What Makes WeWork a Risky Business is Exactly Why It's So Popular

These days, you’ll find WeWork facilities sprouting up all over major cities across the globe. WeWork leases shared workspace to companies ranging from tiny startups to Fortune 500 companies, allowing them to create their own office space without long-term commitments. Recently, WeWork’s parent company revealed extensive information in its initial public offering prospectus. And while the company offered much optimism, not all of it was positive. While prospective tenants may find renting a WeWork space attractive, the reasons that make it attractive pose significant risks to WeWork itself. Here’s a look at why:

No Commitment, No Problem?

Tenants like to utilize WeWork because it doesn’t require them to make long-term lease commitments or significant capital investments to spaces they may not need in the future. WeWork is capitalizing on a constantly changing economy, since it can be hard to know whether your current workspace will serve your team’s best interest in the future. This is highly attractive to tenants large and small. In fact, as of midyear 2019, WeWork had 12,500 people working in its Boston facilities alone!

Absorbing the Risk

In their public offering, WeWork revealed their worth to be $47 billion. However, there’s more to that number than meets the eye. As of June 30, the company has more than $1.3 billion in debt, BisNow reported. They lost $1.9 billion in 2018, and nearly $700 million in the first half of 2019, the same article stated. The company attributes those losses to the cost of rapidly opening new locations and maintaining the current ones. Because WeWork holds the responsibility for the maintenance and preservation of their spaces, they’re ultimately the ones at risk. What remains to be seen is whether WeWork can withstand a down market characterized by lower levels of demand for its spaces. WeWork competitor IWG faced this same dynamic back in the early 2000’s, when its US unit filed for bankruptcy. IWG has since moved toward a franchise model, where its franchisees bear most of the risk associated with holding leases in an economic downturn.

Conclusion

WeWork is a highly popular and sensible solution for myriad companies large and small, because it shifts the capital cost and leasehold risk to WeWork. Time will tell if the company can weather an economic downturn, when the risk of lower demand for its spaces coupled with burdensome capital requirements and long-term leasehold commitments could come home to roost.

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