Why WeWork’s Business Model Is Risky | WSJ

– [Spencer] WeWork’s IPO is
coming as soon as next month. – Investors might rightly be wondering if it’s a bridge to nowhere. – This is, obviously,
an unprofitable company. We’ve seen a number of these companies come to market this year
with actually mixed results. – A lot of numbers are swirling around, but if you really wanna understand
WeWork’s business model, look at this one, $47 billion. That’s how much the
company is on the hook for in lease obligations leading
up to its public offering. It says a lot about how the company works and why some investors
are eyeing the risks. (pleasant piano and orchestral music) You probably know WeWork,
which recently changed its name to The We Company, as an office space with a specific aesthetic. You know what we’re talking about. The glass walls, plants, cafes, mid-century-style furniture. WeWork’s basic business model
is to lease large spaces, transform them to look like this, and then rent them out to
individuals and companies at a higher price. – [Spokesman] Our software
finds the best buildings in the best locations.
(dramatic orchestral music) Before we even begin construction, we build full 3D models to make sure we’re creating environments
that allow members to thrive. – [Spencer] As of 2018,
the company operated more than 35 million square
feet of space globally, and it currently occupies 528 locations in 29 countries around the world. (dramatic orchestral music) – [Spokesman] Speed is important, because on average, we
open two new locations every single day.
(dramatic orchestral music) – To cover the costs of
the renovations and leases, WeWork charges individuals and companies through four different membership options. For one of the cheaper plans, a member can bring their laptop and sit in a common area
if space is available, and for the most expensive plan, companies can rent out full offices, suites, or entire floors. WeWork also offers a service
called Powered by We, full custom build-outs
for larger companies. So why are some analysts
and investors skeptical? Well, some are concerned
with those lease obligations. When WeWork signs a lease
on a building in the U.S., they commit to an average of 15 years, but WeWork’s members only commit
to an average of 15 months. WeWork’s obligations top $47.2 billion, but its customers have only signed leases on $3.4 billion worth of space. Recently, the company has started signing more long-term clients, but still, with 528 locations, that’s a
lot of time and space to fill. It’s unclear how much
space WeWork needs to fill to break even, but the
company’s occupancy rate fell from 84% to about 80%
in the final quarter of 2018. The company said the drop
was caused by expansion. New offices traditionally
take up to 18 months to fill, but it’s unclear what would happen if suddenly fewer
start-ups and freelancers were looking for workspace, which could happen in
an economic downturn. It’s also unclear what would happen if existing tenants started to default. One place investors are
looking for precedent is International Workplace
Group, formerly known as Regus, a Swiss company with a similar
business model to WeWork. During the economic
downturn in the early 2000s, IWG’s U.S. unit filed for bankruptcy as its revenue fell but long-term
leases remained in place. WeWork has said it’s
flexible business model would help keep it safe in a downturn. The company’s rapid expansion has helped it stay out
in front of competitors, but some investors are
concerned that could change. That’s because WeWork’s business
model is easy to replicate. The company has filed for
some industrial design and furniture patent protections, but anyone with enough cash can lease out industrial office space
and flip it, and they have. A New York-based rival, Knotel, hit an estimated $1 billion valuation following a recent round of funding, and in 2017, Blackstone
acquired a majority share of The Office Group, a flexible workplace provider in the U.K. Investors will have to decide if WeWork’s size and
flexibility are enough to protect it in a period
of economic uncertainty. (pleasant mallet percussion music)

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