WeWork Lost $1.9B On $1.8B
Will their massive pivot stem their losses fast enough?
In a strategy reminiscent of the Dotcom Bubble, the world’s biggest coworking company is generating explosive growth by selling dollars for less than fifty cents a piece. Imagine how fast they could grow if they sold dollars for twenty cents? The coworking giant’s legacy as a renter and not an owner is biting them in the butt and the biggest question on Wall Street is whether or not they’ll be able to turn this ship around in time. In 2017 the company generated $886M in revenue with a net loss of $933M. Last year they grew revenues by more than a hundred percent to $1.82B but losses grew at over hundred and three percent to $1.9B (ouch).
The trends at WeWork are troubling. First, their occupancy rate is declining year-over-year and is now down to 80%. More troubling is the fact that they’re having to heavily discount their services to achieve this lower occupancy rate — the average customer is paying them 14% less than they did in 2016. Last year WeWork’s executive team promised that the company would be profitable this quarter — but the losses have doubled. Investor’s are troubled as evidenced by SoftBank’s decision to cut their $16B investment to $2B in January. The good news is that WeWork is sitting on $6B in cash — enough to fund the company for three years at the current rate of loss (but watch out if the company continues to grow losses at over 100% per year).
What might worry investors even more is the fact that the company is under attack from all sides. Last year I suggested that WeWork’s reliance on leased space was their achilles heel in a post titled, “WeWork owes $18 Billion in Leases?” Eight months later I followed up with another post titled, “WeWork’s Massive Pivot” where I noted that WeWork was making a massive investments in ground-up developments. The coworking giant has been facing serious headwinds from landlords who think of WeWork as a “middleman”. Just last fall WeWork was “publically booted from the World Trade Center” and terms for new leases are getting more and more expensive as landlords begin to build their own coworking solutions. Landlords have a new ally in their coworking efforts — CBRE. The massive broker has just launched a new business to help landlords develop and manage their own coworking spaces called Hana — in a head-to-head smackdown with the biggest middleman in the business — WeWork.
According to the Wall Street Journal, “Under the Hana partnership agreements, CBRE and landlords will typically share in the expense of designing and building the space, as well as the profit from operating it. The partners also both are involved in negotiations with occupants.” Hana’s first deal is here in Uptown Dallas located in the PwC building in partnership with Metropolitan Life Insurance Company the building owner. CBRE has announced that Hana will have facilities in at least 25 markets within 2 to 3 years — each in partnership with the landlord.
In response Granit Gjonbalaj, WeWork’s Chief Real Estate Officer, has suggested that the company has been pursuing a similar partnership structure with landlords who aren’t interested in standard leasing agreements. While I think the partnership structure makes a LOT of sense for CBRE I continue to believe that WeWork should focus on ownership and not partnership or leasehold relationships with landlords for a host of reasons. CBRE’s primary business makes it impossible for them to compete with landlords without destroying their company. This is not the case for WeWork.
Hopefully, CBRE’s new offering will save WeWork — forcing them to transition from leasing to ownership. Back in April I argued that WeWork’s reliance on leasing instead of acquisition was their “achilles heel”. WeWork raised their first seed round almost three years after Uber was founded and more than a few people suggested that WeWork was the Uber of coworking. Uber’s claim to fame is that they’re the largest car company that doesn’t own a single car. Similarly WeWork has become the largest office real estate company that doesn’t own the buildings they license to their clients — ironically, I think this fact will turnout to be their achilles heel. What is good for Uber isn’t necessarily good for WeWork — and I predicted it could cost the company and investors billions of dollars. If successful, CBRE’s efforts might accelerate WeWork’s pivot.
The fact that Uber doesn’t own a fleet of cars is a primary driver of their growth. Uber leverages your time and your car to deliver their service. The moment you purchase a car it begins to depreciate and in a sense Uber allows their drivers to extract value from their cars by accelerating the depreciation.WeWork, on the other hand, pays the landlord rent for the privilege of improving the landlord’s property. Real estate, unlike a Ford Focus, tends to increase in value year-over-year. Uber is avoiding buying cars because cars are a HORRIBLE investment. But why is WeWork avoiding buying real estate?Historically real estate has been a good investment. They have easy access to BOTH equity and debt. Wouldn’t it be smart to own the real estate instead of simply leasing it? WeWork has been shifting to ownership and hopefully CBRE’s new business will accelerate this shift.
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.