What WeWork Is Doing Right and Wrong

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WeWork is an amazing business. They are a phenomenon. There are a lot of reasons why WeWork attained the valuation it currently has — which many consider crazy. It was reported last week that the valuation was being slashed — but it is still crazy even at half the price. 

SEE ALSO: Co(ld) War: Why Some Landlords Prefer WeWork and Others Reach for Knotel

The first question worth asking is why WeWork was originally valued at $47 billion.

WeWork does a lot of stuff right. Aside from being exceptional at presenting themselves to both the capital markets and the market at large, flexibility is right and what tenants are demanding. Services delivered as part of being a broader property offering is right. Community is right. And providing workspace catering specifically for the millennial work force is spot-on.

Given the fact that flexible workspace will become 20 to 30 percent of all commercial real-estate (from 5 percent as it is now) provides a lot of headroom for growth. This opportunity validates the high WeWork valuation. It is indisputable that offering more flexible terms and smaller spaces in commercial real estate has a higher yield per square foot. However, delivering services and term rights for these services diminishes this high yield because of service overhead. In trying to land grab for this opportunity, which could potentially be 20 to 30 percent of a trillion-dollar market, it has gotten a lot of stuff wrong.

1) To tackle the cost of servicing smaller and shorter-term leases, automation is critical. WeWork has focused on maximizing utilization of their space but have not automated business processes. This has resulted in a massive service overhead to manage their 250,000 customers globally.

2) WeWork’s rent-in is approximately $150 million a month and their rent-out is approximately $140 million a month. This is before they pay their approximately 10,000 employees plus fit-out costs. Being design-led (one of their competitive advantages) comes with a heavy depreciation overhead. The bigger issue is that when you have a business the size of WeWork that doesn’t cover its costs through its core business, it becomes a very big ship to turn around. The only way for WeWork to get their business model up to par is to either increase the charge to their customers by a factor of two or three or restructure all of their leases. There is precedent for this, as it was done by Regus (now IWG) only one year after floating their business in the early 2000s. It will be harder now as there are technologies that will help landlords to manage flexibility themselves.

3) WeWork very often claims that they are a lot like Amazon (who once had an unprofitable business), claiming that once they grew their business to scale, they would make money. However, WeWork is the opposite. Amazon couldn’t scale their business fast enough to produce enough income to pay for that infrastructure. WeWork, on the other hand, has scaled and acquired enormous liabilities without building for scale and automated. As such, they have no capability to utilize redundant infrastructure to create a profitable enterprise.

4) WeWork is not a technology business. While they have been aggressively acquiring technology enterprises in an attempt to build an eco-system, there is no WeWork technology platform that either helps WeWork run their business in an automated way or improves their customer experience. Recent conversations that I’ve had with multiple WeWork customers say that the technology platform offered to their community has not changed in five years. 

5) Landlords are not going to sit back and be dis-intermediated by an operator. The capability to offer flexibility, services, amenities and community to tenants is getting easier for landlords. Landlords are acquiring the capability to not only match but create a better offering than WeWork. (I’m slightly biased because I’m helping them to do this.)

The commercial real-estate industry needed to be disrupted. Commercial landlords need to be more focused on creating a better tenant experience and on maximizing value for the communities that they have built within their spaces. WeWork has proven that this demand is real and that change must happen. But, the right business model for the delivery of a product that meets these requirements has not been delivered by them. I hope that WeWork is successful and survives to deliver on the promise that flexibility, services, and community will make businesses of all sizes more productive.

My view is that there will be a role for landlords to offer flexibility themselves and there will be a role for operators like WeWork, IWG, Servcorp and Industrious.

Despite the great things WeWork has done for the flexible workspace industry, their land-grab-at-all-costs may prove to be their peril.

Marcus Moufarrige is the former COO of Servcorp and founder of ility, a tech platform to offer flexibility for landlords through automation.