Green Street



Bloomberg: WeWork Turmoil Raises High-Stakes Questions About Office Sharing

According to Bloomberg,

Does WeWork work?

After the office-sharing company sidelined co-founder Adam Neumann to resolve governance and leadership issues, the next question is a more traditional one for prospective IPO investors: Does its business model make sense? It all depends on execution.


Much of WeWork’s business revolves around signing long-term leases with landlords, fixing up the space and renting it out. IWG and other competitors responded with similar offerings, but found ways to mitigate the risks. IWG is pursuing franchise agreements that allow it to expand with less of its own capital at risk, while Industrious, a newer entrant, has shifted to management contracts with landlords instead of outright leases, splitting the profits. Companies like Knotel are focused on leasing space only to large corporate tenants, eschewing startups that tend to proliferate at WeWork locations.

“A fixed lease for co-working operators is a bit of a double edged sword: it’s great for operators in up markets, but pretty painful in down markets, whereas management agreements reduces some of the inherent volatility in a fixed-obligation structure,” said Danny Ismail, an analyst at Green Street Advisors. “By having these alternative structures compared to a traditional lease, it does reduce capital expenditures and makes it more asset-light.”

WeWork is also starting to pursue more management contracts. It’s also shifted its tenant base in the past year toward more corporate and enterprise clients. In these management agreements, landlords fund the buildout of spaces to WeWork’s specifications and maintain responsibility for them. WeWork then collects a fee for managing the office. WeWork generally forms a subsidiary to represent each lease deal, which means individual locations could fold without leaving the company itself with much risk.

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