WeWork has done to dropped ceiling cubicles what Tesla has done to shoddy internal combustion engines. General Motors built an excellent electric vehicle in 1996, but started crushing them around the time that Tesla was founded. GM’s CEO, who flipped the breaker on the company’s pioneering and successful EV program, would later rue the decision as his worst. His company would go bankrupt in 2009. Tesla went public a year later, when GM’s fleet-wide fuel efficiency was 27.5 miles per gallon.
Will WeWork ring Nasdaq’s bell next month? Unless you’re holding We Company options or shares, that’s not the best question.
Instead, we should ask what WeWork’s rapid adoption tells us about what’s happening to the status quo in commercial real estate.
Molting fixed into variable costs
Squint, and you’ll see WeWork’s ability to recast fixed costs into variable costs as a narrow analogy to Amazon Web Services. Small companies have fast access to fully-functioning office space, needing little more than a credit card to start. Expanding companies can skip the construction & facilities management tasks, and add to their space in lockstep with their growth. Established firms can sidestep non-core real estate functions across the world, and bring on new offices in new territories faster than ever before. By sharing conference rooms and common areas, WeWork spreads the costs of better space across members that otherwise would be wedging lawn chairs into storage closets.
Need a conference room for your first Lunch n’ Learn event in Austin, Texas? A few taps on your WeWork app, et voilà. What about your new remote colleague with only periodic needs for a bona fide office? She can have limited access to your HQ suite–and some delicious fruit water–at a fraction of the cost of a full desk. And by pooling demand, smaller WeWork members have access to some of the best buildings on the planet, when they otherwise would be surfing Craigslist subleases.
Data-driving building operations
The company has made a number of software acquisitions to deepen its data-mining capabilities, including SpaceIQ for occupancy studies and space utilization, and Fieldlens for construction and vendor communication, among others. The company has reported it spends $6 million a year on software, and has built “a centralized repository of data, analytics and underwriting models that allow us to better predict member demand and the financial risks and attractiveness of a potential space.”
This technology helps WeWork respond to Occupant requests, select sites, and build out new spaces in five months when the industry average is nine. It has reduced CAPEX per desk by 50% over five years, and the company’s building engineering team is developing if-this-then-that maintenance automation. Would WeWork’s wildly popular offering suffer if its buildings were poorly run?
The fruit water flows from a focus on Occupants
And it’s worth repeating…WeWork is wildly popular, with over 500,000 members worldwide, having more than doubled every year for nearly a decade. The company pioneered a dedicated mobile app for common office interactions, leaving a new “tenant experience” software vertical in its wake. Industry analysts have noted the relative lack of competition at scale–if it was as easy as improving the coffee and swapping out the succulents, we would be talking more about Regus. JLL reports coworking firms might be the top lessor of office space this year, so far signing on to 10+ million square feet, and CBRE forecasts coworking will account for 22% of all U.S. office occupancy by 2030.
Gavin Baker likens this competitive dynamic to Dell in the 1990s, “it’s harder than it looks.” Ben Thompson suggests others simply wont have the same access to capital. And Michael Gold points out that there are three wings to WeWork’s Occupant edifice–dropping the drop ceilings for better design, community management staff trained on service, and the user-facing WeWork mobile app. Booking a conference room has never been easier. And it’s more than just WeWork’s fruit water that makes their spaces liquid: the company’s build-outs are setting the zeitgeist for Occupant aesthetics. This gives asset managers we know confidence in refilling the floor should a WeWork special purpose vehicle dry up.
The dollars are not the story
The CEO of GM responsible for crushing the EV1 claims to have been concerned about the cost of supplying spare parts for the vehicles over a federally-mandated 15 year period. It must have been easy for his Board to approve saving such a big dollar number. Similarly, it’s hard to ignore newspaper articles with billion dollar headlines, and easy to capture attention with stories of Goldman Sachs–the same investment bank to earn a capital infusion from Warren Buffett in the nadir of the Great Recession–estimating WeWork’s value to be the better part of one tenth of a trillion dollars. It shouldn’t be a surprise these articles tend to be two paragraphs long. And that’s because the catchy numbers are not really worth the read.
Firstly, stock prices are generally wrong, and company valuation always needs a story. A caterpillar eats its bodyweight in greens every day–we should look carefully at the firm’s operating strategy and tactics, not just its cash consumption. Indeed, Mr. Baker points to some Wall Street research showing WeWork’s core cash unit economics are actually OK.
Resources
- Ben Thompson, Stratechery, The WeWork IPO
- Gavin Baker, Atreides Management, The Other Side of a Media Pile On
- Aswath Damodaran, Corporate Finance, NYU
- Michael Gold, Real Estate Research, A Glimpse Into the Office of the Future
- JLL, Research, United States Office Outlook – Q2 2019
- CBRE, Research, Flexible Office Space Growth
