WeWork is the largest office tenant in New York City.
hat means that many of the city’s largest landlords are heavily exposed to WeWork credit risk. If WeWork is unable to raise more funding, then this could have a ripple effect throughout the entire office market as WeWork would start missing rent payments, defaulting on leases, and leaving landlords to make up the shortfalls. Even when WeWork has management deals and not leases, their ability to service their tenants and keep the rental revenue in place is entirely dependent upon the company’s ability to keep itself funded. Without access to capital, WeWork will struggle to keep tenants.
We’ve seen firsthand that when smaller coworking businesses falter, the downward spiral starts with layoffs which turns into reduced services (no more coffee refills, receptionists stop showing up, phones go unanswered, etc) which then turns into full-on tenant revolt and ultimately vacancy. A little bit of this is happening right now at the Assemblage, another New York City coworking company with a brash leader who has been accused of wrongdoing.
We predict that no matter the outcome, New York office landlords will end up just fine. Worst case, they will inherit coworking spaces that are built out to WeWork’s exacting design standards with tenants already in place. The office landlords can continue doing what many of them are already doing: running coworking spaces themselves or partnering with Wework’s competitors, companies like Knotel and Convene. Without WeWork’s infrastructure, these landlords might find a way to keep tenants for awhile, but they will eventually have to figure out ways to deliver on some of the tiny details that WeWork tenants love so much — the quality coffee, free beer, lemon-flavored water and special events.
No matter what you think about their valuation, WeWork certainly has some “secret sauce.” That sauce may not be worth $47 billion or even $20 billion (or anything remotely resembling a tech company valuation), but running coworking spaces is a tough and nuanced business. WeWork has demonstrated that workers care about good design and that they prefer to work in spaces that feel fun, energetic and on-trend. And WeWork knows how to deliver both. What WeWork has failed to demonstrate is that a company can make money doing it.
WeWork has completely changed the office game. Office tenants now ask landlords to build out their space to be more WeWork-like and employees have come to think of their office environment as an important part of the overall package when they contemplate which companies to work for.
What’s more, WeWork has succeeded at branding something which was previously thought to be “unbrandable:” office space. The idea that tenants would pay a premium for an office space brand turns the old office building model on its head. (Historically, office building owners would only brand a building by its address and a tiny bronze plaque on the building’s facade with the owner’s name on it.)
As critical as we are of their business model, we believe that WeWork will live to fight another day.
So what will happen next?
Well, the only thing people love more than a catastrophic fall from grace is a comeback story.
And while it’s true that the smart money may not be willing to pay Neumann’s and SoftBank’s nosebleed valuations, there is already plenty of smart money invested side-by-side with WeWork.
We think it’s going to get really interesting.
