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WeWork has seen its fair share of stumbles in the past year: an indefinitely postponed initial public offering, a sharp leasing slowdown in two of its biggest markets, accusations of insider dealings and a sudden crash in valuation. In October 2019, SoftBank Group Corp. agreed to take majority control of the company, but WeWork isn’t out of the woods yet.
WeWork’s problems stem from a number of things, not the least of which being its rapid expansion, an overabundance of venture funding and an apparent growth-at-all-costs approach. It’s interesting to note that these are the same factors that propelled the firm to its position as the most highly valued private startup in America. Unfortunately, it also raised serious questions about whether that growth is sustainable.
As the leader of a commercial real estate investment company, I think the problems WeWork has experienced — and continues to experience — are sad. The business model is phenomenal. As companies and people flock to the coworking model, it’s clear WeWork fills a genuine need. But those same people are now concerned about what might happen to their office space if WeWork capsizes.
I firmly believe that the need for coworking spaces isn’t going anywhere, regardless of whether WeWork itself survives.
How WeWork Changed Commercial Real Estate
The coworking model is not only here to stay — it’s poised to grow. Like anything, though, specific companies within the space will determine outcomes and success.
To be clear, it’s not so much that the commercial real estate market will have to withstand WeWork’s problems — rather, it will have to adapt to the demand for the model. It all comes down to the fact that people increasingly crave flexible space, the ability to take down one office (or even 10 offices) in a location and more freedom with their time and business.
In commercial real estate, the average minimum lease term is three years, but most new tenants have to commit to a five-year lease (or more) if they want specific improvements to the space. Some entrepreneurs might hesitate to commit to those terms due to uncertain cash flow and growth plans. And even if a three-year commitment doesn’t pose financial problems, it may limit flexibility.
Whether WeWork will stand the test of time remains to be seen, but the ideas it was built on have absolutely taken hold. Many entrepreneurs are now hesitant to move their companies into a WeWork space because of its questionable stability. Demand, in this case, could be the thing that determines the future of the company itself — but the model will remain.
Lessons For Commercial Real Estate Leaders
I believe WeWork offers several lessons for commercial real estate leaders. Here are three.
1. Ensure you have viable credit tenants. My company just signed a full-floor lease with a local coworking company in Colorado. When we underwrote the deal, we acknowledged the business as a “master tenant,” allowing it to collect rent from 40 to 100 subtenants. This approach lets multiple tenants support the overall company.
It all comes down to the operational management of our tenant — whether the tenant is smart, doing what it does for the right reasons and has other tenants paying rent. You can make deals with other tenants, too. Be strategic when choosing tenants so you can ensure they’ll be able to pay the bills.
2. Be cautious if WeWork is already your tenant. OK, but what happens if WeWork is already your tenant? What does that mean for the valuation of your property? Should you look at other possibilities or people to backfill a vacancy if you already own the assets? If you have an asset and are leasing space, decide whether WeWork is a tenant that makes sense for you right now.
Similarly, if you’re buying a building and WeWork is already a tenant there, proceed with caution. If you’re underwriting an asset with a certain income stream and that stream were to dry up overnight, you’d be in a world of hurt.
3. View vacancies as opportunities. In several markets, WeWork is reportedly one of the largest tenants in its sector. If it reduces its footprint or shutters its operations, we should expect some level of fallout. There would be significant vacancies in different markets.
On the one hand, this could pose a problem for landlords; on the other, it could be an excellent opportunity for other tenants and buyers of opportunistic or value-add assets. To illustrate, let’s say McDonald’s goes out of business. Practically every corner location in every market would open up for another company to fill. In the same way, other coworking groups could certainly backfill vacant spaces if WeWork went under.
WeWork also owns some facilities. If we go into recession, as many have predicted we will, there could be phenomenal buying opportunities. Change always brings opportunity. The question is: What side of the coin are you on?
Ultimately, I hope WeWork recovers and continues to serve the companies and people who depend on it. Despite its very public stumbles, the model has had a tangible impact on Main Street America. As we watch the company’s next moves, it’s key to remember that other players are waiting in the wings, ready to react to opportunities.