WeWork's Real Estate Chief On Management Deals, New Players In Coworking And Why WeWork Could Weather A Downturn

It’s been a year of milestones for coworking behemoth WeWork. It announced a $3B injection from Japan’s SoftBank Group, which would value the company at $45B, making it second only to Uber as the most valuable startup in the country.

In September, it became the biggest private tenant in Manhattan, with more than 5M SF under its control in the borough. Across the city, WeWork has more than 7.2M SF in total footprint, according to the company's figures, and is in 95 cities worldwide.

This is against a backdrop of a general coworking explosion, with players like Industrious, Knotel, Spaces and Convene all bolstering their presence on the office market. Then there are the newcomers from powerhouses like CBRE with Hana and Tishman Speyer with Studio, respectively.

The swift growth of the sector has forced property owners to rethink the way they run their operations and made some anxious about the sector's vulnerability to a downturn.

But WeWork Chief Development Officer Granit Gjonbalaj, who is speaking at Bisnow’s New York State of the Market event next week, argues the number of new businesses moving into coworking proves the health and strength of the industry.

The more players the better, he says, adding that WeWork’s focus is now on aggressively pursuing partnerships with landlords, as opposed to just traditional leases. This interview has been edited and condensed for clarity.

Bisnow: WeWork became the biggest private landlord in the city this year, surpassing JPMorgan Chase. What do you think 2019 will look like from a leasing perspective? Can we expect more deals before this year is out?

Gjonbalaj: We are very bullish on New York City. It's the market that we started in back in 2010 when the economy wasn't so great, and we enjoyed great success over the years. I think we are expecting to continue our growth here in New York. Frankly, we're having a hard time keeping up with the demand here in New York. So we are very confident that we are going to continue to be active in the market. In terms of whether we'll see any kind of leases signed by the end of the year, we could, potentially. I know that we have a decent amount in the pipeline. The question is, will some of those opportunities get closed on time or not. It's hard to predict.

But we are very confident in New York and we are continuing to grow, we are continuing to partner with landlords. Some of the partners that we've had, we've done business with for a very long time. We are now getting into the phase where [we are] partnering up with them, and they are enjoying some of the upside that we have.

Bisnow: WeWork teamed up with Rudin and Boston Properties to co-develop Dock72, a 675K SF building at the Brooklyn Navy Yard, where WeWork has a third of the space. What does that relationship look like, when WeWork is a co-developer?

Gjonbalaj: Rudin and Boston Properties were very early believers of the WeWork concept. We partnered up with Rudin at 110 Wall, where we developed a WeLive and a WeWork and F&B concept on the retail. It's a very successful project for us. We have a great relationship with Rudin, we have the same with Boston Properties. We've done phenomenal deals with them here in the U.S., especially in San Francisco [where] we are a tenant at their new development, Salesforce Tower. 

We believe in their ability to execute, they share a similar vision to us. We feel very confident. We thought it was going to be a great project, like it turned out to be, and we have great confidence in the project. We had a great experience with them during this development phase, we are now at the point where we are developing our interiors and we expect to open the first quarter of 2019. We're having great activity in the building, but I'm sure after we open for business that's when we are really going to get more interest.

Bisnow: It's still kind of an emerging area, when it comes to office.

Gjonbalaj: It is, but we believe that it’s going to be a successful location for us.

Bisnow: Has Amazon’s HQ2 plans changed your outlook for [Queens and Arlington]? You've got Long Island City, and you have WeWork/WeLive in Crystal City.

Gjonbalaj: Look, I think we were always confident in the location, having Amazon now coming to those two locations (WeWork has 250K SF at Tishman Speyer’s building JACX in Long Island City and a WeLive in Crystal City on South Clark Street) obviously increases the population and the demand.

And I think you'll have a lot of other businesses that are going to be attracted by Amazon. We're going to continue our interest in those locations.

Bisnow: You're not going to change the name to National Landing in Crystal City or anything like that?

Gjonbalaj: Not that I know of. [Laughs.]

Bisnow: Some of WeWork’s peers, like Industrious, have moved more toward a model where they work in partnerships with landlords. It's my understanding that WeWork has previously used more traditional leases. Are you saying you are planning to change that?

Gjonbalaj: In other parts of the world, and even here in the U.S., very early on, we've participated with landlords and we've treated them as partners. So there are opportunities that we have that we share the upside with the landlord. I don't think we were as forthcoming with that product in the past here in the U.S. Outside of the U.S., this is a huge part of our business.

So you know, we have participating leases in Asia — it's a huge market for us — Latin America and Europe. I don't think we've talked about them maybe as much as some other companies have. But it's always been in our plan, and I think with the landlords that we have a very good relationship with, we've done those type of arrangements.

You are going to see us be a little bit more aggressive in pursuing those type of opportunities. And one of the reasons we want to do that is because we want to add value to the landlord and we want to be a true partner with them so that all of our interests are aligned. And I think the demand that we are seeing in the U.S., it just makes a lot of economic sense for both.

Bisnow: So how do they look, or how does it work for WeWork? A partnership versus a traditional lease?

Gjonbalaj: I think one of the major differences between the traditional lease and a participating lease is that the landlords have an opportunity to enjoy the upside with us. That structure can take many different forms, but in a nutshell that's the major difference between a traditional lease and a participating lease.

Bisnow: But how is it different for you? I can see why it's different for the landlord, but how is it different for you as WeWork?

Gjonbalaj: When we are 100% aligned with the landlord and we are essentially sharing some of the upside with them. So we are giving up some of our upside. These participating leases can take different forms so it really depends who we are working with. But the biggest component, and the biggest difference, is that WeWork is sharing the upside with the landlord.

Bisnow: One of the reasons landlords have said they want to do this partnership style is because it will shield them if there is a downturn, and they will be less exposed. Is that part of the reason that you are going to be more aggressive (with partnerships), to make landlords feel more comfortable?

Gjonbalaj: Well, I think that's part of the reason, but also … the most expensive part of the building is vacant space. And everyone is trying to monetize that vacant space as much as they possibly can. I think we have proven that we have the ability to monetize the vacant space, probably more than anybody else in the industry.

The landlords, they have real estate and they have prime real estate and they are saying, ‘The best user that is attracting these large organizations is WeWork, so why not partner with them to best monetize that vacant space?'

Bisnow: Some people worry about coworking or flexible workplace providers, and their exponential growth in the city recently. And they say at this point landlords can’t afford for a company like WeWork to go south, because you have so much space. What do you say to that?

Gjonbalaj: If you think about when our company was founded, we were going through a downturn. 2010 was really not a great time for the U.S. in terms of the economy, and I think we've proven that during the downturn, and during uncertainty in the economy, is when this business does the best.

We have consistently continued to grow year over year. I don't think there's just a spark in 2018 or 2017. We have been very consistent in building the structure, recruiting the talent, building the platform, continuing to develop the technology. We are just continuing to see that growth that we planned for many years. You see the demand here in New York, where our occupancy is off the charts. You are referring to coworking or flexspace — call it what you want — but you see these large enterprise companies that make up 29% or so of our membership base and you see that there are large companies that enjoy and benefit from being in our platform.

That's going to continue to grow, and I think during a downturn, companies are not necessarily going to be very active in pursuing long-term leases. So I think our platform just makes a lot of sense, during the downturn and during good times. We’re going to continue to expand, we’re going to build our pipeline. We are going to continue to work with landlords and try to partner with them so they can enjoy some of the upside that we are enjoying and that's kind of our future.

Bisnow: Well, the counterargument would be that, in 2010, WeWork was small and it grew as the economy grew.

Gjonbalaj: Yeah, but you can also make the argument that in 2010 we were relatively small but we also didn't have the platform and the demand. So just to give you a statistic: In 2015 we did not have a single enterprise company on our platform, or very little. And in 2018, we now have over 1,700 or 1,800 enterprise companies in our platform.

So if 29% of our membership base is now enterprise companies, and in 2015 we had zero, you can just see the exponential growth that we are having on that side of the business. I would make the argument that we are much better positioned today than we were in 2010.

Bisnow: Tishman just announced its own coworking company, Studio, in September. Does that give you cause for concern? The idea that landlords could just start doing what you’ve been doing, except they have bit of a leg up because they actually own the real estate?

Gjonbalaj: No, I don't have a bit of concern. You know, the argument that you were just making two minutes ago, I think it's very counterintuitive. Because if you are seeing all of these landlords now jumping into coworking or the flexible space, what does that really tell you?

It tells you that the business is really solid. This is where the industry is moving to, whether we like it or not. And I think this is going to start to become the norm. So I think the more players we have in this class, the more this type of asset is going to be solidified. The more players we have, the better we do.

Real estate office space is a huge market in the world, so if you have a specific landlord that's doing something and becoming creative in the way that they offer coworking space or flexible space, I think it's great.

Bisnow: Also, CBRE announced it is launching Hana, a new branch of the company to operate flexible office and meeting space in partnerships with landlords. And some coworking companies are really displeased and said they won’t work with CBRE anymore. What’s WeWork’s view?

Gjonbalaj: I think it's similar to Tishman. The more people we have jumping into this class, the more we are going to solidify the asset class. And I think it kind of goes back to the thinking of, ‘What happens to businesses like this during a downturn?’

And I think the more players you have jumping into this class, the more it solidifies it. So no, we are going to continue working with CBRE, we have a great relationship with them, just like we have with other service providers. You know, they are opening up an advisory group to deal with the demand.

It doesn't really change anything on our side.

Bisnow: I always thought it was the opposite when you were trying to own a space. But you think the more the better?

Gjonbalaj: I think the more the better. I think the market is just a huge market, globally. We are not looking at a specific neighborhood or a specific city, and I think we are in a very good position.

Bisnow: Speaking of people moving into the space, Amol Sarva, who is the founder of Knotel, he said recently he expects his company will be bigger than WeWork in 15 months. Do you think that's true?

Gjonbalaj: I've never spoken to the guy. So I have no idea. I wish him all the best. I don't know how true that is.

Bisnow: Is it possible? And do you care?

Gjonbalaj: Frankly, I don't. To get to this scale, it doesn't happen overnight. So, you know, I don't really know the guy, so I can't comment too much on it.