‘The Sprint Became A Marathon’: Coworking Firms Slow Growth After WeWork Meltdown

In the wake of the WeWork IPO debacle, coworking and flexible office companies have been quick to point out how different they are from the industry's elephant in the room. But they say the entire fiasco has taught them a few things, and given them some benefits, too.

“Knotel has been growing quite fast, we have grown almost fourfold in the last year," Knotel co-founder and Chairman Edward Shenderovich said at a future of flex office leadership event hosted by Convene in New York City on Tuesday. "Given what happened with WeWork we'll probably slow down. There's no reason to grow that fast."

Shenderovich said the company — which reportedly has some 800K SF due to become vacant in the next year — will be “cash-flow positive” in all of the firm’s core markets this quarter or next. 

“We want to be sure that every dollar that we invest ultimately brings a profit, and brings a profit in the foreseeable future,” he said, adding that the “dust has settled” over WeWork’s swift fall from grace.

Right now the biggest private tenant in both London and New York City, WeWork on Friday released its “90-day game plan” on its website, which involves reducing the employee headcount and shedding non-core businesses. The company has been in mammoth damage control since it shelved its much-hyped IPO and was subsequently rescued from the brink of insolvency by SoftBank.

Still, landlords across the country remain skeptical of the firm’s ability to right the ship.

Some are preparing for the possibility that WeWork could hand space back or renege on deals, Bisnow reported last week, and others said negotiations are on hold — even after the bailout.

Many in coworking had been rooting for WeWork to successfully debut on the public markets, hoping it would bring strengthened legitimacy and transparency to the industry.

But the tanking of the IPO isn’t a dark cloud for the sector, panelists said Tuesday. Rather, it has sharpened the conversation about growth and ushered in a more rational era for the market.

"The sprint became a marathon,” Convene co-founder Ryan Simonetti said. "I think all of us have benefited from the fact that this become a different game — meaning that you could be thoughtful, be patient, be disciplined, pick the right locations and not feel pressured to do things because of market share."

He added that WeWork had been paying the most for space and charging the least to its users, putting pricing pressure on demand.

“We have lost deals to customers in the last 12 to 18 months [because] they were paying less than WeWork was paying for the real estate itself,” he said. “Regardless of what happens — meaning how many locations they close or not close — we think we're going to get back to a more rational pricing model."

When WeWork filed its IPO prospectus back in August, its voluminous losses — some $1.9B last year, and $700M in the first half of this year — and the fact it expected to lose money for "the foreseeable future” sparked a wave of criticism.

“[WeWork] was somewhat of a cynical approach to extracting capital and not so much an approach to serving businesses and serving customers — it got what it got,” Serendipity Labs CEO John Arenas said. Serendipity Labs primarily uses licensing agreements and management contracts, he said. “When you see $10B, $15B of capital for one company in an industry that was only a $5B industry, you know something's going to break.”

Panelists were quick to stress their steady-as-she-goes approach to profitability. Convene’s Simonetti said his company had taken 93 deals to its investment committee last year, and 11 were approved.

Meanwhile, FORA CEO Enrico Sanna, whose coworking firm does not yet have space in the U.S. but is active in London, said last year his company looked at 100 deals, but ultimately only did three.

“Growth for growth’s sake makes no sense to me whatsoever,” he said.

Coworking firm Industrious — which was not represented at the event — raised $80M in August and said at the time it would be profitable by next year.

"I think one of the big things that has changed with WeWork is there's not a proliferation of leases and somewhat of a land-grab going on right now," said Andrew Kupiec, the CEO of Hana, CBRE’s flexible office business that it launched last year. "There is a bit of a pause as people figure out what's the next step here. And that's allowing conversations to happen with landlords, with occupiers, to get a rational way to expand."

Questions about the impact of a WeWork pullback in markets like New York City and London remain. Multiple potential WeWork lease deals in New York City are said to be canceled or frozen, and many in London are now in jeopardy as WeWork reviews its expansion there, Bloomberg reported earlier this month.

FORA's Sanna believes that leasing markets likely wouldn't be affected if WeWork begins putting space back on the market, but it does impact the tone of the conversation.

“[It’s the] stability conversation, which has an effect on all of us, really. I don’t think you can say you are fully isolated from a landlord calling you [and saying] ‘If WeWork did it to me, why won’t you do it to me?’” he said, though he added each firm is different. "The WeWork story is a WeWork story, it’s not a story about everybody else.”