18 November 2020

n+1 Magazine: “Then WeCame to the End”

This lightness will stand out as WeWork’s true innovation, in two ways. The first was that by signing leases, as opposed to buying or even building, it could grow incredibly quickly, as long it was able to raise enough money to cough up rent. It also built light. Contra its loudest critics, WeWork is more than just marketing, spin, and pineapple water. It has used all of that atmospherical ephemera to convince workers—whether they’re freelancers or employees of fast-growing companies that can’t build out their own space quickly enough—that they don’t need as much space as they might have thought. One estimate puts WeWork’s square footage per “member” at around 50 square feet, well short of the office average of 250. WeWork is thus able to charge high rents for substantially less space than its competitors—including an option where renters don’t have a permanent, dedicated desk.

Eric Rosengren, the president of the Boston Fed, endorsed this analysis, and extended it out further, noting that if subtenants flee, the risk isn’t just to WeWork, but also to its landlords: because WeWork signs its leases through legally complex special purpose vehicles, WeWork might be able to abandon a specific building’s lease with the landlord unable to go to the parent company to collect what’s due. Furthermore, WeWork’s small and venture-funded company tenants might abandon their subleases faster than typical commercial real estate occupants. Not only would WeWork be missing out on sublease payments—its landlords could then get into trouble as WeWork’s special purpose vehicles can’t come up with the rent, putting both those companies at risk as well as their lenders. I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model, Rosengren said.

Matthew Zeitlin

Good summary about WeWork, one of the tech unicorns who quickly collapsed when few people would have anticipated it, including their financial ties to SoftBank and Saudi Arabia. I have never looked at it in detail beyond occasional headlines about banning meat from events, but the business model looks untenable in the long run: while WeWork’s clients gain the flexibility of renting office space by the month, the company needs to shoulder most of the risk. Imagine WeWork during the pandemic, with all its customers canceling their leases because of the lockdowns and the company left to pay the bills!

WeWork business model

What is most ironic about WeWork is that the business idea itself is valid and could prove successful in a post-pandemic economy. If flexible working hours become the norm, if companies allow employees to work from home 2–3 days a week, or require their physical presence only for corporate events, trainings and crucial meetings, the amount of office space needed on a regular basis will shrink substantially. It would then make perfect economic sense to simply rent smaller spaces from a company like WeWork. Companies could distribute smaller offices in different parts of the city (or country) to reduce commute times, which would also stimulate the local economy in those areas, instead of concentrating it around big monolithic skyscrapers. It won’t be the multi-billion dollar business WeWork had set their sights on, but an opportunity nonetheless.

In the old days—which is to say before 2017—Saudi leaders were sated by the fruit of discreet lobbying over security policy: Saudi ambassadors were always treated well in Congress and in the White House. Ever the flashy millennial, MbS couldn’t settle for mere halls of power, and instead publicly wooed the most visible instantiations of the American imperium: technology executives, Thomas Friedman, Dwayne “The Rock” Johnson. As part of his much-ballyhooed opening of Saudi Arabia, he even allowed an American movie to be screened on Saudi soil. The film told the story of an ambitious young king seeking to open up his rich but isolated country to the world: Black Panther.

The attempted diversification of Saudi Arabia’s economy has occasionally veered off into farce, like when the government tasked western consulting firms with implementing MbS’s dreams of a future city in the Arabian desert called Neom. (According to the Wall Street Journal, Neom would feature a beach that supposed to glow “like the face of a watch”, as well as a “robo-cage fight”, “one of many sports on offer”.)

If Neom and bin Salman’s big American grand tour were the physical instantiation to become something more than an oil supplier to the modern corporate technology world, then the check cut to SoftBank is the down payment. (What Saudi Arabia’s supposed payment for US troops stationed there constitutes in this relationship is up for the reader to determine.) And if WeWork is what happens when capital is in the hands of resource-rich autocracies, futurist telecom executives, and cash-rich mature companies, perhaps it can serve as a launching point for thinking about how capital would behave differently under the aegis of democratic control.

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