The most fundamental reform announced in the new tax amnesty scheme — and later incorporated in the budget for the next fiscal — seeks to discourage the use of real estate as a parking lot for tax-evaded and illegal money, and to expand the existing, narrow tax base. But many are sceptical of the success of the scheme,

Do WeWork customers get any meaningful value beyond office space? Will this value-add protect WeWork’s revenues when/if real estate prices drop?

Q: (1) Does WeWork offer any MEANINGFUL VALUE beyond office space, and (2) will that value-add PROTECT ITS REVENUES if real estate prices drop?

A:  The answers are definitely yes and probably not, respectively. WeWork offers three things: space, community, and services.  There is inherent value in all three, but most importantly it’s the community.  However, coworking members want flexibility, good price, and convenient location.  Churn rates are high.  Any drop in real estate prices resulting in members paying significantly less ($75-$100/month) than competing spaces, but which would still allow that member access to the WeWork community (through a virtual plan or otherwise), would probably not counteract WeWork’s corresponding loss in revenue.


INTRODUCTION

“The world of work is changing in a fundamental way” -Richard Morris, CEO/President of Regus (a publicly traded coworking space provider).

The modern U.S. workforce is undergoing profound structural changes in the way people work.  We are shifting away from cubicles, large conference rooms, divided offices, and traditional office space toward more flexible, entrepreneurial, and collaborative work styles.

  • Our economy is quickly moving to an independent worker model. In 2008, only 30% of the U.S. workforce was made up of freelancers and independent contractors. By 2020, that number is expected to surge to 40% of the U.S. workforce.  People are moving away from traditional corporate employment and toward a shared economy or gig economy that favors the freelancer, entrepreneur, startup, and small business person.
  • Coworking improves worker performance.  Coworking is ideal for startups, remote workers, and those who would otherwise be working from home, in a coffee shop, or in a nondescript office.  Coworking aims to provide a collaborative workspace that intentionally facilities “collisions,” or chance encounters and unplanned interactions between knowledge workers.  Harvard Business Review data demonstrates that such collisions not only improve worker performance, they create more positive outcomes.
  • Coworkers are happier.  Harvard Business Review data also found that people who belong to coworking spaces reported, on average, higher levels of satisfaction than employees who do their jobs in regular offices.  There are several reasons, including a lack of confrontation with other employees, a sense of belonging, greater autonomy, a reduction in office politics, etc.  Most importantly, coworkers feel part of a community.
  • Coworking spaces are exploding in popularity across the world. WeWork added 25,000 members in 2015 alone, bringing its total membership to over 45,000 members and 65 spaces.  It is one of the largest tenants in New York City, leasing 1.4 million square feet.  Its membership base is growing rapidly and is projected to continue that growth for years.
  • Price, flexibility, and location are key factors in determining whether a coworking space is the right fit for a person.  Geographical convenience is paramount, but pricing is also important.  Who wants to pay for multi-year long leases with increasing triple net (NNN) costs, cost of living, property taxes, common area maintenance fees, large security deposits, utilities, internet cable, water, coffee, when coworking pays for all of that for a small monthly fee ($350/mo.), with the right to terminate in 30 days?  Deutsche Bank forecasts consumer savings of up to 30%.

Co-working is ideal for start-ups and small companies because it offers a cost-effective workspace model. -Richard Morris, Regus.


Q: DOES WEWORK OFFER ANY VALUE BESIDES SPACE?

WeWork’s core values are space, community and services.

1.  Space

Beautiful workspace for teams of any sizewww.wework.com

At the heart of WeWork’s business model is offering space to people.  The key ingredients of any good workspace are price, flexibility, and location.

WeWork does not always have the most competitive pricing, but they generally fall within the range of comparable spaces.  And when they launch in a new city or new location, they often give rent abatements or discounts to entice new members to join their ranks (but often increase membership rates to market soon after moving in).

Unlike traditional real estate leasing companies, however, the WeWork business model does not focus solely on space.

2. Community

Community is the future of work.”  -Adam Neumann, WeWork CEO

Community is the single most important part of the meaningful values that a coworking space can deliver.

Face-to-face interactions with other people are a big reason why people are attracted to pay money for a workspace, as opposed to working from home for free, working in a coffee shop, or renting a nondescript office.  As shown by Harvard Business Review data, the value in working alongside other creatives and professionals is that your productivity increases the more casual collisions you encounter.  Not only that, but your overall satisfaction improves too.

Each coworking space has its own configuration and vibe, even from the same company, and the managers of each space go to great lengths to cultivate a unique experience that meets the needs of their respective members.

Overall, WeWork cultivates a good sense of community.  Each space hosts events, demos, seminars, parties, happy hours, sometimes free breakfast and lunches, and provides office hours which all promote the idea of casual collisions.  A good display of the strength of the WeWork community is WeWork’s summer annual retreat held on the East Coast.  WEWORK SUMMER CAMP 2015.

3. Services

In addition to space and community, WeWork offers services. 

There are several dozen amenities and benefits offered to community members of WeWork.  Some are awesome, such as free high speed internet and craft beer, but others are meaningless or not-so-great, such as nominal discounts at big chain stores.

WeWork earns money on services that are not-so-great because it can charge a kickback or advertising fee to each service provider while leveraging its currently 45,000+ membership base to use such services.

WeWork advertises curated, low cost services that drive productivity, effectiveness and growth.  For example, TriNet is a strategic partner of the space that saw a 5x increase in average monthly leads since it integrated with WeWork’s app.  Go TriNet!

However, some of the amenities listed are merely a line item on a checklist without any real value attached to it.  For example, “Access to Investors” sounds great until you realize that WeWork does not have actual investors waiting for you to pitch your startup idea.  Or, better yet, listing the company’s “Community Managers” as a value-add service.

But… there may be cracks in the foundation

Ironically, WeWork Community Managers and staff are some of the most unsatisfied people in the coworking community (at least if you believe Glassdoor).  They feel overworked, underpaid, and because of the aggressive expansion of WeWork into far flung places, they lack adequate training, skills, and do not have a good understanding of their mission.  Plus, they really don’t like their boss, Adam Neumann.  38% approval rate?  Ouch, Mr. President.  WeWork has an overall rating of 2.3 out of 5, and that seems inflated by fake positive anonymous reviews.

Here’s what one Glassdoor commenter wrote about the company:

“Believe the comments left by former and current employees. This place is absolutely toxic.”

This is a huge potential problem for WeWork and so far they have been able to sweep it under the rug.  But, if you remember, the media has a tendency to pickup on mistreated workers in disrupting industries.  Just ask Jeff Bezos at Amazon.

By itself, a small group of disillusioned employees typically can’t sink your company, but they can unite against you, take you off your message, and complain to the government and others about conduct that would otherwise go unnoticed.

  • Quick side note: I represented a small business owner who was sued both criminally and civilly just because she failed to treat ONE worker as her employee.  And guess what?  It was the same disgruntled worker she fired who ratted on her.  It goes to show that if your human capital is unhappy, things can quickly fall apart.

WILL THIS VALUE-ADD PROTECT WEWORK IN A DOWN MARKET?

Probably not, and here’s why:

  • Overhyped Sales.  WeWork could have trouble meeting its wildly optimistic financial projections.  It used aggressive sales forecasting to woo Wall Street investors and prominent Silicon Valley VC money.  The company projects substantial growth in both membership numbers and its revenue from each member.  But $1 billion projected revenue in 2016? Come on, that’s over a 1000%  jump from 2014.  WeWork also projected an operating profit in FY 2018 of $942 million on $2.9 billion in revenue, a far cry from the $4.2 million in operating profit on $75 million in revenue it expected in 2014.  And WeWork would not have been profitable in 2014 but for a huge capital infusion.  The investors knew what they were getting into, so that is not the concerning part.  What is concerning is how WeWork intends to make good on its projections. When it was valued at $5 billion, its price to earnings ratio was trading at over 100x.  Even Facebook and AirBNB are not that bad.  And that doesn’t take into account what happened with the earnings ratio after it accepted another $5 billion, pushing its valuation to $10 billion.  Something has to give when there is a clear case of FOMO.
  • But what if Real Estate Prices Drop?  If real estate prices drop, this will undoubtedly put strain on WeWork’s business model.  Up until now, WeWork has been able to grant copious discounts and expand aggressively by securing large concessions from landlords upfront.  WeWork’s near-term operating expenses appear artificially low because it is locking into long-term lease deals (10+ years), in return for getting free rent up to one year. WeWork is betting the farm that its long-term leases will shelter it from rent increases, but if the market is at its peak right now, this will actually make it harder for WeWork to rent their office space in the future.

On the other hand, there are other revenue streams that may offset this loss.

  • WeLive: The Promise of Tomorrow. In 2016, WeWork will launch “WeLive” throughout several US cities which will provide members with shared residential micro-apartments (see above photo). There has been a lot of hype surrounding the launch. Apartments start at $1,650 or more in areas that might go for $2,500 or more.  WeWork expects a serious financial return on the concept — in financial projections, it is expected to supply 21% of the company’s overall revenue by 2018 and bring in $605.9 million in annual revenue three years after its debut.
  • Supplemental Services.  WeWork will also rely on new services that may offset some of the operating losses for a drop in revenue due to the economy.

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