A Blog by Jonathan Low


Feb 6, 2018

WeWork Has Become London's Largest Business Office Space Tenant

WeWork's strategy epitomizes the intangible value of knowledge capitalism.

It is arbitraging the uncertainty over Brexit and technology's impact on employment by providing flexible work space to large banks and corporations unsure of their future growth and hesitant to commit to tangible assets. JL

Jack Sidders and Giles Turner report in Bloomberg, Rich Bockmann reports in The Real Deal:

WeWork has leased more than Google, Amazon, JPMorgan, HSBC, Goldman Sachs and Deutsche Bank. WeWork is second only to the U.K. government in the amount of space it occupies. WeWork’s strategy is  to capitalize on banks’ uncertainty over Brexit by leasing them flexible office space. (It’s) success in London depends on demand for flexible office space growing fast enough to keep rental income above the historically high rates the company pays to lease its properties.
The Real Deal The $20 billion co-working startup has leased 2.6 million square feet of space since 2012, according to Cushman & Wakefield figures cited by the Financial Times. That’s more than the 1.3 million square feet leased during that time by Google, Amazon’s roughly 1 million square feet and the 900,000 square feet leased by Deutsche Bank.
WeWork is second only to the U.K. government in the amount of space it occupies. “Have they won the race for scale?” asked Elaine Rossall, head of UK offices research and insight at Cushman & Wakefield. “Yes, I don’t think anybody could keep up with their pace of growth.”
WeWork in 2016 ranked as the 11th-largest office tenant in Manhattan, according to data CoStar provided to The Real Deal.
In the City of London, the company’s footprint more than doubled in 2017, and those familiar with WeWork’s strategy say it’s looking to capitalize on banks’ uncertainty over Brexit by leasing them flexible office space.
In October, WeWork agreed to buy the Blackstone Group’s London office complex Devonshire Square for about $785 million.

Bloomberg A seven-year-old U.S. startup is set to become the biggest private tenant in London just as the U.K.’s economic outlook worsens.Three years after entering the British capital, WeWork Cos. has signed leases that will make it the city’s No. 1 private-sector user of office space, according to data compiled by CoStar Group Inc. for Bloomberg. The rapid growth makes WeWork, valued at $20 billion, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.
“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015.
“In the present uncertain market many people are hoping that the WeWork model works -- but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalized business, but if the cycle turns down, then the model looks vulnerable.”
WeWork’s success in London depends on demand for flexible office space growing fast enough to keep rental income above the historically high rates the company pays to lease its properties. While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments.
WeWork, through a spokeswoman, declined to be interviewed for this story. The firm currently operates 17 London locations, with two more opening soon and a further 10 announced. It has also begun buying some buildings and is in talks to purchase a 12-building campus close to Liverpool Street station from Blackstone Group LP for about 600 million pounds ($807 million). Peter Grauer, chairman of Bloomberg LP, is a non-executive
director at Blackstone.
WeWork’s most basic membership plan, which allows access to the company’s offices two days a month and use of the firm’s app, starts at $45 a month, according to its website. The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers fees of as much as 20 percent for bringing in tenants, double the industry norm, people with knowledge of the matter said. WeWork’s standard broker payment is 10 percent, another person said.
“In typical English fashion, we frown on the new boys,” said Jonathan Goldstein, chief executive officer of Cain International, a developer and lender that is involved with two large London projects leased to WeWork. A multi-billion dollar injection by SoftBank Group Co., which he called a sophisticated investor, “is going to change the dynamic in the market.” Goldstein was speaking at an event organized by Bisnow on Business Inc.

Future Payments

WeWork’s rapid growth in London means that at a minimum it has committed to paying about 815 million pounds of rent in the future. Of that, 231 million pounds must be paid over the next five years, according to its British unit’s accounts filed in late October. Membership income for WeWork UK Ltd. was 61 million
pounds in 2016 and the division posted a loss of 11.1 million pounds.
Jamie Hopkins, CEO of WeWork competitor Workspace Group Plc, said he prefers a business based on purchasing the properties the company rents out as short-term offices.
“Buying long-term leases and selling short ones at a profit is not a model we are comfortable with at all,” Hopkins said in an interview. Owning its buildings gives Workspace “much more flexibility in terms of pricing if we need it,” he said.
Growing demand for flexible leases has drawn increasing competition. Blackstone bought The Office Group for about 500 million pounds earlier this year and plans to expand the business while British Land Co., the U.K.’s second-largest real estate investment trust, has started Storey, a new flexible workspace brand. There were almost 1,140 serviced office and co-working facilities in London in April 2017, up from around 490 in 2012, according to data collated by broker Instant Offices.
Founded in 2010 in New York, WeWork started life offering short-term offices and has expanded into a diverse range of areas, from co-living to kindergartens, all of which center on the idea of creating a community. Created by Israeli Adam Neumann and American Michael McKelvey, the company has also begun branching out from purely leasing office space and has now begun purchasing properties in London and New York.

Free Beer

WeWork has average occupancy of 90 percent across its London portfolio, according to a spokeswoman. Part of WeWork’s appeal is that tenants are sold memberships, rather than leases, which offer access to an app designed to facilitate collaboration with other occupants, together with regular events, discounts on a range of services from gym membership to health insurance, as well as free beer and prosecco, all designed to foster a sense of belonging.
In recent years, big companies as well as startups have chosen to use co-working spaces for some employees. WeWork has secured deals with firms including International Business Machines Corp. and Amazon.com Inc. in its U.S. business and is seeking similar deals with blue-chip tenants in London.

All Sizes

Some companies have as many as 600 people in WeWork sites, McKelvey, the chief creative officer, told Bloomberg in an interview in July.
“Our approach appeals to companies of all shapes and sizes,” he said, discussing a plan to expand rapidly in Latin America. The chief creative officer also described WeWork’s approach to growing quickly.
“To build out locations is a challenge,” he said. “But we came out with a very sophisticated platform of how we manage that whole process and it allows us to run it like a software development process, and it gives us a lot of confidence in our ability to execute.”
London remains one of the world’s most expensive office markets even after the Brexit vote. The U.K. capital’s West End district ranks as the second most expensive globally with an occupancy cost of $213.80 a square foot a year while the City of London borough, where WeWork’s largest building is located, ranked 11th, according to a June report published by broker CBRE Group Inc.
Brexit could cause as many as 75,000 job losses in banking and insurance, largely based in the City, if the U.K. leaves the European Union without a trade deal, according to Sam Woods, chief executive officer of the Bank of England’s Prudential Regulation Authority. Prime Minister Theresa May’s chances of getting breakthrough that would allow the U.K. to begin trade talks with the EU receded this week as the Northern Irish party that backs her government continued to resist a deal and she faced a cabinet rebellion over her strategy for quitting the bloc.
Companies are at risk of losing so-called passporting rights, which allow them to trade goods and services freely throughout the bloc.
The risk involving future lease payments is partly offset by the arrival of WeWork’s latest investor. In August, SoftBank Group Co. and its $97 billion Vision Fund agreed to invest $4.4 billion, which is helping finance its global expansion plan. The deal valued WeWork at $20 billion.
Before the deal was announced SoftBank Vice Chairman Ron Fisher -- who led the investment -- met with executives at IWG Plc, a competitor with a much lower valuation and more than 10 times as many sites, people with direct knowledge of the matter said. The meeting was held to better understand the temporary office business model and address the investor’s concerns over WeWork’s valuation, they said.
month later, SoftBank revealed its investment and Fisher, a long-time lieutenant of SoftBank Chief Executive Officer Masayoshi Son, joined WeWork’s board alongside Mark Schwartz, SoftBank’s external director and the former Asia Pacific chairman at Goldman Sachs Group Inc.

Competitor’s Struggles

IWG, in its former incarnation as Regus, filed for bankruptcy protection for its U.S. business in 2003 after it expanded too rapidly in the dot-com boom. IWG has a market value of just 1.8 billion pounds despite having nearly 3,000 locations worldwide compared to WeWork’s 235. More recently, the Swiss company has seen the value of its shares drop almost 40 percent since Oct. 19 when it issued a profit warning, citing in part weakness in the London market.
IWG is “the same business, the returns are the same and there is no difference -- there’s no alchemy in it,” CEO Mark Dixon said in an interview about half-year earnings, comparing his company to WeWork.
A spokesman for IWG declined to comment on the SoftBank meeting. A representative of Tokyo-based SoftBank declined to comment.
While WeWork has helped stoke demand for London’s office space, some say the risk is simply being passed down the chain. Rather than a landlord needing to rent out its offices, it’s now WeWork, the renter, that needs to find a steady supply of businesses to fill its spaces.
“When serviced office occupiers take space, that isn’t actually affecting the vacancy rate, yet people think it does,” Rob Noel, CEO of Land Securities Group Plc, the U.K.’s largest real estate investment trust, said in an interview. “You are effectively transferring risk from a landlord to an intermediary, that space still needs to be let out.”

Major Backer

Despite the risks, WeWork has its backers in the London property market. “I hear people say it is going to blow up any minute now, but they have got major investors,” Tony Gibbon, founder of broker GM Real Estate said at the Bisnow event. “People question the valuation but so what, it is a considerable scale and it is a trend that isn’t going to disappear.”
While Brexit and political discord in the U.K. may play into the hands of companies providing flexible leases, WeWork’s scale could give it an advantage over competitors, enabling it to offer customers access to buildings around the world as well as a range of additional services.
“There are clearly risks associated with the speed of expansion of WeWork,” Toby Courtauld, CEO of London office landlord Great Portland Estates Plc, said in an interview. “It is probably too early to call whether that’s a systemic problem or in fact is a fantastic call by them.”


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