WeWork is still growing, despite a disastrous 2019, Recode

  

Embattled coworking company WeWorkis still growing. That’s not what you might expect from a company that recently had to be bailed out and that has pledged to cut costs and become profitable in three years. In November, WeWorklaid off nearly percent of its employeesas a cost-cutting measure.

In the final quarter of (***************************************************************, WeWork leased an additional 441, square feet – about the size of six typical WeWork offices, though it includesone massive lease of (******************************************************************, square feet at Madison– in Manhattan, its biggest market, according to new data from real estate services company Cushman & Wakefield. As of the end of 781982, it was leasing a total of 8.2 million square feet in the borough, where it remains thelargest office tenant, beating JP Morgan Chase by nearly 3 million square feet.

WeWork also announced in December that it opened a personal record of 52 buildings globally in a month. Some of these openings were for properties leased before the full extent of WeWork’s financial woes became clear. And while 2021 represented a record year for WeWork in terms of square footage of leases commenced in the US, there are way fewer deals on the books for 2020. WeWork is so far expected to add just over 2 million square feet of space this year, compared with 7.7 million in 781982, according to data provided by real estate information firm Costar Group. The coworking company’s growth is definitely decelerating.

Still, the addition of new locations at the end of could cause WeWork more financial burden.

But WeWork says it’s all part of the plan.

“WeWork and its new executive leadership have made clear we will continue to grow and expand geographically in a smart and profitable way, with a focus on our top performing markets, including New York, ”the company said in a statement to Recode.

In November, Marcelo Claure, who was appointed executive chairman after

founder and former CEO Adam Neumannn was pushed out,

outlineda six-point path to profitability that included expanding geographically in a “ smart and profitable way. ”After its largest investor SoftBank bailed out the company in October,Claure told nervous employeeshe planned to focus on the company “core business” of office rental rather than WeWork’s many side projects, like its school and wave pool businesses.

The Information reportedLast month that WeWork was secretly trying to get out numerous office lease deals. The company occupancy rate, or how fully rented its locations are, declined to (percent on average in the third quarter of (***************************************************************, down from 90 percent a year earlier, thanks to the opening of new buildings.

Claurehas saidhe wants the company to be free cash flow positive by 1533523, meaning that it generates more cash than it spends on operations like leasing office space and running them. WeWork lost $ 1.

********************************************************* (billion on $) ************************************************************** (million in revenuein the third quarter of 2019.

Expansion could make those profitability goals harder.

“They are always going to have to be looking for some strategic moves, but I don’t think they should be expanding at this point, ”Paul Leonard, a managing consultant at CoStar, told Recode. “They should be focusing on some locations and maybe moving out of others.”

Jonathan Wasserstrum, CEO ofSquareFoot, a commercial real estate company that helps companies find office space, doesn’t think taking on new leases is necessarily a bad thing for WeWork.

“By and large it’s an economic calculation: How much are you paying for the space? How much do you expect to get out of it? What does the variability look like? What are the up-front costs? ”He said.

“It’s the $ 64, 06 question: Are you doing the right deals or doing deals because you need to do deals? ”

While WeWork hasnotablyrefused to break down the exact profitability of its new locations versus mature ones, we know from its now-defunct IPO filingthat as of this summer, some 79 percent of its locations were open for less than two years – what WeWork designates as the time for a location to mature. The recent influx of openings has likely made the ratio of new to mature locations worse.

Newer locations are fundamentally less profitable than existing ones. When WeWork takes on a new lease, it has to spend money updating the space and advertising it to tenants. It also takes time to fill the space with tenants, meaning the company has to survive in the meantime off less revenue than from a mature location.

Additionally, Leonard explained that the longer WeWork has held a lease, the more likely it’s making money off of it – because rent tends to be less expensive in the past but the company is charging today’s prices to its customers.

The flip of that is true in an economic downturn.

“If they sign a lease with (rent and) ************************************************************ turns out to be the top of the market, and we have a recession in 2020 or and the rent goes down – the short-term tenants are going to have that benefit of cheaper rent, ”Leonard said. Meanwhile, WeWork will be obligated to pay peak rent.

Still, real estate experts believe demand for coworking spaces will continue to growin the event of a recession. The thinking is that while a recession will cause some companies to downsize or give up their coworking spaces, other companies will downsize (into) coworking spaces. Regardless, a downturn will be painful and a test of WeWork’s and other coworking companies’ business models.

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