Fruit water, micro-roasted coffee, and kegs of craft beer will soon be commonplace in every U.S. office.
Or so it would seem, based on shared office space company WeWork’s meteoric rise to prominence. The company rents real estate in major cities, converting large buildings into office spaces that can be rented on a monthly basis by individuals or companies. Its offices emphasize shared workspaces to encourage a community environment, and the spaces’ trendy interior design and sometimes unorthodox amenities draw a generally youthful, startup-focused clientele.
Founded in 2010, WeWork has 144 offices around the world, and is now the fourth most valuable U.S. startup behind Uber, Airbnb, and SpaceX. In September, WeWork surpassed JPMorgan as the largest holder of real estate in Manhattan. A recent investment by SoftBank’s Vision Fund – part of the investment arm of the giant Japanese holding company – valued WeWork at more than $20 billion.
The company’s rise in popularity comes alongside a wider trend of employers making their offices more attractive to employees. Silicon Valley companies like Apple and Google have long been known for their glitzy campuses featuring amenities such as volleyball courts, nap pods, and massage rooms. Modern offices are also increasingly open and dynamic, with assigned cubicles and offices slowly being replaced by open floor plans and community workspaces.
WeWork shares the same Silicon Valley roots as Apple and Google, and it capitalizes on them in the way it markets itself to investors. WeWork’s CEO Adam Neumann has called its office spaces a “physical social network,” and the company positions itself as more of a Silicon Valley-style startup than a traditional real estate company. That strategy has resulted in the company’s high valuation, that places it in league with the likes of Uber and SpaceX.
Critics of WeWork’s sky-high valuation compare it to other companies that they say are more similar to WeWork than investors realize. IWG PLC, another office-leasing company, manages five times the real estate as WeWork, but has one-eighth the valuation. The largest publicly-traded office landlord in the U.S., Boston Properties Inc., owns five times as much real estate as WeWork manages, and has roughly the same market value.
WeWork is private, but its growth comes alongside an influx into the market of growth-oriented tech companies. Such companies’ potential for growth, along with promises to upend traditional industries, lure investors eager to get in on the ground floor of the next big thing. Critics point out, however, that not every company that claims to be a technology startup truly deserves to be valued as such. If investors began to see Uber like a regular taxi company, Airbnb like a standard hotel company, and WeWork like just a real-estate company, their valuations would decrease tenfold. Investors expect WeWork to completely disrupt how offices are organized and paid for. The question is: can it?
WeWork’s proposed path towards growth is certainly compelling. By amassing a treasure trove of data about how workers use their workspaces, WeWork hopes to eventually provide value to large companies eager to reduce the costs of office space and increase productivity. If WeWork can use its many current coworking spaces to provide sophisticated and valuable services to employers—services it calls “Powered by We,” which range from smart conference room scheduling to office space design—or even take over workspace management entirely for large companies, it could eventually justify its steep valuation.
WeWork’s technology may change the office experience for the next generation of workers, but competition and poor management are potential roadblocks to its success.
One metric for evaluating the potential long-term success of a startup is its “moat,” the factors underlying its business that can keep it from being overtaken by competition. Superior technology, valuable intellectual property, and even name recognition can allow startups to defend themselves from potential competitors. A company with an effective moat has much greater flexibility in management decisions such as pricing and growth strategy.
WeWork’s moat lies in its first-mover advantage and its widespread name recognition, but little else. As one of the first companies to be part of the trend of short-term office rentals and trendier, friendlier workspaces, WeWork has a developmental head-start on other companies looking to get into the industry. To dethrone WeWork as the premier company in the shared-office-space micro-industry, a competitor would have to outpace even WeWork’s astounding growth.
In part due to that head-start, WeWork also has intellectual dominance over the shared-office-space market in the minds of consumers. The company is so enshrined in the trend towards nontraditional offices that its name practically represents the entire millennial office culture. Its competitors feel more like second choices.
So, it is all the more worrying that WeWork faces increasingly stiff competition from other companies with similar business models. A company called Convene has been buying up Manhattan real estate with an eye towards becoming WeWork’s closest competitor, and is quickly growing. Other competitors utilize specific traits to set themselves apart: Spacious, for example, has turned more than 25 upscale restaurants in cities such as San Francisco and Manhattan into shared work spaces outside the restaurants’ dinner hours.
The success of these competitors is a worrying sign for WeWork. Apparently, consumers – workers and employers alike – are attached to the ideas behind WeWork, but not so much to the company itself. Any company that could amass a real estate portfolio and tenant list comparable to WeWork could easily collect the data needed to replicate the service offerings that underpin WeWork’s valuation.
There are also red flags about the quality of the company’s management. The Wall Street Journal describes Neumann as being “fueled by showmanship…and the occasional shot of tequila.” Immature or overconfident leaders are par for the course in Silicon Valley-esque startups, but they often wind up putting their companies in difficult positions. A lawsuit filed in October by former employee Ruby Anaya alleges that she was fired for reporting sexual assaults that occurred at two company events; the lawsuit names cofounder Miguel McKelvey, Anaya’s direct boss. It also describes a “frat-like culture” at the company, notes its policy of making free beer on tap available all day, and claims Neumann gave Anaya tequila shots during her job interview.
After the lawsuit was filed, WeWork instituted a 4-glass-per-day limit for some of its tenants.
Anaya’s accusations evoke Uber’s mishandling of sexual harassment claims in 2017 that led eventually to the ouster of its CEO Travis Kalanick.
Statistical metrics indicate WeWork’s core model may also be starting to show cracks: occupancy rates have declined in the past year, the company has raised commissions for brokers bringing in new tenants, and discounts and promotions are increasingly common.
To be clear, WeWork shows fantastic potential. Its tech-based approach to office spaces could save companies money, make employees happier, and increase productivity. To make good on those promises though, the start-up will have to fend off vicious competition and demonstrate disciplined management. Expectations for WeWork are sky-high; a single misstep could cost it everything.