WeWork is the dominant coworking player in Boston, comprising 3.2 percent of tenancy across the 72 million-square-foot office market. Image courtesy of WeWork
Co-working company WeWork would probably like you to think of it as the Amazon of real estate as it gobbles up large blocks of prime office space in downtown Boston and cities across the world.
WeWork envisions itself as tech startup leading the transformation of the global workplace, one that will “create a world where people make a life, not just a living,” as the company’s mission statement puts it.
But with its main source of revenue leasing office space, WeWork is not a tech startup. Rather, it’s a real estate firm – and a risky one at that.
A better comparison is to a high-flying and ultimately ill-fated New York investment firm that spent a fortune back in 2006 to buy Boston’s most prominent tower.
Broadway Partners turned heads when it shelled out $1.3 billion at the height of the mid-2000s real estate boom to snag the Hancock Tower.
Much like WeWork today, Broadway was sure it could make the numbers work – and a hefty profit – by jacking up already high rents and then watching the money roll in, year after year after year.
Given that Broadway’s big beg wound up in foreclosure, it’s a comparison that should give chills to Boston tower owners who have cut deals with WeWork, or, for that matter anyone else with a stake in the health of the downtown office market.
After all, WeWork now controls over 1 million square feet of office space in downtown Boston, leasing it from tower owners and then renting it out again at dramatically higher rates – on a membership basis – to everyone from tech geeks to lawyers.
And if WeWork, which just laid off 300 employees and is still losing money, were to run into serious financial problems during a downturn, an awful lot of suddenly cheap office space could open up just as companies in towers across the city dump space on the market.
A Broadway Partners Rerun?
Beware of a business model that involves betting the house – or, in this case, the office tower – on the ability to push already sky-high rents ever higher, year after year, recessions be damned.
When Broadway bought the Hancock Tower in 2006, it paid more than twice what the seller, Beacon Capital Partners, had paid just three years before.
The real estate market was hot, and Broadway bet that it would make back that number and then some from the ever–higher rents it thought it could charge.
Less than three years later in the depth of the Great Recession rents were falling, not rising. Broadway lost the Hancock at a foreclosure auction, with the buyers paying $660 million, half of what Broadway had just paid a few years before.
In a case of here-we-go-again, WeWork appears to be making a similar bet.
The co-working startup is shelling out hundreds of millions of dollars to tower owners to take on large blocks of office space under 10 to 15–year leases.
WeWork assuredly has had to pay top dollar – no landlord is going to give away space in the midst of a hot market for anything but a hefty premium.
WeWork’s Strategy: Pack Them In
To make the numbers work, WeWork has been turning around and charging astronomical rates for office space – albeit very well designed with perks like coffee – that are two or even three times those levied by owners of the city’s priciest office towers.
As an example, let’s take space in one of Boston’s top towers, where you could easily pay $50 a square foot. It would cost a company anywhere from $12,500 to $21,000 a year to rent 250 square feet of space – the traditional metric – for a single employee, the range based on a number of variables.
WeWork charges members a monthly fee, rather than for a certain number of square feet, so it can be hard to make direct comparisons.
That said, a recent report by consulting firm CB Insights found WeWork manages to squeeze five office renters into the space normally reserved for a single worker in a traditional office space layout, or five per 250 square feet.
Based on the average member revenue of $6,641 per year, that’s $33,205 in revenue for every 250 square feet – a cut above and then some from what even the priciest towers are charging.
“Underneath this aspirational culture is a fundamental business truth. The company makes money primarily through rent arbitrage: charging its members more than it has to pay its landlords,” CB noted. “The principal means of accomplishing this is by packing a lot of people into its locations.”
Firm Continues to Lose Millions
Yet despite this huge amount of rent, WeWork, which was launched, continues to lose money, shedding more than $400 million in the first nine months of 2018 alone.
Scott Van Voorhis
One can only imagine what will happen when the economy takes a dive, as it must and will, whether this year or, more likely 2020 or 2021.
As the freelancers, entrepreneurs, solo practitioners and other assorted small businesses renting WeWork space lose contracts and revenue, they may very well decide their garage, their home office, or their local Starbucks is suddenly a more appealing option than spending thousands of dollars a month on fancy downtown digs.
Here’s hoping the owners of Boston’s office towers truly know what they are getting into as they turn over an ever–larger share of the city’s office market to WeWork.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
