It was an afternoon in March 2019 and the champagne was in free flow at Manchester’s 20 Stories rooftop bar. WeWork was in town, celebrating its first two openings in the city by inviting office agents to a three course meal and limitless booze. For the real estate industry, still shaking from the 2007 financial crash, it was a brief return to the boom times.
WeWork, already haemorrhaging money, flashed its SoftBank-funded chequebook. Bring us a business for the new offices, attendees were urged, and WeWork will give you 20 per cent of its first year of rent up front. If companies take extra space along the way, you get extra commission. Agents used to making a couple grand from client fees were suddenly looking at £15,000 for a single deal. Could WeWork afford it? At the time, no one asked.
Fast forward eight months and WeWork's value has crashed from $47 billion to about $10bn, having scrapped an unconvincing, financially opaque IPO. WeWork's main backer SoftBank — which has pumped around $19bn into the company to date — has taken control to try and turn the company around.
Last week WeWork kicked off large-scale redundancy consultations to cut thousands of staff after controversial chief executive Adam Neumann exited with a $1.7bn payoff. The UK has not been spared from cuts. Earlier this month, the company issued a formal warning over redundancies to staff in the UK, where it employs more than 1,000 people.
Yet few players in the UK property market are willing to contemplate that WeWork could crumble. In fact, it’s quite the opposite. The property sector, so fundamentally disrupted and discombobulated by WeWork’s wild rise, is now banding together to help it survive.
Landlords and agents are wary of going on the record when mentioning WeWork — and most decline to talk about it. If they do, it’s in broadly positive terms. How has a company that was not long ago classed as an outsider and a disruptor come to hold such sway over an industry that’s famously conservative and slow to innovate — especially now?
WeWork’s UK expansion, particularly in London where it’s the biggest commercial occupier in the city, makes it a significant source of business for agents and landlords who don’t want to burn bridges piled high with money. But, as recent events have shown, that money isn’t quite what it seems. WeWork made a $1.25bn loss in the third quarter of the year, with Softbank now enacting a drastic change in strategy that focuses on income generation. In an industry that has come to depend on WeWork, there is hope — real or forced — that profitability will follow. If it manages to slim down its operations, new centres might not open as often, but WeWork could continue to be a major player – and spender – in UK property.
In many ways, this positive rhetoric is about self-preservation. “Everyone wants to see them succeed. It doesn’t make any sense to talk the market down,” says John Nash, a director at Manchester-based office agent Canning O’Neill. After all, the amount of void space if the opposite happened would not be good for anybody.
If WeWork were to start vacating offices, it would leave landlords — more than 50 of them in the UK — empty-handed, which could be disastrous considering WeWork has more than $47bn in rental commitments globally, as reported by the Financial Times in August. But talking up the market can only go so far. WeWork’s success relies on turning around its finances and saving its brand. “I haven’t come across any genuine optimism toward WeWork,” Nash says of the company’s troubled finances. WeWork’s dilemma is that the brand that made it popular — the globally ambitious one with near limitless possibilities — is at odds with the austerity it needs to survive. How will a humble, slimmed down WeWork differentiate itself from the competition?
The worry is that some of that popularity is fuelled by the same thing that caused WeWork’s losses: its penchant for spending on lavish freebies. Free beer, games rooms, yoga and meditation classes, DJs and multiple coffee bars are a mainstay at these spaces. At Manchester’s No. 1 Spinningfields, startup co-founder Sam Fitz-Hugh says the perks are one reason he’s been at WeWork for two years, and not at any of its competitors in Manchester.
“You had an extra glass of water and it gets added to your bill at the end of the month,” he says, half-jokingly, of WeWorks’s competitors. For businesses who don't have to foot the bill, WeWork covers perks employees want. But if the company starts to make widespread cuts to freebies to make ends meet, it risks alienating more than a few startup founders.
WeWork offices in prime locations such as 2 Southbank Place in Waterloo rely on big business to absorb space and foot the bill. At Southbank Place, HSBC leases more than 1,100 of its 6,000 desks, which means it will “probably” have a better chance of generating enough of a margin to pay the building’s rent, industry analyst Mike Prew wrote in a note last week. But part of the reason HSBC is there is to be part of the WeWork buzz. And if its offering starts to lose its appeal to startups, WeWork risks losing its ability to reel in big corporate clients.
“WeWork made a lot of traditional property owners sit up and think about what they do and how they behave in the market,” says Nick Deacon, head of offices at Nuveen Real Estate, which owns London’s Devonshire Square with WeWork and Danish pension fund PFA Ejendomme. “You can see a whole raft of people, including ourselves, start to think more strategically around how we offer space and service to our customers.”
Unfortunately for WeWork, this means a slimmed down model has to compete with an ever-growing number of businesses that have followed in its footsteps.
The collapses of WeWork-style competitors show how difficult the model is to sustain without SoftBank's deep pockets. Clubhouse and Central Working recently fell into administration (IWG has now bought Clubhouse and is in talks to buy Central Working). Meanwhile, Property Week has reported that another operator, Campfire, has closed its UK operations and Prospect Business Centres has had to close one of its London centres.
But others will likely fill the vacant space. There are now 1,681 flexible workspace centres in London alone, run by 759 operators, according to The Instant Group. Operators, such as IWG, which owns brands like Regus and Spaces, may have existed for decades (and, in the case of IWG, are actually turning a profit), but the rate of growth in the sector is new: 30 per cent of all London office lettings, by size, went to serviced office providers in the third quarter of 2019, according to Estates Gazette.
The hope is that the same would happen if WeWork fails to turn its fortunes around. That would mean that WeWork were to disappear tomorrow, rents would fall but only in the short-term, argues Peter Papadakos, head of European research at Green Street Advisors.
Papadakos is confident that the underlying demand for a product like WeWork is high and a slew of competitors are ready to pounce on available space, pushing rents back up. “I think within 12 to 18 months, the market wouldn’t be able to tell whether WeWork existed or not,” he says.
Still, for many, WeWork has become synonymous with these spaces, which gives its brand a disproportionate amount of power over opinions of the sector as a whole. In the way someone might buy a Hoover rather than vacuum cleaner, Nash says he has clients ask him to find them “a WeWork” instead of a serviced office. It’s an association that even competitors appreciate — and fear.
Back in No. 1 Spinningfields, Fitz-Hugh says he and his colleagues know that WeWork’s downfall is a real possibility, but watching it navigate a recovery would be a learning exercise for startups like his. That path to redemption will be painful, starting with these large-scale layoffs and a restructuring plan that may not be enough. WeWork has critically disrupted the industry, but it now has to survive to tell the tale.
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This article was originally published by WIRED UK
