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Why WeWork's Business Model Is Risky | WSJ - YouTube
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- [Spencer] WeWork's IPO is
coming as soon as next month.
[5]
- Investors might rightly be wondering
[6]
if it's a bridge to nowhere.
[7]
- This is, obviously,
an unprofitable company.
[9]
We've seen a number of these companies
[11]
come to market this year
with actually mixed results.
[15]
- A lot of numbers are swirling around,
[16]
but if you really wanna understand
WeWork's business model,
[19]
look at this one, $47 billion.
[23]
That's how much the
company is on the hook for
[25]
in lease obligations leading
up to its public offering.
[28]
It says a lot about how the company works
[31]
and why some investors
are eyeing the risks.
[33]
(pleasant piano and orchestral music)
[38]
You probably know WeWork,
which recently changed its name
[40]
to The We Company, as an office space
[42]
with a specific aesthetic.
[44]
You know what we're talking about.
[46]
The glass walls, plants, cafes,
[49]
mid-century-style furniture.
[51]
WeWork's basic business model
is to lease large spaces,
[54]
transform them to look like this,
[56]
and then rent them out to
individuals and companies
[58]
at a higher price.
[59]
- [Spokesman] Our software
finds the best buildings
[61]
in the best locations.
(dramatic orchestral music)
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Before we even begin construction,
[65]
we build full 3D models to make sure
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we're creating environments
that allow members to thrive.
[72]
- [Spencer] As of 2018,
the company operated
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more than 35 million square
feet of space globally,
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and it currently occupies 528 locations
[80]
in 29 countries around the world.
[82]
(dramatic orchestral music)
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- [Spokesman] Speed is important,
[85]
because on average, we
open two new locations
[88]
every single day.
(dramatic orchestral music)
[90]
- To cover the costs of
the renovations and leases,
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WeWork charges individuals and companies
[94]
through four different membership options.
[97]
For one of the cheaper plans,
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a member can bring their laptop
[100]
and sit in a common area
if space is available,
[103]
and for the most expensive plan,
[105]
companies can rent out full offices,
[106]
suites, or entire floors.
[109]
WeWork also offers a service
called Powered by We,
[112]
full custom build-outs
for larger companies.
[115]
So why are some analysts
and investors skeptical?
[119]
Well, some are concerned
with those lease obligations.
[122]
When WeWork signs a lease
on a building in the U.S.,
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they commit to an average of 15 years,
[127]
but WeWork's members only commit
to an average of 15 months.
[132]
WeWork's obligations top $47.2 billion,
[136]
but its customers have only signed leases
[138]
on $3.4 billion worth of space.
[141]
Recently, the company has started signing
[143]
more long-term clients, but still,
[145]
with 528 locations, that's a
lot of time and space to fill.
[150]
It's unclear how much
space WeWork needs to fill
[152]
to break even, but the
company's occupancy rate
[155]
fell from 84% to about 80%
in the final quarter of 2018.
[161]
The company said the drop
was caused by expansion.
[164]
New offices traditionally
take up to 18 months to fill,
[167]
but it's unclear what would happen
[169]
if suddenly fewer
start-ups and freelancers
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were looking for workspace,
[172]
which could happen in
an economic downturn.
[175]
It's also unclear what would happen
[176]
if existing tenants started to default.
[179]
One place investors are
looking for precedent
[181]
is International Workplace
Group, formerly known as Regus,
[184]
a Swiss company with a similar
business model to WeWork.
[187]
During the economic
downturn in the early 2000s,
[190]
IWG's U.S. unit filed for bankruptcy
[193]
as its revenue fell but long-term
leases remained in place.
[197]
WeWork has said it's
flexible business model
[199]
would help keep it safe in a downturn.
[202]
The company's rapid expansion
[203]
has helped it stay out
in front of competitors,
[206]
but some investors are
concerned that could change.
[208]
That's because WeWork's business
model is easy to replicate.
[212]
The company has filed for
some industrial design
[214]
and furniture patent protections,
[216]
but anyone with enough cash can lease out
[218]
industrial office space
and flip it, and they have.
[222]
A New York-based rival, Knotel,
[224]
hit an estimated $1 billion valuation
[227]
following a recent round of funding,
[229]
and in 2017, Blackstone
acquired a majority share
[232]
of The Office Group,
[233]
a flexible workplace provider in the U.K.
[236]
Investors will have to decide
[238]
if WeWork's size and
flexibility are enough
[240]
to protect it in a period
of economic uncertainty.
[243]
(pleasant mallet percussion music)
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