WeWork, a company that leases office space to startups, is now worth $10 billion, twice as much as it was worth 9 months ago. Is this a sign that the tech boom is turning into a tech bubble?
Analyst Ben Thompson lays out the bear and bull cases for the company in his newsletter today.
It's easy to see WeWork as a risky real-estate arbitrage play — it finds office space in hot markets while it's still relatively cheap, mainly by being an anchor tenant in new developments, then sells it at a markup to venture-funded startups.
When the flow of venture capital and other startup financing slows down or dries up, as it must eventually, that could put WeWork in a very tough spot.
More generally, commercial real estate is a boom and bust business. When the economy stumbles, landlords who were faced with waiting lists a few months ago suddenly struggle to find tenants and have to accept lower prices.
But Thompson argues that WeWork may be a new kind of business because:
- It's creating a community with a particular identity, not just renting space.
- It appeals to the "on-demand" mindset that a lot of startups and their employees enjoy with services like Uber and Airbnb (and even in cloud-based technology like Amazon Web Services and Salesforce). Instead of locking yourself into a long-term contract for space you may not need, WeWork lets the company retain a lot of flexibility to grow and shrink as your needs change.
- It may seem expensive, but it lets you outsource the kinds of services that used to require a dedicated office manager.
Business Insider is now a two-time customer of WeWork in San Francisco, and while the community aspect is nice — it's fun to work in a pleasant well-appointed office with a lot of other similar-minded startup employees and amenities like free beer on tap — it's Thompson's last two points that really resonate.
Earlier this year, our previous landlord, TechSpace, couldn't guarantee any new space in time for the new employees who were starting soon. The fact that WeWork is expanding so fast — the space we moved to opened in June, and it's planning two more facilities in San Francisco — meant that they could accommodate us right when we needed it.
The office management benefits are a little overstated — for instance, this WeWork facility did not include telephone land lines, so we had to come up with our own solution — but even so, we don't really need a full-time office or facilities manager for our 20-person office. I'm not sure that would be the case with a traditional lease.
There are a couple other things I've noticed that make me positive on the company:
- They pre-lease spaces before they're finished. Maybe this is standard practice, but both times we've rented WeWork spaces, we took hardhat tours before the space was complete. The final amenities — like desks — weren't added until a day or two before move in. Right now in this space, a couple floors are done, but the remaining floors are still being built out. This is great for WeWork's cash flow — it can use the first tenants to help fund the rest of this space's expansion.
- Space is used extremely efficiently, with glass walls to make it feel bigger. Our current space covers significantly fewer square feet than our last one — and it's cheaper — but it holds more people. WeWork is able to do this thanks to extremely efficient use of space — there's no square footage wasted in alcoves or entryways, and nearly every wall and window has a desk in front of it. This could feel crowded, except every single wall throughout the facility is mostly glass. That light goes a long way.
- Not just office space, but coworking space. In the last WeWork space we rented, there was a large common space reserved for on-demand coworking — customers could buy packages starting at $45 and rent a desk for a day. WeWork gives them a mailing address, Internet connection, and so on. This doesn't make sense for a fast-growing company that's already funded, but it's perfect for entrepreneurs working on an idea, contractors, or freelancers. Not every WeWork facility has this option, but many do.
Yes, real estate is risky business. And WeWork is dependent on the current tech boom.
But if you believe that the startup landscape has changed forever — it's so much cheaper to start a tech company now than it was 15 years ago, thanks to Amazon Web Services and dozens of similar on-demand services — maybe WeWork is at the vanguard of a 21st century way of working, not just an arbitrage play.
