Top CRE Execs Answer 3 Important Questions On The Future Of WeWork
It took eight and a half years for WeWork to climb to the top of the commercial real estate world, dominating the world's biggest office markets and raking in billions in investment. It took less than two months for it all to come crashing down.
Much has been written about WeWork and now-former CEO Adam Neumann's meteoric rise and precipitous fall. And while WeWork has some very public, very persuasive critics, those who it really needs to convince of its durability are future investors and the industry it spent years disrupting. That's who Bisnow wanted to hear from, so that's who we asked.
In an online poll of more than 500 Bisnow readers, 54% said they expect WeWork to file for bankruptcy. Fifty-nine percent of respondents believe it will be much harder, but not impossible, for WeWork to sign leases, while 12% agreed with the statement, "No one will want to lease to WeWork."
We also put out the call to hundreds of the smartest, most influential people in office real estate across the country to ask about the future of WeWork and its impact. Most of them declined to answer. Here are some of the best responses we did get, gathered by the Bisnow team and lightly edited.
John Davidson
CEO, Parmenter Realty Partners
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
I think many landlords have been wary of WeWork for some time now. We at Parmenter have never leased space to WeWork anywhere in our portfolio. There is demand for what WeWork offers, but it is more about the flexibility in the lease than it is about coworking.
Is the IPO being shelved good or bad for the office market?
I think it was an inevitable thing. My belief was that their model would fail in a downturn, I thought they would be the most vulnerable when businesses needed to contract footprints and their space would be the easiest to cut. I also felt that they would have to contribute capital to keep their spaces fresh when they renewed leases. The fact that they are losing as much money as they are now is frankly stunning.
What will we be saying about WeWork at this time next year?
I think it’s a viable business and they have some great locations that are very successful. Some operator is likely to buy them and likely rebrand them. There are other good coworking operators out there, like Industrious.
Peter Stoll
Head of Europe, Carlyle Group
London
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
The attitudes of the market had already been changing. It was struggling to secure good leasehold space in today’s market compared to what was possible before. Landlords were demanding credit support. Offering less [capital expenditure] has also been slowing its growth.
Is the IPO being shelved good or bad for the office market?
It is unclear if being public versus private matters much. The launch of the prospectus, the scrutiny and the changes in the company and attitudes are good for the market.
What will we be saying about WeWork at this time next year?
Too big to fail? I suspect a slightly scaled-back company will be clawing its way back to relevance, but on more balanced and reasonable terms.
Willy Walker
Chairman and CEO, Walker & Dunlop
Washington, D.C.
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
If it doesn't, they are idiots.
Is the IPO being shelved good or bad for the office market?
Terrible. They were a massive user of space.
What will we be saying about WeWork at this time next year?
WeWorked. What was really interesting to me was that CBRE, JLL and Newmark all showed really strong leasing activity in their Q2 earnings, and I couldn’t figure out what was driving that outperformance given most corporations have been pulling back on CapEx this year due to concerns about a slowing economy? I don’t have any hard numbers, but something tells me that a lot of that outperformance was due to WeWork signing up leases with reckless abandon. It will be very interesting to see what happens to leasing activity, particularly in the major markets where WeWork was growing so rapidly, in the coming quarters. My tummy tells me it falls off significantly.
Dan Arends
Principal, co-chair of National Occupier Advisors group, Colliers International
Chicago
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Yes, I think landlords will scrutinize flex operators more closely. Many people in real estate were somewhat cynical previously, and this will just add fuel to the fire. I think it will cause landlords who are considering them as an anchor or lead tenant in a building to reconsider. Clients with membership agreements are already asking what happens if WeWork defaults, so the concern is very real. Just like landlords have exposure, so do the users with membership agreements that are using WeWork in multiple markets. It probably helps Regus/Spaces, Knotel, etc., who have stronger balance sheets.
Is the IPO being shelved good or bad for the office market?
Neutral, to be determined. The transparency of the flawed business model (super fast growth with operational dysfunction) is not investable. Fundamentals still matter and while the WeWork brand may remain intact, they need to prove a path to profitability. We are also heading to a softening market, and this will test WeWork’s resolve. As market rental rates fall they will be forced to reduce their pricing to users while their cost will remain fixed and free rent they were experiencing will have burned off.
What will we be saying about WeWork at this time next year?
If we assume they effectively cut costs and manage the business, they have a place in this market for years to come. If they don't, and subsequently lose support of the investment community, they will either 1) be sold to IWG or another flex operator or 2) the WeWork brand will remain intact, just under new ownership with landlords/owners like Tishman Speyer and others stepping in to operate the flexible spaces. The demand for flexible lease terms is definitely there as proven by WeWork’s growth in markets like Chicago where they are 82% occupied and New York where they are 93% occupied.
Nick Clark
Founder and CEO, Common Desk
Dallas
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
It's already happening, but landlords were cautious doing deals with WeWork before all of this. I believe landlords will continue to shy away from leases (especially with WeWork) and the popularity of the management agreement will exponentially increase as the prevailing model binding landlords and coworking operators. Landlords will do even more due diligence to ensure they're getting the best operators for the regions their buildings are in.
Is the IPO being shelved good or bad for the office market?
It's a good thing. SoftBank will invest another billion dollars in WeWork to try and restructure the company and keep it alive long enough to get Vision Fund II off the ground. As WeWork begins to throttle back on new locations and excessive deals offered to prospective members, it'll allow the best operators of the future to continuing growing (the right way) and the industry to correct from the WeWork bubble.
What will we be saying about WeWork at this time next year?
You can raise $10B, but at some point you have to abide by the rules of economics and make money. All the fruit water in the world won't change that.
Casey Keitchen
Principal, Avison Young
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Yes, the attitude is already shifting with many institutional owners unwilling to lease more than 20% of any project to WeWork, and others creating competing coworking companies in-house, so that they can stay in control of their assets yet still capture the coworking demand in the marketplace.
Is the IPO being shelved good or bad for the office market?
The delay in the IPO and drastic cut in valuation is good for the office market overall. Leases with contingent liabilities should never be worth more than the underlying real estate, and with them being the largest and most active tenant in every major market, their growth is unsustainable. So hopefully the delay will cause them to slow their expansion and only focus on viable locations with long-term intrinsic coworking demand.
What will we be saying about WeWork at this time next year?
We(don’t)Work, WeSoftBank or WeWTF.
Doug Firstenberg
Managing Principal, Stonebridge
Bethesda, Maryland
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
The attitude about WeWork had already been changing over the past two years. Exposure to WeWork. Limited information on the operations and success of the company. The changing deal structures requested by the company. So many folks were trying to determine — with limited information — what was the right WeWork strategy on its own and in the context of coworking overall. With the information on the company provided, more questions are likely to be raised than answers about how much exposure to WeWork a landlord or an investor will want. With this information, it is likely that many landlords will want to be more cautious in their exposure and even more focused on the deal structure.
Is the IPO being shelved good or bad for the office market?
With all of the changes that are happening at WeWork, it would seem to be a good thing that the IPO was pulled. Allowing the company to reset and implement a new approach before being subject to the pressures of quarterly analysts updates is likely to benefit the company to make the changes in its corporate structure and operations.
What will we be saying about WeWork at this time next year?
WeWork will likely not be public as much for the poor performance of the other 2019 IPOs than the actual results at WeWork. So the talk will be: Has WeWork been able to implement changes that demonstrate a viable long-term business strategy, one that generates profits?
K.C. Conway
Chief Economist, CCIM
Tuscaloosa, Alabama
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Many landlords have been leery since its inception, but they were doing WeWork deals for two key reasons. For one, they needed to lease up the space. Secondly, WeWork was doing much-needed CapEx on the space, so even if WeWork failed, the building owner would get back an updated, open/creative-style space that would be easier to relet. Coworking as a concept isn't dead, WeWork is just giving it a bit of a black eye. Large, office-space-using companies — like banks and tech — want a coworking model as it cuts costs and is more efficient. This demand for coworking is also being driven by the new lease accounting rules (ASC 842) that take effect at the end of 2019, which require companies to put leases on their balance sheets as liabilities. Companies want a way to offload the lease liability, and coworking solves that.
Is the IPO being shelved good or bad for the office market?
The IPO situation is healthy, actually. WeWork was out over its skis and headed toward a tumble. Banks and investors didn’t know how to value a WeWork office building or one with a large percentage of coworking space. This situation is now forcing the market to go back to the basics and first understand the economics of a coworking business model. Bottom line, it’s much healthier for us to experience this now than after an IPO and/or more untethered WeWork growth where it would potentially bring down quite a few office buildings and even some lenders that jumped on board. For now, it is a SoftBank issue. None of the U.S. banks invested in this concept with any degree of concentration that would bring down an office REIT or office building lender. Sometimes getting the flu makes our immune system stronger. Coworking is getting a dose of WeWork flu that will only make the concept healthier.
What will we be saying about WeWork at this time next year?
WeWork will be a case study in the evolution of coworking. We’ll talk about it as the flashy startup that proved that the concept had viability, but needed taming and the economic fundamentals sorted out. The coworking concept is an efficient means for companies to use real estate without tying up capital to either own or long-term lease office space, warehouses or other real estate and is already finding its way into the industrial warehouse market. An extension of this concept is even finding its way into residential with for-rent subdivisions by companies like America Homes 4 Rent, which are building subdivisions where all the homes are for rent.
Tony Natsis
Partner, Chair of the Global Real Estate Group, Allen Matkins
Los Angeles
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Yes. There are and will be landlords that do not want to do WeWork deals based on the latest occurrences, and this is not surprising. However, there are some landlords that are still willing to do WeWork deals regardless of those occurrences.
Is the IPO being shelved good or bad for the office market?
It depends on whether you think WeWork is good or bad for the office market. If you think it is bad, then shelving of the IPO is a good thing for the office market because it limits WeWork's ability to expand, because they will not have access to public market capital.
What will we be saying about WeWork at this time next year?
We will probably be saying one of three things:
1. They failed and defaulted on their leases and/or went into bankruptcy and did not come out of bankruptcy.
2. They went into bankruptcy, reorganized and came out of bankruptcy as a much smaller going concern.
3. They worked out a number of leases with their landlords, including terminations, and they survived as a smaller going concern and avoided bankruptcy.
Kris Miller
President, Ackerman & Co.
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Landlords and purchasers are already leery of WeWork.
Is the IPO being shelved good or bad for the office market?
Neutral to slightly bad. The bad stemming from “there must be a reason.”
What will we be saying about WeWork at this time next year?
It grew too fast.
Rob Bould
Chairman, Coyote Software
London
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Yes, the credit risk must have gone off the scale, and I can’t see why any landlord would take the letting risk until the waters have settled and their primary equity provider makes public the level of support. Existing landlords will be considering a fallback position.
Is the IPO being shelved good or bad for the office market?
Depends on the market you are in and the demand/supply position, but overall it is bad if the resultant fallout is that they are no longer a player. They are a tech-enabled business but not a tech business and for the ill-informed there could be some negative funding impact in the tech space.
What will we be saying about WeWork at this time next year?
WeWork highlighted how some occupiers are seeking their accommodation, and that they should be provided with flexible, customer-focused, tech-enabled space. Although the business model may be flawed, the approach to service provision and customer demand certainly isn’t.
Sara Travers
CEO, Workbar
Boston
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Landlords are going to want to lessen their dependence on WeWork and explore partnerships with operators that have a history of performance in the industry. The barriers to entry in this space might be low, but it takes time to find a winning formula that can be replicated across multiple locations. Workbar’s winning formula took close to 10 years to perfect and only now consists of a regional dense footprint of locations that include both an activity-based neighborhood coworking layout coupled with private offices and ample spaces to take calls and hold meetings.
Is the IPO being shelved good or bad for the office market?
WeWork may be coterminous at the moment with coworking, but the simple truth is that this industry was around long before WeWork and will be around long after WeWork. Workbar has been focused on a path of self-sustained profitable growth driven by a diverse portfolio of real estate partnerships — including direct leases, management deals and network licensing agreements. Comparing the Workbar model to the WeWork model is like comparing a modern, earthquake and flood-proof building with a sandcastle. Our model is built on strong fundamentals achieved through risk management. The IPO being shelved is good for the office market; my hope is that anyone sitting on the sidelines of this industry takes a hard look at the differentiators between WeWork and the operators that have been thoughtfully growing their footprint with a clear path towards profitability.
What will we be saying about WeWork at this time next year?
No one wins if WeWork fails. Artie Minson and Sebastian Gunningham [the new co-CEOs of WeWork] will need to show revenue growth through their portfolio of mature locations, which have suffered from self-inflicted market saturation and creative accounting measures. The key term being revenue growth, not occupancy growth. We’ve seen how WeWork grows their occupancy — poaching from competitors by offering years of free rent, absorbing break penalty and moving fees, and paying brokers 100% commission. The flexible space market is going to continue on its path of growth — with or without WeWork.
Sonny Kalsi
President, BentallGreenOak
New York City
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
I think landlords will be very focused on their ability to fund their operating shortfalls. Without an IPO, will they have access to private equity or debt capital? Many people had relied on corporate guarantees, but now there will be a different level of credit analysis done on that guarantee.
Is the IPO being shelved good or bad for the office market?
I don’t think there is anything good about it per se for the market, healthier tenants are good for everyone. It will only be bad if they are unable to fund their operating shortfalls, which in a worst case, could lead to defaults on leases or WeWork having to reduce its footprint, which would obviously be a headwind to the markets given their size.
What will we be saying about WeWork at this time next year?
They have some major sponsors, such as SoftBank, who will need to work with them to recapitalize the business, again focusing on how to cover losses. I believe they will be around in a year. But think they will be smaller than they are today, significantly pulling back on growth and rationalizing some of the bigger loss-making locations.
Nori Gerardo Lietz
Senior lecturer of Business Administration, Harvard Business School
Cambridge, Massachusetts
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Of course landlord attitudes will change. They have already announced they aren't entering into any new leases. The company is a huge credit risk if they can’t get financing from the banks. WeWork will run out of cash within the next six months or so unless they can radically reduce their cash hemorrhaging.
Is the IPO being shelved good or bad for the office market?
They have taken up significant space in many major markets. The IPO failure will clearly slow or stop their new leasing activity, which will have a short-term impact on the office markets. The better question is what will the impact be on the office markets should WeWork go bankrupt. That would have a material impact.
What will we be saying about WeWork at this time next year?
I wish we would be saying nothing. I think we'll see a similar dissection of the company akin to Uber. I am writing a piece now on "where were the adults in the room?"
Gregg Metcalf
Senior Vice President, JLL
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
It seems reasonable to think landlords will have their guards up, at least in the near term. Market demand for coworking, though, is here to stay. So while we could see some of WeWork's competition leapfrog them on deals they would have liked to do, when you look across markets at existing supply, WeWork typically has more open locations and will therefore capture demand as a function of availability, since many coworking and even enterprise users have speed to market as a driver for their requirement.
Is the IPO being shelved good or bad for the office market?
The office market will be influenced by WeWork’s success or failure regardless of IPO. New leadership will undoubtedly focus less on growth and more on profitability, which could negatively impact vacancy and rent growth, but WeWork becoming a more stable and creditworthy business in many ways helps the overall office market by firming up rent rolls in all their existing buildings.
What will we be saying about WeWork at this time next year?
"What a difference a year makes!" If WeWork can tighten up the books by focusing on the core "space as a service" business and move from a growth story towards profitability, it's a good thing for tenants, landlords, the market and, not to mention, brokers who have become accustomed to competition in flexible office space as an option for our clients.
Jeff Reinstein
CEO, Premier Workspaces
Irvine, California
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
For the last few years, landlords have been more focused on the companies that have raised a lot of money and spent it to create an over-improved product, rather than the ones that have a track record for making money. I think the landlords are now starting to regret those decisions. Some landlords have already started reaching out to us about taking over WeWork centers and repositioning them should WeWork fail, given that Premier Workspaces is one of the few shared workspace companies with a 17-year track record for taking over and repositioning distressed centers. We have repositioned 74 distressed shared workspace centers with minimal disruption and in some cases, on only a few hours’ notice.
Is the IPO being shelved good or bad for the office market?
If the IPO had been a success, it would have been great for WeWork. Should WeWork not be able to raise more money and fail, I think it is going to be a catastrophic event for the office market, especially markets like NYC where they are the largest tenant.
What will we be saying about WeWork at this time next year?
Regardless of what happens with WeWork, they have created a lot more awareness of our industry and forced shared workspace operators to improve their game in terms of design. They have also forever changed the way landlords lease space and tenant expectations.
Bryan Murphy
CEO, Breather
New York City
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Savvy industry players are separating the baby from the bathwater here and see the very real business value that flexible office space provides. Companies have decided that flexible workspace is an essential tool for the business and we see that trend accelerating.
Is the IPO being shelved good or bad for the office market?
Regardless of what happens with WeWork’s IPO, the company has kick-started the flexible office market. Though the company is synonymous with coworking and mainstreamed that concept, it’s helping people adopt flexible, private and on-demand offices like Breathers — a product that has enormous business value from growth stage companies dealing with fluctuating headcounts to giants diversifying their real estate portfolio. The industry is only in the second inning of a gigantic transformation. Estimates from JLL forecast that the flexible office market will grow from 2% to 30% of a trillion-dollar market over the next decade or so.
What will we be saying about WeWork at this time next year?
I think a year from now, we’ll be talking about how much the industry has grown and thanking WeWork for driving such enormous interest into the space.
Ismael Clemente
CEO, Merlin Properties
Madrid
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
I don't think so, because the market started wondering about WeWork's business model a long time ago, particularly for large, mono-tenant leases. Only companies wanting to drive artificially high headline rents for capital markets purposes remained blind to the obvious.
Is the IPO being shelved good or bad for the office market?
Neutral, since absorption is absorption and vacancy is vacancy, no matter whether direct or "shadow." For markets highly penetrated by WeWork like New York or London, it might be a little worse in the short term, as an important source of immediate, albeit vulnerable, take-up might dry.
What will we be saying about WeWork at this time next year?
That the company will be fighting to achieve profitability through the ordinary course of business so as to become EBITDA-positive, just like any other company, and will have definitively abandoned the tech fanfare that was created for IPO purposes.
Wil Catlin
Managing Director and Senior Partner, Boston Realty Advisors
Boston
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
WeWork solves for flexibility and global convenience. While there are some landlords that have never inked a lease with the coworking juggernaut, any landlord that signs a lease with WeWork in the future will assess them like any other tenant — based on good credit and how they utilize space. It is WeWork that has a lot to learn from its current modus operandi. Until recently, WeWork has been willing to pay more for rent than anyone else and therefore attained the real estate where they aspired to be. There is an imbalance of too much space and not enough member revenue. As the “WeCorrection” gets underway, traditional tenants will again be able to compete for office space that WeWork was once consuming.
Is the IPO being shelved good or bad for the office market?
The investment community lost faith in the original WeWork management team. Adam Neumann and crew were focused on growth and market share, while the new management team will be focused on investors' return. With that said, the advent of an IPO or not will not affect the office market. WeWork itself does not bring jobs to a marketplace. They provide space for companies and employees that are already in the given market. Whether it be WeWork, another flex space provider or direct to the landlord, these companies will still need office space. For example, here locally, from 2010, the year WeWork was founded, to 2019, the number of life sciences jobs in Boston grew 28% and with it over 12M SF of commercial space. With or without WeWork, these companies still need a roof over their head.
What will we be saying about WeWork at this time next year?
In all companies, there needs to be a path for profitability. The cowork model is a proven necessity and I believe that the new WeWork management will right the ship. We might even see a spinoff named, “WeSurvived."
Jim Bacchetta
Vice President, Highwoods Properties
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Any landlord who saw the recent interview by Sam Zell, a pretty smart guy, on CNBC might want to exercise some caution, but it’s too early to say how WeWork is going to do long term.
Is the IPO being shelved good or bad for the office market?
The IPO delay is probably a smart choice given all the recent turbulence and negative publicity. If they have a more successful IPO as a result, in the short term at least, it’s good.
What will we be saying about WeWork at this time next year?
Not sure. What’ll be more interesting is what is said after the next recession.
Bob Mathews
President, Colliers International Atlanta
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Sentiment had already begun to shift away from the risk of a WeWork model.
Is the IPO being shelved good or bad for the office market?
IPO is being shelved because the underlying value of WeWork didn’t match the oversized valuation that was predicted. It is also likely to change the office markets negatively where WeWork has a big presence like NYC. The IPO being shelved puts a cloud on those markets and heavily exposed WeWork lessors and on the entire shared space market. Too soon to tell how much effect in each market.
What will we be saying about WeWork at this time next year?
Innovative, aggressive and ? The story is left to be told. Time will tell. The CEO is out but has voting control.
Eric Sussman
Adjunct professor of accounting and real estate, UCLA; Founding partner, Clear Capital LLC
Los Angeles
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
No question. I have no doubt that WeWork’s reputation will absolutely tank. It has to. If you look at it from a landlord’s perspective, similar to how they underwrite, they look for the three C's — credit, collateral and character. If you were to analogize this to the landlord market, well, what’s [WeWork’s] credit? That has gone down. Their collateral is now similarly downgraded. And thirdly, character. There are a lot of stories coming out about Mr. Neumann. I know he stepped down, but character seems to be lacking in a number of areas.
Is the IPO being shelved good or bad for the office market?
It’s neutral as far as the office market nationally. WeWork is an expanding niche of the office market and they only operated in certain primary markets. Overall, on a macro level, it will be a blip.
There is no such thing as an “office market.” The office market is so regional and some regions have several submarkets like Los Angeles. Will the WeWork problems impact certain primary office markets? Yes, there will be some impact but how deep is not known. The rest of the U.S. didn’t have any exposure to WeWork, so it’s not an issue.
What will we be saying about WeWork at this time next year?
Let me know if the Psychic Friends Network or if Miss Cleo is still in business. If WeWork files for Chapter 11 bankruptcy, there’s going to be at least six months of reorganization. If they are able to reprice the IPO as something south of $20B, that could perhaps [keep them afloat]. And if they get a new CEO with a good reputation, who knows? There are so many moving parts. Anyone trying to predict this, you might as well look at a Ouija board.
I do wonder with everything going on with WeWork, if we look back five years from now and with whatever happens with this company, that we look at this time and this event as a peak of this market cycle. I’m not making that prediction. But it would not shock me five years from now that the scrapped WeWork IPO, if it happens, marks a real turning point in the capital markets, unicorns and the funding and valuations of these companies.
Evan Schwimmer
Senior Vice President, The John Buck Co.
San Francisco
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
The market has always been generally concerned about exposing too much inventory to WeWork’s lease arbitrage model, but recent press has deepened the concern that WeWork could be a serious credit risk if they are unable to turn around their cash burn.
Is the IPO being shelved good or bad for the office market?
The outgrowth of the change in IPO strategy is WeWork is presumably slowing its pace of growth, which has a cooling effect on the margin in the markets that WeWork has been active in.
What will we be saying about WeWork at this time next year?
They put themselves on the map like no other by following the tech darling playbook — almost single-handedly creating and serving a new market. Likewise, they successfully pivoted back to their roots as a real estate operating company when presented with a public market wake-up call, likely fortuitous timing given the anticipated economic storm clouds looming on the horizon.
Flip Howard
CEO, WorkSuites
Dallas
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
There is no doubt that the attitude towards WeWork will never be the same, but that’s not necessarily a bad thing. A lot of people have always viewed their way of operating with a healthy dose of skepticism. If WeWork comes out on the other side of this microscope with a more visible path to profitability, they will be viewed more positively than ever before. If they don’t, it won’t really matter how they are viewed.
Is the IPO being shelved good or bad for the office market?
WeWork shelving its IPO is like an engagement broken off a week before the wedding. No one is happy about it, but it’s better than if it happened afterwards.
What will we be saying about WeWork at this time next year?
The only real problem with WeWork was the unrealistic valuation. I think we will all look back and realize that instead of blaming Adam Neumann for convincing SoftBank to invest at lofty valuations, the blame should fall on Mr. Son and SoftBank. The way I see it, if someone pays four times what something was worth, the buyer is the fool, not the seller. Neumann’s eccentric salesmanship has irreversibly transformed how the world consumes office space.
Ralph Winter
Founder, Corestate Capital and W5 Group
Zurich
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
When WeWork started, it mostly offered interesting leases based on a very innovative concepts for vacant floors and space. Because of positive feedback from employees, etc., they also stepped into the top locations and their success was even bigger. So what landlords did, and this will be the same in the next decades, is a risk/return profile which told them to sign a master lease with WeWork. The concept of coworking is mind-blowing and changed the commercial real estate world forever. So I do not think that great concepts will not find investors who will support it.
The lesson learned, that will impact WeWork’s model tremendously, is the huge cash-negative moment which can put them in real trouble. So this will have landlords thinking and being more cautious, but nevertheless it is not the end of all master leases. There are so many different types of tenants who will be hit by a downturn differently.
Is the IPO being shelved good or bad for the office market?
Every IPO which is pulled creates negative momentum and more critical questions. I would have hoped that the number of advisers Adam Neumann hired were more resistant on some of the most criticised conflicts. This is a very bad picture of experienced advice.
What will we be saying about WeWork at this time next year?
Wow, the most difficult question. Realistically, WeWork needs a strong partner who is able to bridge them for the next 12 to 24 months. I think this cannot be SoftBank because it lost a lot of its credibility and is not seen as a professional investor in this case, so it needs another independent, well-reputed corporate investor with large pockets. In addition, a necessary cost-cutting with a more humble management will help bring it back to better acceptance. I would not be surprised if WeWork in 12 to 24 months is back to being a very in-demand business model.
The ugly case scenario: A recession kicks in very badly, combined with a geopolitical disaster and they go bust … but I would only give that a 20% chance. I hope everything turns out well. Co-living concepts are performing much better, and one of the reasons is because they are seen as resilient to potential market volatility.
Jon Glass
Corporate Managing Director, Savills
Washington, D.C.
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Yes, I think landlords and their investors will be much more cautious in their dealings with WeWork and related coworking companies before committing to long-term leases that require significant capital and risk tolerance. While there are clear signs that the business model and growth strategy of WeWork has flaws, one thing that is not going away, regardless of WeWork’s future, is the demand for flexible office space. WeWork did an incredible job of illuminating the disconnect between business and real estate. Tenants are willing to pay a premium for office space that allows for greater term flexibility and less resources devoted to building out and “activating” space. This allows companies to focus their resources on their core business while providing a “cool” space that helps with recruiting and retention, while at the same time avoiding a 10+-year lease commitment for space that may not be in demand in a few short years.
Is the IPO being shelved good or bad for the office market?
Hard to tell. For years, real estate professionals have had trouble determining WeWork’s astronomical valuation and growth strategy prior to the IPO. The math just didn’t work out. They were consuming space at a super high rate in some of the most expensive buildings in the city and paying top dollar to build them out. At the same time, vacancy within their portfolio remained high and the rents they were securing from “members” didn’t seem to be covering their expenses. It is good that they came back down to earth after testing the public market, but time will tell how it really impacts the office market. They were by far the biggest catalyst for growth — especially in D.C. — so now that they are pumping the brakes, we will likely see absorption drop considerably.
What will we be saying about WeWork at this time next year?
I think they will still be a force in the marketplace. They have so much office space in key markets that isn’t going to disappear any time soon. It should also be noted that they do deliver a good product that is well received by tenants, so they will still be relevant this time next year. They deserve a lot of credit for massively disrupting the way people work, which will continue to evolve as the workforce becomes younger.
Bruce Ford
President, Eastern Region, Transwestern
Atlanta
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
The attitude toward WeWork has changed already over the past several months, and it will continue to evolve as this story unfolds. But there are two truths that will remain. First, Regus showed landlords years ago that there is a market for coworking space, and now there are many others competing in the space with new ideas, product and solutions. They won’t all make it, but landlords will continue to lease space to operators that are well capitalized and are able to post necessary LOC’s or other instruments. Second, the demand for coworking space is continuing to grow and evolve. This desire for functional and flexible space is now deeply embedded in the real estate world. So going forward, solutions will be needed — whether they come from WeWork, other companies or the landlords themselves.
Is the IPO being shelved good or bad for the office market?
This is all about liquidity, stabilization and profitability. The IPO would have cured some ills, but the underlying leadership and management structure of WeWork needed to be adjusted. Perhaps this shake-up will solve that and WeWork will be able to shore up its balance sheet. If they can’t do that, then this will be trouble for the CRE marketplace.
What will we be saying about WeWork at this time next year?
If I were a competitor, I would be pretty excited about what’s happening in the coworking space — not because WeWork could fail, but to see that they will no longer be the hot hand and that opens up more room for competition. The WeWork story will continue to unfold quickly over the next few months, and this will put pressure on other operators to demonstrate a better business model and stable financials to landlords, and if they are well operated, this will provide opportunities for growth.
Ian Strano
Executive Vice President, NAI Capital
Los Angeles
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Landlord attitudes toward WeWork changed the day they read WeWork’s IPO prospectus for the first time, which revealed crucial information about the poor financial condition of the company. It was a big surprise not only to landlords, but everyone as well. Had landlords known these facts before they entered into leases, many may have either passed on WeWork as a tenant entirely or approached the negotiation very differently.
For those landlords with “healthy” security deposits or a letter of credit, in the short term these landlords will be fine, but the long term is uncertain. Surprises and uncertainty are never looked at favorably by the market in general.
Is the IPO being shelved good or bad for the office market?
WeWork went from a $47B valuation to an IPO failure. WeWork (coworking in general) was the next big thing to happen to the office market. As a company, with a perceived stratospheric valuation, landlords chased WeWork as the leader in this space. The IPO being shelved creates uncertainty in the office markets saturated by coworking companies — and certainly, for landlords with WeWork as the major tenant.
There is a lot of hand-wringing in the office market as the facts about WeWork become clearer. WeWork’s liabilities, governance, and unsustainable burn rate concerns landlords because when a tenant pays rent, it’s good and when a tenant doesn’t (or can’t) pay rent, it's bad.
What will we be saying about WeWork at this time next year?
There is no easy fix for WeWork. WeWork will go through its growing pains — as will landlords adjusting to the coworking industry. Despite WeWork’s size, profile and epic IPO fail, the success of the industry at large will continue. Competitors will emerge but WeWork will always be credited with fundamentally changing how people work, office space-sharing, and flexible leases, etc. Already landlords are adopting their own “WeWork” flexible workspace options with short-term leases.
Robert Wolstenholme
CEO, Trilogy Real Estate
London
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Discussions seem to range from the naysayers — “We always knew that a business model based on short-term volatile income streams balanced against long-term liabilities was dangerous” — through to advocates saying “there remains a structural undersupply of flex space in the market and they are always full." There is certainly more talk of nervousness amongst landlords, institutional investors and lenders, but it remains to be seen how this works out.
Is the IPO being shelved good or bad for the office market?
Could it be that the datasets that have been gathered as a result of the scale of WeWork could provide someone with the rocket fuel necessary to transform the office sector through the use of smart technologies and artificial intelligence?
What will we be saying about WeWork at this time next year?
Is there a price at which the business could become an interesting target for the likes of CBRE, JLL or IWG?
Charles Robinson
Senior Vice President for the U.S., Servcorp
New York City
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
While WeWork are likely to have their difficulties in the short to medium term, there seems to be broad industry acceptance of the significant growth potential in flexible workspace overall. If WeWork are able to make the right difficult decisions in the year or so ahead, then there is a chance they will be able to participate along with proven and reliable performers like Servcorp and IWG in this longer-term global growth.
Is the IPO being shelved good or bad for the office market?
It is good in the sense that if they had gone public as planned and continued on their original course, they probably would have dramatically imploded in a year or two, causing significant collateral damage to other recent entrants in our sector and then to commercial real estate in general. Now at least, as much as the task may be enormously difficult and time-consuming for the new WeWork leadership, there is a chance they can steady the ship and chart a more realistic path forward in what should be a growing global market for those like Servcorp and IWG who have proven and sustainable business models.
What will we be saying about WeWork at this time next year?
It appears WeWork went on a massive marketing binge and CRE land grab with their SoftBank dollars, without properly investing in the way Servcorp has in an accounting and technology backbone to effectively run a global hospitality business. That is not something they will be able to fix overnight, and the jury may still be out until they can show they have the necessary automations in place to run their global business far more efficiently.
Allen Rogoway
Managing Principal, Cresa
Chicago
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
From an occupier’s adviser perspective, we will certainly increase due diligence on the viability of WeWork locations. But this is not exclusive to WeWork. The public offering process has merely created more awareness and transparency in the coworking business models, how leases are structured and potential risks by investors and users of their product. Our focus will continue to be in negotiating on behalf of our occupier clients. From this perspective, we will continue to scrutinize the underlying health of any potential landlord, whether it be a traditional building owner or an operator of a flexible office space.
Is the IPO being shelved good or bad for the office market?
I think the disclosures from the IPO process will be helpful. Now there will be more focus on the viability of different coworking business models.
What will we be saying about WeWork at this time next year?
I think we will say that WeWork was the catalyst for the formation and growth of modern coworking providers. The brand is almost synonymous with coworking, and I believe over time it will be able to reposition itself as a leader in the industry.
Jeff Fronek
Vice President, Director of Acquisitions, Rubenstein Partners
New York City
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
WeWork’s sudden liquidity situation may hasten its walking away from underperforming locations. However, the reality is that WeWork was one of the only coworking operators still signing leases; the rest of the industry has already switched to a management agreement structure. With management agreements, the landlord pays for the entire build-out and owns the business, so there is negligible credit concern.
Is the IPO being shelved good or bad for the office market?
A lot of people ordained WeWork as a bellwether of various situations, but I think that is overblown. They are the latest company with a drive to scale at all costs and the ability to raise almost unlimited amounts of capital in the private markets at unchecked valuations. That had to come to an end, and now it has. That is a good thing, because a rational market is a good market. It shows that, at least in the public markets, there is still some consensus around the need to tie asset prices to fundamentals.
What will we be saying about WeWork at this time next year?
Too early to tell.
Manuel Fishman
Shareholder, Buchalter Law Firm
San Francisco
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
I think many landlords will want to limit their exposure to "WeWork-type" tenants for the near term.
Is the IPO being shelved good or bad for the office market?
I think, overall, it is a good thing. WeWork created an anomaly in the office market. It is good to see this correction.
What will we be saying about WeWork at this time next year?
Better company, new CEO, more targeted and more focused. Let’s not forget, the company has a real value and niche.
Jason Richards
Partner, Stos Partners
Encinitas, California
Will the attitude of landlords and the office market toward WeWork change after everything we’ve learned?
Landlord reaction to the latest publicity and failed WeWork IPO is likely to result in increased hesitation towards concessions and reduced lessor contributions towards any new lease negotiations. WeWork has done its best to shift location-specific operational risk to the lessors where it can. As a result, there may not be much recourse for a landlord if a specific location fails. It’s also likely that WeWork’s profitability will now be under a microscope, which could impact subsequent lending or investment sales of properties heavily occupied by WeWork.
Is the IPO being shelved good or bad for the office market?
If the WeWork IPO is being shelved because of a lack of fundamental strength in the company’s business model, then it's good for the office market. Many in the industry believe the long-term viability of the coworking business model on which WeWork is based still needs to be proven. If the WeWork model is, in fact, broken, it's best for that to be out in the open so its risk can be appropriately assessed.
What will we be saying about WeWork at this time next year?
While we believe the WeWork model can work, it appears that it may need to go through this current reorganization to better align itself on a path to success. A year from now, we believe the consensus will be that it was good for WeWork to have undergone this shake-up, and that the company will then be on stronger footing. However, the firm’s aggressive growth strategy will likely have to wane in order to shore up its foundation.
