WeWork (or do we?)

I have just returned to my desk after attending a Property Council Lunch in Perth, Western Australia where WeWork’s Senior Director of Real Estate - Australia and New Zealand, Johnathan Kearins was presenting.

Based on my previously stated nervousness around WeWork’s reckless approach to growth and my disbelief that they are sustainable as a mature business, I was hoping for some comfort.

I wanted some comfort that they undertake reasonable due diligence before entering a new market, some comfort that they understand the basic mathematics associated with the flexible workspace business model and some comfort that they do in fact have a ‘secret sauce’ that will magically create a market the size of which they are committing to. Unfortunately, I left more nervous than when I arrived.

During the presentation Jonathan made it clear that WeWork do not want to be seen as or associated with the serviced office sector. He then proceeded to play a video which described what WeWork offer such as facilities management, reception staff, meeting facilities and flexibility which forgive me if I am wrong, sounds very much like a serviced office.

Whether they believe they are in the serviced office business or not there are a number of fundamentals that are identical; at maturity it is a very high fixed cost business.

Some of the stats mentioned in today’s presentation should be raising red flags across their landlord and investor base, yet no one questioned them. In fact, most in the room seemed a little start struck as if we had a A-list celebrity amongst us.   

Back to my nervousness; stats like ‘we are growing at around 100,000sqm per month and our member base is growing by 10,000 per month’ should be a red flag. Now it wasn’t clear if they are adding 10,000 new members per month or growing their member base by 10,000 per month as the two are very different numbers. For the purposes of my comments I am giving them the benefit of the doubt.

100,000sqm equates to circa 20,000 desks. Therefore, they are increasing their fixed costs by circa 20,000 desks per month and adding only 10,000 members.

10,000 members probably equates to only 5000 fully occupied desks given the nature of the way members can buy and use space.

So, what they admitted to in a public forum 2 hours ago in Perth is that they are at best creating a hole of 10,000 empty desks every month but more likely a hole of up to 15,000 desks per month, every month!

In a balanced market they need 65% occupancy to break-even, but a venture of their size will need more as they will have some poor performers within their portfolio dragging down the numbers. They just admitted to achieving 25% - 50% occupancy and the problem is magnifying every month that goes by.

Everyone knows they are already burning over U.S. $800m per annum in negative cash-flow, the question is, when the growth stops, and the rent free dries up, how much cash do they need to survive, and can they ever reach a mature occupancy globally given the vast size of each location and their over exposure in individual markets?

The thing is, I like what they are doing in terms of shaking things up and getting occupiers of all sizes to rethink not only the way they work but how they procure and deliver the workspace. My extreme nervousness is entirely linked to the speed and the scale at which WeWork are moving, it is reckless.

It appears their imminent market entry in Perth is no different. They are acquiring 5000sqm initially and growing from there based on market research which seems to consist of “it’s a resource led town, that absolutely makes sense for us”.

The one thing resource towns are is cyclical and the last thing you want in a downturn is enormous fixed costs, believe me.

So my advice to landlords, and in particular the landlords in Perth would be this; do not fund their fit out, get a bank guarantee equivalent to the incentive value and do not accept a silo'ed vehicle – get a parent guarantee, or you could be the one left holding the baby.