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WeWork: A case of boom...and bust?

Harry Trotter explores the sustainability of the American serviced office giant.

The rise of serviced or flexi offices has been nothing short of remarkable over recent years. 

This is due primarily to the largest and most famous of them all: the behemoth that is WeWork. While the American company’s prominence in the London and New York markets has been emerging for some time, we are now seeing the ripple effect around the wider UK office markets. 

In 2010 the first WeWork was set up in the Soho district in New York. Just seven years later they occupy 14 million sq ft across the globe and owe $18bn in rent. In the UK alone they are signed up to 41 leases, totalling 3.06m sq ft of office space with a rent roll of £3.02bn over the next 24 years. The stats alone are staggering, but what have WeWork created that is so attractive to investors?  

The answer is really quite simple: they have created a community. They have created spaces employees want to be in. WeWork stole a march on many landlords by creating cool and funky offices when there was nothing else like it on the market. Not only do the spaces look good, but also the services on offer had never been available before: co-working areas, quirky meeting spaces and breakout areas, table tennis, endless coffee and free drinks on Fridays. It became cool to work in a WeWork and everyone wanted to be in one. 

Since launch, the company’s growth has been exponential and shows no signs of slowing. There are, however, warning signs ahead for WeWork and others who follow suit. 

A Property Week analyst who wishes to remain anonymous said: 

One of the worries the industry has – and it’s unproven to date – is what happens if we go through a stickier patch with the economy. The company’s business model is predicated on full occupancy, or as close to full occupancy as possible, and in a downsize scenario where occupancy rates fall to 50%, there is a question mark about how viable this model becomes.

I have a horrible feeling WeWork are going to hit some rocky times because they have grown so quickly and taken great big chunks of space at enormous rents with rent-free periods that are starting to come off soon and it does worry me that this could be like the dotcom bubble.

He cites the cautionary example of Regus, which filed for bankruptcy in the US some time ago. One of the root causes of the firm’s initial downfall was the number of long leases on empty buildings it was left holding. There can be no doubt that such quick growth of WeWork will lead to trickier times in tougher markets. WeWork have indeed started – and there are early signs of success – targeting larger occupiers on longer leases in order to secure long-term rental income over larger chunks of space. A sensible decision, but will large occupiers want to be in such a heavily branded WeWork building? Branding and representation has always been a negative of the serviced model – is this going to change? 

Landlords are now heavily investing in creating their own serviced concepts or co-working operations within their buildings or indeed purchasing serviced office providers themselves. They have caught up with creating the funky spaces and have neither the debt nor the monumental rent roll that WeWork have taken on. 

The office landscape has changed dramatically over recent years and will continue to do so as the presence of serviced or flexi offices becomes more integrated with the traditional office market. It is likely that we will see a greater blurring of the lines between conventional and more flexible space as the demand for flexibility and innovation from occupiers continues to grow. 

It remains to be seen if WeWork can continue to survive at such a trajectory, but what is clear is that occupier demands of their working environment continue to evolve. Shrewd landlords will keep listening to these demands in order to keep up.