Embattled coworking company WeWork is 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, WeWork laid off nearly 20 percent of its employees as a cost-cutting measure.
In the final quarter of 2019, WeWork leased an additional 441,000 square feet — about the size of six typical WeWork offices, though it includes one massive lease of 360,000 square feet at 437 Madison — in Manhattan, its biggest market, according to new data from real estate services company Cushman & Wakefield. As of the end of 2019, it was leasing a total of 8.2 million square feet in the borough, where it remains the biggest 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 2019 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 2019, according to data provided by real estate information firm Costar Group. The coworking company’s growth is certainly decelerating.
Still, the addition of new locations at the end of 2019 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, outlined a 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 employees he planned to focus on the company’s “core business” of office rental rather than WeWork’s many side projects, like its school and wave pool businesses.
The Information reported last month that WeWork was secretly trying to get out numerous office lease deals. The company’s occupancy rate, or how fully rented its locations are, declined to 79 percent on average in the third quarter of 2019, down from 84 percent a year earlier, thanks to the opening of new buildings.
Claure has said he wants the company to be free cash flow positive by 2023, meaning that it generates more cash than it spends on operations like leasing office space and running them. WeWork lost $1.25 billion on $934 million in revenue in 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 of SquareFoot, 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 $64,000 question: Are you doing the right deals or doing deals because you need to do deals?”
While WeWork has notably refused to break down the exact profitability of its new locations versus mature ones, we know from its now-defunct IPO filing that as of this summer, some 70 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 2019 rent and 2019 turns out to be the top of the market, and we have a recession in 2020 or 2021 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 grow in 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.