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WeWork’s Ordinary Business Model

The Wall Street Journal
2019-05-17 16:19

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It is hard to find a real-estate boom that hasn’t ended badly for piggy-backers. WeWork, a self-proclaimed savior to problems that have historically besieged the office-rental real-estate model, has layered toppy asset prices with a whiff of tech to give it an eye-popping multiple. What could possibly go wrong?

WeWork said Wednesday that it would boost its efforts to buy its own real estate, setting up a fund named ARK to be housed as an affiliate of the parent company. It is in part a way to keep Chief Executive Adam Neumann’s own real-estate investments at arm’s length.

But it also demonstrates why WeWork isn’t extraordinary. WeWork’s business model is primarily as a sublessor. It rents space from other landlords, whips it into shape with neon lighting and beer taps, then rents it to tenants often looking for flexibility in leases. The business model fits with what tenants want. As technology disrupts the workforce, renters, with less hiring visibility, don’t want to commit.

The trouble is its model negates protections against the cyclicality in the rental market. Ironclad leases give office-building owners protection when renters want to pull the plug. WeWork has forfeited some pricing power, too. If it wanted to raise rents, theoretically the tenant could trot to the building owner and negotiate different prices, sometimes in the same building.

Worse, while WeWork’s revenue is growing, the company noted in its earnings report Wednesday that its losses continue to mount. That it wants to own its own propertyis, in some ways, an admission its model has deficiencies. WeWork is taking a bet on office buildings just as asset prices are near records. Its losses suggest its business model isn’t exactly finding novel ways to solve traditional problems.

Source: The Wall Street Journal
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