WeWork: The King is Dead, Long Live the King!

Founded by an entrepreneur with a vision. Taking a close look at upward moving trends, a company was born to meet the apparently insatiable needs for flexible workspace from entrepreneurs and small businesses.

That company grew quickly, as business confidence flexed its muscles after a recession. Pretty soon, everyone from the hottest startup to corporate giants were signing-up and taking flexible short-term leases from them.

As demand increased, this company became one of the hottest tickets in real estate. It became a well-known global brand. They partied in Las Vegas. It felt like everyone in real estate was either working for them, or making good money, either brokering deals or providing other services. We all drank the Kool Aid.

But the good times were not to last. Trouble came, as it usually does, when growth is too fast and furious. If you haven't guessed yet, I’m not talking about WeWork.

I’m talking about Regus, now known as IWG plc.

Lessons from history

I started out in real estate in London, 1992, following the, “Loadsamoney” years of the late 1980s. We were in recession. I was only one of five graduates taken on by CBRE that year. It was a tenants market and therefore the perfect storm for Mark Dixon and Regus to take leases at the bottom of the market where they could profit from the rent arbitrage.

In 1994, Regus started its international expansion. A few years later, in the hype of the first dot-com craze, Regus completed an IPO on the LSE in 2001. Less than two years later, it filed for Chapter 11 for its U.S. operation.

But as we all know, that wasn't the end of the story. Regus recovered. Regus was operating profitably in the UK and used that to restructure and rescue the U.S. operation. In the years since, as the demand for flex and co-working space has increased, Regus has continued to expand and evolve – check out their new SPACES concept [pictured below] if you haven’t already. Never too fast and furious, and never at the expense of profitability and sustainability.

Ever since its painful brush with Chapter 11, Regus, which became International Workplace Group plc (IWG) in 2016, has cut back on the parties and focused on healthy growth. It stopped passing out the Kool Aid and got serious.

Now IWG has over 3,000 locations in 120, with 7 brands and 7 products. It generated over $3 billion in revenues, made a decent profit (as of 2018), and employs around 10,000 people. According to the Wall Street Journal, IWG is valued around $4.45 billion.

The WeWork woes

Founded in 2010 by Adam Neumann and Miguel McKelvey, following an exit of a smaller eco-friendly co-working startup, GreenDesk, WeWork — known as The We Company — quickly capitalized on a whole range of post-recession trends from the Global Financial Crisis of 2008.

Entrepreneurs and startups want more flexible, Millennial friendly workplaces. Companies want to attract and retain talent. Co-working and flex working appeals to and is more practical for younger companies that can’t be tied to a 5 to 10 year lease if they might not exist in 5-10 months. As a result of the recession, more workers are self-employed and freelance.

More people than ever want the flexibility to work wherever they want. Sometimes from home. At other times, surrounded by colleagues and those who work for other companies and themselves. Co-working spaces allow for collaboration, flexibility, creativity. WeWork and its investors jumped on these trends and made the most of them.

In almost no time at all, WeWork became a recognizable global brand. With a global footprint and investment figures to match. It seemed that everyone in real estate was either working for them or providing a range of services to them; brokerage, project management, facilities management. Loads of people have been benefiting from the continued growth of WeWork.

Awards were won. A massive PR, marketing and sales machine kept pushing the brand forward. Lavish tequila-soaked parties were held in Vegas and English mansions. The company even owned a Gulfstream G650 jet, worth $60 million.

WeWork has 5 brands, with 836 locations, around 15,000 employees, and currently manages— and therefore is responsible for — over 46 million square feet of real estate around the world. That isn't the most impressive figure. Before the S-1 filing, in the run up to an aborted IPO, WeWork had absorbed $12.8 billion, with a valuation of $47 billion. Ten times that of IWG.

After the delayed IPO, WeWork has come crashing back to earth. The S-1 showed what everyone had suspected for some time: the Emperor was wearing no clothes. Neumann stepped down. No one is buying into the message that this is a tech company. It isn’t. WeWork is in the real estate game, and now it’s playing by the same rules as everyone else.

In the weeks since the abandoned IPO, WeWork was thrown a couple of lifelines. It was too big to fail. On October 23, 2019, WeWork confirmed that it accepted the SoftBank offer.

SoftBank is rescuing them and effectively taking over, with a $5 billion cash injection, alongside $3bn set aside for current investors. SoftBank will now own 80% of the company, with Neumann likely to walk away with $1.7bn, while retaining “observer” status. The Gulfstream G650 jet is being sold.

Softbank chairman Masayoshi Son said they are “providing a significant capital infusion and operational support,” because they remain “a firm believer that the world is undergoing a massive transformation in the way people work.”

CEO of SoftBank Group International (and former Sprint CEO), Marcelo Claure, has been appointed executive chairman, with the immediate aim to “right-size the business to achieve positive free cash flow and profitability.” WeWork is saved, has cash again (as it was fast running out), and is now going to focus on achieving profitability, while slowing its current rate of growth. 2,400 jobs have been cut, Claure has already said in an email. Getting on the right course won’t be easy, but if Regus, now IWG managed, with a lot less cash, then the future should be a bright one for WeWork.

The future is flexible

Knight Frank also feels that no one should write off WeWork. Unsustainable growth resulted in serious mistakes, and they had some damaging leadership and governance failings. But as far as concepts go, they are onto a good thing.

As JLL notes, the flex office inventory is currently only around 5 percent of U.S. office stock.

Flex space, as a concept and series of products, is a massive growth market. Growth has been around 23 percent every year since 2010. JLL expects this to continue, with the market reaching 30 percent of office stock in 2030.

Other countries and regions have experienced similar growth rates. Big companies love it because they don't need to be tied to costly long-term leases when more of their employees are working remotely, and startups and freelancers love flex space for obvious reasons.

None of these trends behind the WeWork craze were exclusive to that company. WeWork didn't create this market. Almost every player in the real estate market, from startups to Big Corporates, has already got into the flex and co-working sector. None of that is going to slow down because WeWork is going through a restructuring.

WeWork’s competitors have been quick to differentiate themselves. Convene, Industrious, Serendipity Labs, Studio, TOG, Servcorp, Premier Workspaces, Knotel etc., have all been on the PR trail, writing articles, sitting on panels, hosting webinars. They all provide great products and have an opportunity now, not to be squeezed by a behemoth, paying no regard to profits when pricing against them.

Regus learned from unsustainable growth. Ultimately, I believe the same will happen with WeWork, and the flex market will continue to benefit every player in the market; operators, landlords and tenants/'members’.

Whether you’re a tenant thinking about your next office move, a corporate wanting to adopt it, or a Landlord keen to work how to bring the concept into your own portfolio; I’d be happy to help you navigate the flex office industry.

Richard Sexton, MBE, CEO Office Concierge, +1 917 412 7478 [email protected]