Too Much WeWork In A Building Still Makes Investors Nervous

WeWork may be one of the most valuable startups and coworking operators in the world, but new research reveals investors tend to pay less for assets where WeWork occupies large amounts of space.

A new Cushman & Wakefield study found that eight buildings that traded hands since 2016 where WeWork occupied more than 40% of office space all sold with above-average cap rates — from 50 to over 100 basis points higher than average in most cases, The Real Deal reports. Of the nine buildings to trade hands where WeWork occupied less than 40%, five traded at significantly lower cap rates than average.

While WeWork can boost a building's visibility and cool factor, making it more enticing to investors, properties where WeWork absorbs large swatches of space often result in a lack of confidence in the coworking giant's long-term prospects, Cushman Head of Americas Capital Research David Bitner told TRD.

Part of that could be due to memories of virtual and shared-office provider Regus' bankruptcy during the 2001 recession, when aggressive spending on expansion left it overleveraged. WeWork has been operating at a loss since its inception, ending 2017 at a $934M deficit as spending outstripped incoming revenue. The current coworking trend looks markedly different than it did at the turn of the millennium, but it has also not experienced a downturn.

That said, Bitner does not expect WeWork to repeat the downfall of Regus, which has since been bought by IWG (which is working toward a sale itself). Judging by SoftBank's multibillion-dollar investment, he is not alone.

Meanwhile, WeWork continues to add more components to its business in an attempt to insulate itself should coworking take a dive. It now manages spaces entirely occupied by heavyweights such as IBM and Amazon in New York, and recently launched a headquarters design and management arm for companies not interested in coworking. Optimists consider the diversification to be positive, but IWG CEO Mark Dixon wonders if WeWork is repeating Regus' mistakes.

The industry leader also remains as aggressive as ever in expanding its membership, striking deals with brokerages to steer office users toward its spaces. If indeed its growth is too much, too soon, buildings that depend heavily on WeWork as a tenant will be exposed if the other shoe drops, which is why investors are demanding discounts on such properties.