How many times is it socially acceptable to ask about the sustainability of a company’s $10bn (£6.6bn) valuation and break-neck expansion rate? Based on Patrick Nelson’s capacity to keep responding to the same question, the limit probably hovers at about four.
When we hit number five, WeWork’s head of European real estate takes a different tack: “Have you ever been to a WeWork to use the space?” It is a reasonable question. And apart from being sat in one for the interview – a glass conference room at the company’s newly launched 160,000 sq ft co-working facility at Brookfield’s Moor Place, EC2 – I am forced to admit the answer is no.
That is, unless the building’s glamourous launch party counts. And what with a stream of waitresses carrying a constant supply of shots weaving between hundreds of people dancing to a DJ set from Grammy Award-winning super-producer Mark Ronson, it would be fair to say it probably wasn’t the best time to get a feel for the day-to-day running of the place.
“I would strongly encourage people to take their time to come and visit a WeWork,” adds Nelson. “To come and see what it is that we’re doing, get a feel for the atmosphere, the energy that we’re creating.”
His plea is entirely understandable. The co-working company attracts scepticism from the traditional property industry like no other. Perhaps because it is at the intersection of the venture capital-backed tech world – which attracts endless warnings of overhyped valuations and popping bubbles – and real estate, that notoriously cyclical asset class that was so much to blame for the last great financial crash.
Either way, I’ve decided I need to take him at his word. So, in an attempt to get under the skin of the company and to understand whether it justifies its meteoric rise and even more dizzying valuation, I decided to spend a few days dropping into Moor Place – WeWork’s biggest outpost to date – to work and write up this interview. And to try to challenge some of traditional property’s preconceptions.
Growth trajectory
To fully appreciate the reasons behind concerns over WeWork’s future, you need to consider its astronomically fast growth trajectory.
Start-up entrepreneurs Adam Neumann and Miguel McKelvey launched the company five years ago in New York. After a rapid US expansion, it opened its first European facility at Deerbrook’s Sea Containers House, SE1, in October 2014. Barely more than a year later it has 63 facilities globally and 400,000 sq ft of space in the UK.
But that’s just the start. It is either fitting out or under offer on another 600,000 sq ft in London and expects to hit 2m sq ft within a couple of years.
Serious backing by some heavyweight investors is helping drive forward the growth. Goldman Sachs, JP Morgan, Fidelity, Boston Properties’ billionaire owner Mort Zuckerman and several others have pumped close to $1bn of equity into the company, which at its last round of fundraising this summer now values it at $10bn.
Those investors are betting on some ambitious growth projects. Pitch documents used by WeWork when raising capital in 2014 were leaked to Buzzfeed earlier this year showing just how fast the company thinks it can grow revenues. It forecast $49.6m of operating income in 2015, rising to close to $1bn by 2018. Revenues were expected to grow from $75m in 2014 to $2.8bn four years later. WeWork’s $5bn valuation at the time reflected a 100-times multiple to its earnings. Regus, the traditional serviced office business and the company’s closest competitor (at least in terms of size) typically trades at around 13 times its earnings.
“So many people nowadays speak about valuation but I think not a lot of people speak about value,” says Eugen Miopolski, WeWork’s director of Europe. He recently joined the company from AirBnB, another tech decacorn (Silicon Valley speak for a start-up with a $10bn plus valuation). “I think it’s the value that WeWork is creating for small entrepreneurs, for small businesses but also for growing businesses, that is important.”
Membership perks
So what is it that makes WeWork fundamentally different from the Regus’s of this world?
“We are providing a membership,” says Nelson.
“The modus operandi really is that when you come in to WeWork, we have a huge team of people that are effectively focused on how we can make your business more successful, your life more enjoyable, your soul happier.”
Prices start from $45 (£30) per month for virtual membership, rising to £250 for hot-desk space, £325 for dedicated desks and £600 for a private office.
Members include start-ups and freelancers from a wide range of industries and some larger companies who rent out dozens of desks at a time.
But it is the “network” where Miopolski sees the real value. WeWork’s app connects members, the idea being that they can source programmers, public relations experts, recruiters or whatever business service they might require via the network of other WeWork users. “I’ve posted to see if I can find someone to look after my bulldog while I’m in Paris”, says Hilary Deppeler, who looks after members at the Moorgate office.
Members also get access to an array of events when they sign up, from lunch and learn seminars to a full-blown summer camp.
They are mainly designed to help small businesses grow, but they are equally as likely to involve beer and music. And the free beer is definitely a factor.
Most of the newer generation of co-working spaces offer some degree of events programme for start-ups, but WeWork’s provision of an unmanned beer tap on every floor sets it apart, at least in terms of attracting further controversy. Some smaller rivals now define themselves in opposition to the company, typically saying things like: “We are like WeWork but without the beer.”
On my first trip to Moorgate I was surprised to see people drinking in the hot-desking area at around 11 o’clock in the morning, but any fears that this was the norm were misplaced.
The Friday night happy hour was packed (and there was only cider left by the time I got to the pump) but otherwise I saw little sign of much daytime drinking amid all the heads bowed in front of laptop screens and people talking about their companies over the free – and excellent – coffee.
Of course there’s much more than just free beer and coffee on offer. Nelson is keen to emphasise features like the group health insurance WeWork’s US business now offers at “virtually the cheapest rate you’ll get anywhere”.
And the more WeWork grows the more it can offer these extras: “So this is the key thing and it is slightly counterintuitive,” Nelson says.
“The more locations we have in any city, the faster those locations fill up. The last five locations we’ve opened in New York have opened 100% full.”
“That’s the really interesting part, the network accelerates itself,” Miopolski adds. “The more locations you have, the more efficient the network becomes.”
Bursting the bubble
And it is this point which many people find hard to digest. WeWork sceptics often refer back to Regus’s rapid growth in the dotcom boom and its subsequent filing for bankruptcy protection in the US when the bubble burst. Ready funding or not, there’s no getting away from the fact that WeWork is signing new – and long – leases at a time when rents are at record highs.
“I’m not doing deals where we don’t expect to have an operating margin in that individual building in excess of 35%,” says Nelson. “It is me thinking about my resilience to a downturn – I’m basically obsessed with that.”
To achieve those margins against the very high cost of fitting out – and digitally upgrading – the spaces it occupies, WeWork often asks landlords for big rent-free periods or sometimes agrees profit share agreements which see the landlord participate in the income from the venue in exchange for a discounted rent. It has one such profit share agreement already in London – understood to be, though unconfirmed by WeWork, at Sea Containers House – and it is now looking to do more innovative deals such as bespoke prelets or even joint venture developments.
And it sees landlords as partners. It is no coincidence that WeWork’s biggest London location is at a Brookfield building, a major landlord with whom it works in the US, or that Brookfield’s Potsdamer Platz in Berlin will be among WeWork’s first German locations. That’s why it is so keen to persuade landlords to give it a go – once they do, there tend to be lots more opportunities that follow.
So should they? While working at Moor Place another WeWork sceptic forwards me an article about the company piling on $750m of new debt to fuel its expansion, which references the leaked pitch documents and raises concern that the accounting of rent-free periods appears to mask the longer term costs faced by the business.
WeWork isn’t commenting on the documents, which don’t give a full picture of the company’s finances.
And clearly plenty of landlords – which have presumably asked for their own assurances about WeWork’s finances – are satisfied and have leased space to the business. From my sixth-floor booth looking down through the building’s central light well on the dozens of other millennials working on sofas, tables and booths, it is hard to feel too concerned. It is a great space to work in, the atmosphere is relaxed and the freebies are enough to seduce even the most cynical of drop-ins.
A timely reminder
It is only on the way out of the bathroom that my revelry and excitement wavers.
In Disney’s Pinocchio there is a scene where the boys are taken to a fairground on Pleasure Island where they can drink, smoke and gamble to their heart’s content. What they don’t realise is their wicked behaviour will soon turn them all into donkeys.
The plush, executive style loos at WeWork Moor Place are a stark reminder that this building – in the heart of the Square Mile – was designed with a very different type of tenant in mind. So as I emerge and walk headlong into a bearded man wheeling a keg of beer down the corridor, I can’t help wondering whether both of us – or more likely WeWork’s investors – are on the same trajectory, destined to turn into donkeys.
