4/16/2016

WeWork - a physical social network



                                                                     A few days or so after WeWork’s valuation has jumped to $15bn, and Adam Neumann (right), chief executive of the office space start-up, is fussing over what kind of tea to serve me.

Neumann, a former Israeli navy captain, co-founded WeWork with Miguel McKelvey (left) in 2010 to transform normal offices into what he describes as “the future of work”. The result is industrial chic workspaces with neon signs, free craft beer on tap and taco party nights. WeWork creates a youngish vibe, especially appealing to millennial workers.

WeWork says it has 50,000 “members” — or customers — spanning 78 locations in 23 cities in the US and Europe. It expects the number of members to more than double by the end of the year.

At its core WeWork is a property company, but has branded itself as a sharing economy start-up, attracting investors — such as Goldman Sachs and JPMorgan — that have pumped nearly $800m into the enterprise in the past year and a half.  This implies that WeWork’s office space of some 5m sq ft in total is worth $3,000 per square foot, more than even the highest-class towers in New York, such as the GM building, which commands $2,400 per square foot.

WeWork’s business model was born out of the financial crisis. In 2007 Neumann owned a baby clothing company that he describes as “not a great success”. He ran the business from a building in Brooklyn, where he noticed chunks of empty space and convinced his landlord to let him sublet cubicles on the classified advertisement website Craigslist for extra cash. This morphed into Green Desk, a sustainably-focused co-working space company, which he founded with McKelvey, an architect who also worked in the building.

A few years later, with the US unemployment rate still hovering around 9 per cent, WeWork was born. In a shaky jobs market, more workers were freelancing or working from home.

A third of US workers are now freelancers, according to research by software company Intuit, and this is expected to grow to more than 40 per cent by 2020. Neumann sees the so-called gig economy as a permanent shift in the nature of work.

“An entire generation saw this downturn” and noticed “that the old rules are broken”, he says. “The sharing economy is around in so many different aspects of their lives. Kids today, they don’t need to buy a car, they can drive around in Uber. They don’t have to buy an office, we can rent an office for them.”

WeWork now has 26 locations in New York City, where it has leased more than 700,000 sq ft of property in central Manhattan.

“It’s hard to quite understand,” says a New York real estate lawyer. “These buildings don’t have great air conditioning or good light. The windows leak. It’s quirky and for some reason quirky has become not only a plus, but a requirement.”

Neumann says that beyond the aesthetic, WeWork connects companies with each other, cultivating a “physical social network”. Members post jobs and events on the company app and WeWork offices hold start-up pitch nights.

WeWork is betting that its model will find success in more and more high-tech cities globally. The company has big plans for Europe, where it has already opened locations in London in the past year. Berlin and Paris are on its horizon.

Neumann says London will soon compete with New York as a prime WeWork hub, with 14 locations expected by the end of the year. “We know New York is our biggest city now. We know that London will be our biggest city two years down the road,” he says.

WeWork is moving into the residential market with WeLive and its community-oriented “co-living” apartments. The first WeLive apartment complex opened in New York this year.

The world has changed dramatically since WeWork first opened its doors and now it is not easy to find the more affordable older buildings that WeWork leased in its early days.

WeWork has combated rising rents by securing preferential lease. Even so, WeWork’s structure is intrinsically risky. It takes out long leases of at least 10 years, but its own customers are on monthly contracts.

Neumann admits that some of WeWork’s customers “will have issues” if the economy sours, but adds that property prices are likely to fall in a downturn, which cuts WeWork’s costs.

Internal documents obtained by The Information, a news site, showed WeWork had $4m in profits on $75m in sales in 2014. WeWork projected profits to grow to more than $900m on sales of $3bn by 2018, the documents showed.

Despite these lofty expectations, Neumann says he does not take uncalculated risks. The company does its research, he insists. “We know the demand is there.”