They only "owe" $18b in rent the same way any company leasing office space "owes" their landlord money. The word "owe" is thrown around here in relation (almost exclusively to WeWork) to imply they're in arrears to the landlords to the sum of sum of $18b.
It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.
Over the length of their leases they have an $18b obligation, but that isn't the same as the way "they owe 18b" is used colloquially to mean currently in arrears/default.
It is the same as entering into any agreement - over the agreements length you have an obligation, which if you can't service you're insolvent.
I guess I find the narrative that they "owe" $18b to imply a far greater extent of distress than the reality of their leasing obligations actually entail.
Precisely. They have liabilities of $18b with no profits. In the event of revenue drying up, they are still on the hook for those leases. There is no real difference financially between a lease and a loan in that sense. If I lose my job and can't pay the rent, I don't get to just say to my landlord "Sorry, lease is up!", and move out. I can be sued for that entire value.
If I was an investor in WeWork I'd care 0 about the total amount and almost entirely on what their trajectories look like, and the terms of those leases, etc. The $18B number is a red herring.
But nobody sues when they can just rent to another party.
That's the whole point though.It is lost revenue because in an economic downturn, when no one is trying to rent office space, the landlords will be left with no recourse but sue if the leases aren't paid. There are underlying construction and mortgage loans on the buildings being leased that must be paid regardless of whether the lessees bail out. At a certain point someone is left holding the bag.
The right to use asset is depreciated over the course of the lease whilst the liability is decreased as payments are made.
So it isn't a huge negative equity hole (particularly at present since lease obligations are off balance sheet), but with these changes gross debt will increase substantially, which may trigger covenants with regards to debt ratios (equity will be offset by right to use asset however, so no bit equity hole even with new accounting rules).
A landlord can re-let the space to another tenant, and start earning revenue again.
The money loaned however is gone until it is repaid. The total loss of a loan is the principal remaining unpaid at time of default, since you have permanently parted ways with the money once you transfer the funds to the borrower.
A lease on the other-hand hasn't deprived you of anything. You've still got the asset that can be released.
The losses in this instance are limited to the period of time the premised was vacant and unpaid for, as well as associated other costs such as an amount of any incentives provided as a proportionate to the length of the lease term remaining, legal costs, reletting costs, advertising and renovation costs etc.
You can't simply sue them for the entire value of the lease - especially if someone else moves into it and starts paying rent, you'd be double dipping.
I think it’s fair for their rent obligation to contribute to the concern about their business in this sense.
Yes, it’s not like an immediate obligation of $18 billion. But the effect on a net present value calculation of a company already operating on big losses is still very important.
You can sublease or assign your obligations in a lease, typically you can't assign a loan in the same way.
To clarify, when the average household talks about their family debt, they don't include the future lease payments that they're liable to pay over the remaining term of their family home's lease in their calculation - that is (rightfully) an expense, not a liability.
They do think about their mortgage though in terms of net worth and debt position.
You're right that only WeWork appears in the news in these terms, but WeWork is an unusual case. I would be interested to know if there are other companies in a similar situation.
In the linked article of this thread though, and a few others I've read specifically about WeWork, it feels like it is used to imply a currently due debt that they can't pay, mostly for dramatic effect I imagine.
Someone else had some comments in another part of this thread about other companies with large plant/equipment leases receiving similar commentary, such as expensive data centers.
Of course Uber and Basecamp and Reddit and Dropbox and other unicorns don't have this kind of criticism, because they don't have the same amount of heavy plant capital that WeWork has.
Look at any thread about a company building/buying a datacenter and you'll see the same argument. It's a bad idea because if they shrink in the future they're stuck with capital they can't pay for and now they go out of business. Only in this case, they can't shrink any more because they're already massively unprofitable, PLUS they have ungodly amounts of debt obligations.
A definition of a pyramid scheme
Is that a known fact or just a guess? The prices are low enough that it seems like it could easily appeal to bootstrapped companies or small businesses.
WeWork tracks everything that goes on in its buildings. They're in the business of understanding the quantifiable nuances of human interactions within a workspace. WeWork itself uses that data to "optimize" the coworking experience, but from what I understand, SoftBank has much grander schemes.
Oh wow look what else SoftBank owns:
Soon there will be robots walking around the WeWork offices delivering coffee and monitoring peoples breathing patterns.
So unless WeWork can use that data to be a better real estate company, it doesn't much matter.
And I have a hard time believing that WeWork needs all that data to create their coworking spaces these days, especially since lots of competitors come real close without the data.
They'd get data on how they don't have enough bathrooms for their capacity, there are often broken items in these bathrooms, and more.
They'd have data on how there's never enough mugs and how they're at <60% capacity in one building, yet opening up 2 more in a city :).
I'm thinking of it as a lab for quantitatively studying human behavior in a candid setting. When you go into a WeWork space, you're a specimen.
- A fresh presentation on small suite / desk rental + some trendy common area space (vs legacy players like Regus which had gotten very tired)
- Having space that's largely built out. Companies can spend $50 - $100+/ft getting space ready for their use
- Bridging the mismatched term expectation between landlords (desiring 5-10 year terms) and smaller tenants (desiring 0-3 year terms).
What frictions do you think gives WeWork essentially what you describe as a lease arbitrage opportunity?
Also, due to protracted lease negotiations and brokerage model (both tenant and landlord brokers get paid based on the total lease payments), there isn't motivation for shorter term leases. Just ask anyone who has a small lease requirement that is in a stable, non-VC backed company -- no tenant rep broker wants to take this work on because there is no money in that transaction, there's not that much less work than required vs a larger lease requirement, and no promise of a bigger deal with that company down the road in case they become the next Dropbox....
So 3 out of the 4 involved parties are not motivated to shorten lease term. The only one who wants shorter leases are the tenant.
Where is the WeWork moat? Buildout? Reception clerk? Meeting room reservation software? Demand forecast?
At some point the VCs will stop pouring money into it, WeWork will have to charge the full price, and then any old group of people with money can build a local WeWork clone. And unlike WeWork they won't be saddled with expectations of paying a return on the multi-billion investment spent on subsidies.
Croissant is an interesting aggregator that does this across smaller coworking spaces, but does require you spend some time getting set up each time you use a new space.
Having worked in a company fully based in a WeWork location in Boston, I can tell you WeWork basically is a complete stereotype of precisely all of the miserable, distraction-focused problems with open plan offices in general.
For fun meetups and goofing around, they are nice spaces.
For getting work done, it’s horrible, universally. People on my team would actively leave the WeWork office and walk to Starbucks to get work done, or more often just constantly work from home.
Whatever VC <-> founder winking social signaling and sort of cookie cutter “look at how start-uppy and innovative we are” status signaling must be the driver of locating in WeWork and coworking spaces generally.
It is clearly not related to productivity, quiet or private conditions conducive to engineering work, or basic workplace ergonomy or cognitive health.
That aside, percentage of WeWork tenants that ha e to travel is what? 2%?
The coworking industry, a novelty in US, was alive and kicking everywhere else before becoming a hipster trend in US.
I'd say, WeWork, with all its colossality, is still only managed to secure single digits of the market share. In the future, it has no chances to approach even, say, 10% as competition is cut throat.
Theranos had a valuation of $9 billion not too long ago. Did we forget about Pets.com and all the "valuable" properties during the dotcom boom that became worthless in a manner of months? Or the shacks worth hundreds of thousands during the 2000 housing bubble?
> I'd consider the lemonade stand on the corner to be more of a business than WeWork in the true sense of the word.
You should. There is so much money out there looking for assets that you could start a lemonade franchise business and you are sure to get investors bidding up your property even if it makes no money.
The current economic environment is dotcom bubble + housing bubble combined on steroids. There is lots of money to be made if you are willing to suppress your morals and just take the money.
That's a sub 3% dilution on their valuation. Laughable with the capital that is freely flowing right now.
It only matters if the music stops at a time when their finances are in very bad shape. If you had polled HN about that, you would have gotten four years ago as the popular answer to when the music was going to stop.
Amazon took the exact same risk, bleeding vast red ink to expand aggressively, financing itself with free flowing capital during a bubble. So is this comparable to 1996, 1998, 2000, 2005, 2007, none of those? Who knows, especially given the behavior of central banks is aggressively interventionalist post 2007.
What recent technological advance made WeWork possible in a way that was not viable 10 years ago? Cash burning VCs' pockets that lets them underbid the competition?
How is this absurd valuation -- or for that matter, even the 17 BILLION previous valuation -- justified esp considering (according to the article) they are losing money ?
> The company’s bond offering documents showed fast-growing sales but even faster-increasing losses. WeWork had total revenue of $886 million but a net loss of $933 million in 2017, according to the documents.
A good franchise business will force the franchisee to buy the real estate and give the franchise the opportunity to buy the real estate at a fixed cost (either fixed outright or a multiple of revenue for the location), effectively giving them no downside on capital depreciation on the site (i.e. the value of the site going down) or the ongoing dilaps costs. They only have upside: they can buy the site if it's doing really well. And meanwhile, you're buying your training, goods, services, and paying a portion of your revenues to the franchise.
WeWork is like a franchise which has no interest in owning your real estate.
They and others have realised the opportunity to take advantage of a couple of factors in the macro (more fluidity in working working lives -- telecommuting, flexible work --, startups, low interest rates meaning units can be vacant and on balance sheet without too much pain for an owner) and build a smart offering around that: got an empty building OR bored of the overheads and headaches of managing an office space yourself? We'll lease it from you for a fixed price and then take any upside. You get smoothed cashflow and a fixed yield, and we get whatever upside we can make.
They don't have any of the overheads, complexity, costs, or risks of owning the real estate. The IP and brand they're building (brand is an important factor here!) are not wedded to geography. Shoreditch isn't cool for startups any more? WeWork is gone.
They spend massive sums of money to build out other people's buildings and typically enter triple net leases which means they do indeed have the overhead, complexity and costs of owning real estate. Even more complex really because they have a long term lease and need to constantly keep it filled with short term tenants.
But it doesn't answer the existential question as to their valuation.
I don't see how WW has any systematic advantages at all.
Nobody really cares if offices are in WW or some copycat clone.
Many companies are wearing of paying heavy premiums for such offices and want out as soon as they can.
Real estate is an old business. There is no 'new' here. Dressing up places, making them cool and selling at a premium is not new.
I just don't see where the magic sauce in this business is.
1) The brand has value. Sure, making an empty space into a co-working space is not that hard. However, how do you market that? How do you get potential workers to know about your space, and choose to work there? If WeWork or Impact Hub are the known brands, people will search there first, and never find you.
2) They may also be exploiting information asymmetry between the high-cost and low-cost areas. If a company in NYC or SF is used to paying $50/sqft/mo ($500/mo for just 10sqft) for space alone plus utilities, etc., they may not really balk at $500/mo for the co-working space used by a remote employee. Sure, those companies know they're getting fleeced compared to regular costs in those cities, but they may also not care, as it's not worth it to economize for just a few employees, and when it gets to many, they just negotiate a bulk deal with WeWork.
There is no 'asymmetry' in commercial real-estate really ... prices are well known and watched in every town. Do a little running around in any town and you get a pretty good idea very quickly.
Also, they are loosing a huge ball of money.
The BI article hints at 'dot-com bubble trouble' and I believe it for this one ... the economics look bad and it could crash.
If this goes, and say, Tesla pops ... it could be really bad because the 'crypto coin' thing is essentially a bubble of sort (by that I mean fuelled by speculation) and that could come crashing down very easily and quickly as well. There is also an AI bubble (AI is here to stay, but companies/valuations are whack) that needs a correction.
So long as the US economy stays good ... maybe all of this will hold, but some douche-bags are going to just make 'one lie too far' and things will get gummed up for a lot of otherwise good companies.
Tesla needs cash, and if they can't get it, they could fail. Or be massively downsized.
WW needs cash badly, if they don't raise ... it will crash.
I don't know about that. The relationship between WeWork and the building owners may be co-dependent rather than merely symbiotic.
If you owe $10,000,000 in rent, you have a problem. If you owe $10,000,000,000 in rent, the landlord has a problem.
I am not saying WeWork can justify their valuation, but they (and some others) are fundamentally changing portions of the real estate market. They are putting more people per square foot into offices and are getting people to pay a premium for perks and flexible leases. Getting people to pay more for less space is a big deal (if it continues to work...) This is a totally different model than what traditional real estate players have done. Hence why a lot of commercial real estate players are scared and trying to catch up.
No. At least for now.
Starbuck's convinced a generation that they = coffee + environment.
WeWork could feasibly convince a generation of Gen-Z startup wannabes that 'they are startups'.
I find the milktoast 'fake startup' environments at WW kind of repulsive in that way - they are literally designed to be the 'environment for the post-Uni lifestyle' but in a watered down, 'safe space' inauthentic manner.
Kids are going through schools with 'everything', Unis 'with everything' (i.e. cappuccinos and lattes into class) to workspaces 'with everything'. It's like they don't have to encounter reality now until 30. And with 'retirement spaces' moving back from 65 ... we may successfully create the capitalist driven 'cradle to grave' lifestyle factories.
Like 'touring the world' is hoping from each of the 'French' and 'UK' and 'Canada' pavillions at Disney's Epcot centre ... you'll soon be able to walk through someone else's version of reality, like living full time in a 'real life commercial'.
I always appreciate the entrepreneurs who want to 'get out of there as soon as possible' for so many reasons.
All startups should have at least a few symbolic 'desks made out of doors' or something of the sorts, or maybe not-so-symbolic ones.
I'm not entirely sure what that equation means. That Starbucks has convinced a generation they're...a coffee shop? Even if you don't like their coffee, they are a coffee shop. That Starbucks...cares about the environment? By big corporation standards, you could do worse, I guess? Or do you mean that they present themselves as a good environment to do the "hang out here for a while or work here with a laptop" thing? With provisos about how wildly this can vary from location to location (boy howdy, can it), in general I'd argue they are a good place for that. In the SF Bay Area I have a panoply of cafes that serve better coffee, but the majority of them are louder and/or more crowded and/or more expensive and/or less comfortable and/or subtly-to-openly hostile to "digital nomads."
If I have a complaint against WeWork & friends, it's mostly a matter of cost; if I'd been bold enough to try a startup 10–15 years ago, which I probably should have, I wouldn't have dreamed of looking for office space until we had actual revenue (i.e., not VC/seed funding).
What they ostensibly want to crate is a 'mini community centre' a place where people can go, hang out, read, and interact in a hyper-local manner with 'people they know' - like the terraces in France or Italy. But what they've done is not this at all - the experience is utterly corporatized to the point of being banal. None of their products are locally sourced or relevant. They certainly didn't even try with things like Croissants (Starbucks croissants are like rubber, but who cares, so long as people don't know what a Croissant actually tastes like and keep buying them). The music is even 'lowest common denominator'.
There's a coffee shop near from me which is in fact the 'real deal': all foods made fresh each morning on-site, local owner who is actively engaged in the community (and a total character), and it's actually a true centre for finding out all the cool goings on in my hood. The music is chosen by the folks working there and it's always charming, nuanced and interesting. Literally with old French guys arguing about some political this or that (it's Quebec).
After hanging out in this local spot - visiting a Starbucks for me has about the charming authenticity of a McDonald's.
I've realized only recently that I think people have difficulty grasping this because they've lived in a corporatized bubble of culture their entire lives (this is common in North America) and have almost no context with which to compare it.
WeWork has pragmatic value (just like I don't mind grabbing a Starbucks when I'm out and about), but it's also designed to create an environment which is the 'romanticized' version of startups, not necessarily real ones. There is a great P Graham article about startups who 'play house' (I'm sorry I tried to find it for you to no avail) i.e. going through the motions. whenever I visit WW I get that feeling 10x. I also feel that the environments are inauthentic ... tiny little beer cups? What's with that? Liability? "Drink beer, but really, don't". Please.
A pragmatic concern is the 'arms race' that they kind of create for new startups trying to attract talent, in some ways 'hyper cool office' is becoming normative, and it's just an added, not-so-necessary expense.
I like the shared spaces for MeetUps however - this is actually quite valid and authentic.
> The company had initially planned to sell $500 million, and then received orders of about five times that amount.
> Moody’s Investors Service rated the notes Caa1, seven steps into junk. S&P Global Ratings rated them three steps higher than Moody’s at B+, while Fitch gave them a rating of BB-, four steps higher than Moody’s.
tl;dr disregard their ability to sell junk bonds
People couldn’t believe Uber was worth more than Delta airlines in one of their valuation rounds.. this is very common. They were about to own the taxi industry and take a cut out of every ride.
This is so much bigger than that.
It's easy (relatively speaking) to build a big business when you can take on billions of dollars in losses. Turning that around is the hard part.
Uber will be near or at break-even within 18-24 months. Their sales will be over $20 billion at that point.
Are they worth three time sales? Definitely. How about 5x or more the $20 billion in sales two years out? Probably. Twitter is fetching 13x sales currently, and has only finally started making money after more than a decade of vast losses (even worse, Twitter has almost no growth).
So how does a Twitter-like 10x sales multiple on $20 billion sound, two years out? $200 billion valuation. Does that sound crazy? I think it's very rich, the capital markets may think it makes sense.
Netflix has a zillion PE ratio (and has for a long time), and a 16x sales multiple. Their margins are horrendous and will never be very good. There's a small chance they can ever grow into their current valuation (it'd require 500+ million global customers), much less anything higher.
Uber's quarterly sales will catch Netflix in probably four or five quarters. How about a 16x multiple on Uber's sales four years out, with a conservative $25 billion in sales at that point. How does $400 billion sound?
Meanwhile, Uber and Lyft have been shut out of Europe and Asia, and at best might become the major (but not sole) player in the car service market.
Definitely false. The majority of office buildings on the market aren't interested in leasing me spaces of varying sizes for terms from 1 month to 5 years.
I don't understand the precise mechanisms in the case of WeWork (it's not as clear as, say, Uber + self driving cars). Can someone explain?
They’re smart about getting other companies to sponsor events and provide the goods. A WeWork funded activity is like 5 boxes of cereal and some milk and they call it a “cereal bar” - that’s like $20.
Their front desk people are nice, but always seemed overwhelmed and don’t help beyond surface level.
I’m learning that when it comes to your last month, the customer service goes out the window and they turn into sharks. One day late on my notice and they force me to pay a full month to not have an “illegal moveout”. Buyer beware.
- While local coworking spaces could match the decor, vibe, etc. your local coworking space didn't have locations in other cities. I got 5? credits that I could use to work out of other WeWork locations.
- WeWork definitely had a tech-first attitude. If you wanted to reserve meeting rooms, register a guest, sign-up for events, etc, they wanted you to do that through their mobile app or website. Regus may have had a site, but they didn't push you towards it.
- WeWork had a "marketplace" where you could get discounts on various tech/non-tech things like accounting software, business cards, services, etc. Probably another good revenue stream. They could be pitching it as the "App Store" for startups.
- In my location, in the LA area, tech wasn't the majority. I would say 75% of the people I met were in some sort of service (real estate agents, lawyers, consultants, recruiters, etc,).
I don't think they're worth $35B (Delta Airlines' market cap is $38B, Atlassian market cap is $15B for some benchmarks), but they definitely do have some positives.
It may be a small perk, but the extra hours / effort people put in to get / retain their spot more than pays for what we spend on the seats.
If this easily re-createable environment was the norm, it wouldnt motivate internally. If the company only created it for a snall portion of the company, employees would resent leadership.
It's been a very effective business investment for the company i work at.
That being said, a sexier environment is just one of many ways to motivate people.
Rewarding people who work harder is one of the better management decisions in my oppinion. Merit based bonuses are the main way my company handles this, but there are more perks for the individuals who take initiative & constantly get shit done (as it should be)
To your second point, i started in the first environment & eventually got a seat. I never resented people who were over there. I saw some friends get there before me and i was happy for them. There was no internal competition, just another nice reward to thank employees. I wouldnt want it to go away even if i lost my seat.
The drawback? They really know how to jam a lot of people into a very small space, which might be why their valuation is so high.
That is not at all what WeWork offers. I'm typing this from a Regus office space (probably the best known incumbent), and having worked out of WeWork offices at other times, the difference between the two experiences couldn't be more stark.
A lot of companies try to claim to be "tech companies" when they're really just doing some mundane thing, in the same way as ever, but with a "tech" sheen on the website. (Maybe some green kanji characters scrolling down a black background, that sort of thing.)
WeWork really is different. I've seen some of the tech they deploy to improve the density ratio of the buildings, and to track different aspects of their customers' experience, and on and on. I'll grant that there aren't many barriers to entry in a small-scale, "hey, here's a desk and hot coffee" local market -- but very few companies can create the kind of global footprint that WeWork now has, which is a big part of the main strategy, going after the office needs of the Global 2k.
That being said, they trump up their internal social network as part of their valuation, but it barely gets used in my WeWork and I can see globally that it doesn’t get used much except for selling and some reference requests.
It’s used at a rate of like less than one posting a month per person.
If other companies were able to lose $900m/yr and still operate I bet they would be able to create that type of global footprint
But of course it wouldn't be the quickest way to grow since you'd need insane captial. If your competitive advantage is the extra return you're squeezing from the properties, makes far more sense to lease them so you can have more, rather than be buying them upfront.
Owning commercial real estate in today's market == losing money.
Rent to buy ratio is all time high.
- Being there is expensive for individuals. It seems to be mostly small companies and projects renting space. They get a decent deal of having an office and all stuff that comes with that as part of the package.
- They seem to use space efficiently, I did not spot many vacancies and it was packed with people.
- It looked to me like they are not having demand issues and they are basically billing per seat.
- Setting up these spaces must be costing them a bit as a one time investment. The space looks nice and clearly they are going for quality here. Seems to be part of their brand.
I imagine the latter is what is driving recent losses, because they have been expanding like crazy. The flip side is that if each of those new offices has similar occupancy, they are growing their revenue as well. The initial investment can be amortized over the lifetime of the lease probably, which presumably is many years. As soon as they stop growing, they should be making money. My guess is they are instead expanding as fast as they can get away with. This means that these losses are in fact solid investments. Somebody else in this thread is citing 40% profit margins; this sounds legitimate to me. The per building revenue should be substantial based on what I've seen.
Especially considering the churn rate I see at Make, I'd be surprised if they do much more than break even on the customers they got with a 6-month credit.
"I have to say, if SoftBank is going to become the entire market for hot private technology startups, then every valuation is going to be marked-to-SoftBank, and the numbers will start to lose their meaning.
SoftBank: Would you like some money at a $10 billion valuation?
SoftBank: Here you go. Would you like some more at a $20 billion valuation?
SoftBank: Here you go. How about a $40 billion valuation?
Startup: This is dumb but it’s not like we’re going to say no.
SoftBank: Here you go.
Startup: Thanks brb buying a yacht.
SoftBank: Our mark-to-market investment returns are tremendous, we must be good at this."
1. Good furniture. You either buy super duper expensive italian handwork stuff, or generic IKEA. Nothing in between.
2. Think of smaller spaces, down to few rooms for 6 people in the same building. Getting a wholesale rent rate on those, will be I say, easier than that for warehouse sized halls you rent today.
3. Rent in premium highrise towers. Your clientele is more than eager to work out of these places.
4. Reduce working hours, and charge extra for late stayers!!! You can't work when you are being disturbed by cleaning staff. Having everybody leave for the time cleaners do their work, will make life of both cleaners and renters easier.
5. Forbid eating at workplace. Having people carrying coffee bumping into me 3 times in 2 months, made me leave your cowo.