What case is Softbank underwriting with its $4.4bn investment in WeWork?
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By our math, Softbank’s $4.4bn investment sizes the global shared office space market at +$500bn.
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Softbank’s $4.4bn investment into WeWork reportedly valued the startup at $20bn. As with most businesses, but particularly with startups, much of WeWork’s valuation is attributable to its growth potential. So to value the business on its current footprint alone (reportedly ~125,000 desks) misses the point.
Much of WeWork’s value as a company (and as a brand) is tied to co-working capacity for which it has yet to even ‘acquire’ the square footage. The question is how much incremental capacity Softbank is underwriting to the extent reports of $20bn valuations are accurate.
Our analysis suggests that some 80% of a $20bn valuation is likely attributable to future capacity — or ~550,000 desks. We arrive at that by considering the intrinsic present value of the average WeWork desk. At a range of margin assumptions, our analysis places that value at approximately $30k per desk and implicitly values WeWork’s existing capacity at $3.5–4.0bn.
If we assume for a moment that our math is directionally correct and that therefore Softbank believes the fully deployed productive capacity of WeWork is at least +650,000 desks, the question then becomes: how reasonable is that? Our answer: It’s definitely possible. We base that answer primarily on the sheer scale of the global office space market and, specifically, the number of office workers in both developed and developing countries. Across the 10 largest global economies, we estimate that there are +70 million office workers (implying a $504b total addressable market at $600/seat/month on average). For context, there are 1.5 million in New York (which would represent ~2% of our estimate). We base our office worker estimate on an estimate of the global economy’s Professional and Business Services workforce, which itself is a subset of a larger Service economy. Our estimate specifically does not include government employees.
At that level, WeWork would have to house 0.8% of the globe’s office workers to achieve +650,000 desk scale. For illustrative purposes, we also consider a world in which China’s professional and business service economy reaches U.S. levels, which would implicitly add 60m office workers to the mix and reduce the market share required of WeWork to 0.5%.
Of course any measurable penetration of such a massive global market is (a) difficult to imagine and (b) unprecedented. But in the Internet era, we can at least ask “why not?” A brand like WeWork has never been possible before, in part because no one has ever known — much less cared about — who owns the real estate that they work in. As word travels faster now, expectations about what a nice office environment looks like rise. Those that can provide that experience consistently will benefit. WeWork is a leader on the dimension. Relatedly, most offices have traditionally been set up to cater to the type of work people do in them. In a knowledge economy, most office workers’ work looks a lot like sitting and staring at a screen. The Internet uniquely enables WeWork the brand and WeWork the office space for people sitting at computers. Is 0.5–0.8% market share of the global office space market difficult to imagine? Yes. Impossible? No.
