I’m good friends with the founder of the first and long-dominant tech/creative co-working space in my Australian city, and I served on its advisory board in the past couple years, through what turned out to be a distressed sale of the business to its landlord, after it became insolvent and unsalvageable.
There are several fundamental flaws with the concept that make it very hard for this kind of business to work:
1) Difficult/unpredictable/uncontrollable customer retention
Most of your customers are individual freelancers and early-stage companies up to about 20 people. If they become successful, they outgrow the space and leave (possibly after a period of tenancy on negotiated discounted rates because “hey it would really hurt you guys if we left”). If they are unsuccessful, they go out of business and leave, possibly after a couple of months of non-payment (“oh man we’re just waiting for a big payment/financing, we’ll be able to pay next month for sure”), which is hard/impossible to recover once they’ve left. And even where people remain eligible customers, the transient nature of the customer-supplier relationship means it's easy to jump ship if a cooler space opens around the corner.
So you’re running this revolving-door business, where retention is only partially within your control, and having to invest heavily on new customer acquisition (often involving free trial periods and other incentives) to keep up with churn.
Your most reliable customers in terms of tenancy and payment are remote workers/teams for bigger interstate/international companies, but too many of them and the culture can become too corporate-feeling and less appealing for everyone - them included.
2) High setup costs and fixed running costs
Rent, fit-out, furniture, facilities, utilities, cleaning/maintenance, staff, etc. Most of these costs are largely independent of occupancy levels/revenues.
3) Difficulty finding/keeping good staff
The “community management” job in these places is highly specialised and demanding. All day you’re dealing with human problems that are exacerbated by people’s stresses about their business or job, as well as all the minutiae of things like the toilets/kitchens being clean/stocked, meeting room booking windows being adhered to, ensuring that the people in the space are all people who are meant to be there.
Emergency calls from people who e.g. left their wallet in the space that day and “just need someone to let me in to grab it” (at 9.30pm) become routine occurrences once you reach a certain scale.
Beyond these practicalities, the people in these roles set the mood for the whole space, and can make all the difference between it being a welcoming and happy place or a dull/miserable one.
Finding people who can not only do this kind of work all day every day, but do it with an enthusiastic and friendly demeanour, is very difficult, and burnout/turnover is common.
In general, the kinds of people who can do this job really well can get a less-stressful/better paid job elsewhere (quite possibly for one of your resident companies).
The market in many cities has become saturated (partly thanks to WeWork itself). This pushes market rates down, acquisition/retention costs up, expectations up (“the other place has FOUR types of kombucha on tap”), and dilutes the pool of potential residents and staff.
And after all, what you’re offering is not essential for freelancers/small companies anyway. They can easily work from home, cafes, borrowed/subleased space with other companies.
It seems the only way to make these businesses financially viable is by partnering with something like a startup accelerator/investment company or an R&D body backed by industry and/or academia.
But this requires deep links with local community/industry, and is a huge amount of work to establish and manage.
For a player like WeWork, this kind of work is hard to do as it can’t be done with a cookie-cutter approach, and local collaborators for these kinds of partnerships often prefer to work with locally-owned businesses rather than big outsiders.
So, we’ll wait and see. Maybe WeWork has something up their sleeve that will allow them to build a model that works.
I’ll be interested to watch it play out.
WeWork and AMEX are currently offer a deal when if you get an Amex Business Platinum card, they give you unlimited hot desk access to any WeWork in the world for a year. You can work for an entire year for free (even in super high cost places like NYC, SF, London, etc.), even if you are already a paying WeWork member. All my friends and I cancelled our WeWork memberships and moved to AMEX. It's saving me >$6k this year and I get a better product than I had as a paying user.
This has led me to visit a lot of WeWork locations:
- In my experience, most of the WeWorks in the world don't have that many "coworkers". Most of the people in the buildings are at traditional companies renting office space. The companies renting space are frequently giant corps like Netflix or Facebook getting spill-over space when their main office is full. (There are exceptions like the WeWorks in downtown SF where there are lots of coworkers, but it is not the norm.)
- WeWork places so little value on the income from shared desk "coworkers" that they will give away the product completely for free as a loss leader to grow the brand and entice more people to try out the product and rent a larger space.
- Entire WeWork locations will just "shut down" to the public if WeWork manages to lease all the space to a company like Facebook. See 125 Shaftesbury Avenue in London. Obviously they care more about leasing to a big company than running shared office space.
My take is that they are trying to be Starbucks for renting office space. This product is very convenient and it has a lot of value, but I don't think it is a "tech company" and I don't think it justifies the current valuation level because the margins aren't there. But who knows what the market will think.
But two things are crystal clear to me:
1. I would get out of the coworking business if I was trying to compete with WeWork. I couldn't possibly offer the quality of product (pretty good) at their price point (as low as $0) unless I had unlimited piles of VC money to burn.
2. If you are doing independent consulting or remote dev and don't need traditional fixed office space, you might as well help them spend their VC money by using their space.
Customer retention is even worse here, as so many spaces keep opening up and offering huge discounts to move in.
At first WeWork kept their price the same at an average of 3,000RMB desk/month (600AUD per month), then local competition came in at under 2,000RMB, then WeWork did 3-6 months free rent incentives, 25% broker commissions etc, opened around 30 (?) spaces in 2 years.
Now the average price of a desk is around 2,000RMB at WeWork, local competiton is under that, and brokers still get 15%. The Tenants know how much power they have in the negotiation as it's all a big competition between coworking operators.
Who's winning in this? Landlords, Tenants and Brokers.
Right now we have a situation where companies like WeWork are creating huge amounts of demand by offering extremely low rents to tenants on short leases and renting spaces from landlords on long term leases at high prices. This is stimulating the creation of more office space.
If this continues for a long time, great landlords are rolling in it! But if we're right about how this is going to go - these companies are going to run out of money, and when they do run out of money, they're just going to fail to pay those long term leases. The landlords are the ones left holding the bag - they'll have a load of office space with broken contracts, that there's no demand for, because all the demand was stimulated by renting it out at a loss.
At that point the bottom will fall out of the market. Landlords will be stuck with a load of broken contracts, tenants will have unrealistic expectations and demand will collapse as people go back to working in cafes etc.
Ultimately, for control of many of these issues, a localist approach is superior..understand the local culture, etc.
Maybe a coworkery in La Jolla would have surfboard racks and a tacit understanding that surfing comes first...so allowance for wet gears (and showers) might be needed. Maybe a location in Boulder has community climbing gear and/or a bouldering wall.
So, does scale lend _any_ benefit? Certainly the "network" of locations might help...but what % of tenants are really and truely jet-setters off to many major cities, versus those that stay close to home and just need a regular space out of the house. I don't think scale is that vital in this view.
Next, deals...I suppose scale can lend itself to leasing deals with major brokers that have multi-city inventory. But that benefit is only on the supply side, and unless the _same_ landlord is involved, they won't come down in price just because.
At the end of the day, more, 'localist' coworking spaces probably wins and is a more dynamic market (and thus resilient) than some attempt at "winner-take-all" scale. Also, to reinforce that...I suspect many times a good coworking location is probably an individuals labor of love...they like their town, had access to the commercial space, and they wanted it first-and-foremost for themselves. Any subscribers are just helping to pay the bills and making new friends.
Spot on here. They are building for a world in which everyone is location-and-asset-independent. Don't need a car because we have Uber/Lyft. Don't need a home as we have Airbnb. Don't need an office as we have WeWork. Etc.
But the market of people who live that way is still small, and I think it will always be somewhat small, or at least limited. (It becomes much harder to live that way once you have a family, for example.)
And can they really end up opening spaces in all the places where location-independent, digital nomads want to go - e.g., all those beach resort towns in Thailand and exotic villages in Central/South America?
But even if they do, independent digital nomads are not the people who will sustain the business anyway, as independent freelancers are more costly to acquire and service, and harder to retain. Their bread-and-butter is mid-sized teams (5-20) and satellite staff for interstate/international companies.
They're often described as the Starbucks of office space .
But Starbucks doesn't succeed in every region it enters - certainly not ours , as we have our own many-decades-old coffee/cafe culture in which people much prefer independent cafes over large chains.
I'm sure this mentality will apply to co-working spaces just as much as cafes, in many places.
> But the market of people who live that way is [A] still small, and [B] will always be somewhat small
I agree with A, but not B. To me this is a classic disruptive tech scenario. Right now living in hotels and working in coffee shops is strictly worse than having a home and an office for almost everyone.
A few people who have very special needs are well served by coworking.
However, all of the different metered rental propositions (metered office rental, metered car rental, etc) offerings are getting better and better. They are all pretty bad but you can imagine what it would take for them to be great.
Will those experiences eventually catch up to long term home/office leases? Maybe. If enough services like that get good you open up interesting possibilities like a company that only exists for a week but can do everything a fixed company can do.
I find it difficult to predict what can and can’t happen here, so I think your “people will never want this” assessment is too hasty. If there are enough early adopters who will hold on and provide feedback and a small amount of revenue, that could produce something quite compelling over the next decade.
Maybe it's just the WeWork I've been it, but it was every bit as loud and distracting as a Starbucks. The glass fishbowl offices constantly remind you other people are walking around you. You see them, they see you. In addition, the one I was in had the bright idea of installing hardwood floors everywhere. Men and women in dress shoes and high heels would "clop clop clop" all day long.
You also never want to mix sales people with engineers. Or any job title that requires a good percent of the day socializing. Sales people are on the phone nonstop, usually running a script quite loudly. That's not even something you could get away with at most Starbucks. But WeWork on the other hand...
> I agree with A, but not B
Being a digital nomad is fun for a few years and then you want to settle to have relationships. Humans are social animals. This is unavoidable. Also, people want possesions, most people want to have their own touch on their own places because it makes them feel better. Home, sweet home is not just a place where you store your off season clothing.
Yep, fair enough, and that's (part of) the bet WeWork is making and is what we'll watch play out over the coming years/decades. I don't feel strongly either way, I'm happy to wait and see.
This is the "Stand on Zanzibar" / "Future Shock" world, and it looks alarmingly plausible. Alarming because all those things are so fragile to cashflow issues and the general insecurity problems of being a renter rather than an owner. And plausible because of what's currently happening with AirBnB: because it enables arbitrage between the "residential" and "hotel" prices, it has the potential to force all residential prices up to hotel levels.
It’s easy to look at current trends and extrapolate from there but when I think of Wework, I am reminded of the time when selling ones home and moving to a shared boarding house was commonplace. Trends reverse, often quite quickly.
I co-own a 15-18 desk space and while we have churn, our setup costs were not especially high, we don't have staff (we are tenants ourselves) and we largely ignore the competition. We would be one of the more expensive spaces but uncompetitive on facilities/services - I think we have attracted people because we're simpler and quieter.
A single WeWork in one city is risky due to fluctuations in real estate, economics, labor supply, competition, etc. a thousand locations are less risky, since the company can still exist even if a local market tanks for a year.
I mean, yeah there is a lot of climbing in Boulder, but a MUCH better resource would be a daycare. You'd have line out the door if you had a daycare in Boulder. Childcare costs in CO are crazy high, like ~$40k/year for 2 kids.
We live in a small town in Colorado that has never provided work opportunities in our field, but we've always been successful working remotely.
Small town co-working has provided a huge value for us: no commute, we're out of the house, camaraderie, friendship and support. Maybe this is an example of a profitable co-working.
I know that in these past 8 years the owner has done very little recruiting and the desks are nearly always full.
Yep, sounds very familiar.
Our space was like that when it was the only one in town, and it was the go-to place for self-selecting people who wanted to connect with other like-minded folk.
But our city has four million people, and startups/freelancing became super-popular and demand for co-working shot up (our space actually had to turn many people away at its peak), but then the whole industry became fragmented, and our space (indeed, any space), stopped being the go-to place for "people like us".
They might not be able to do that well, but at scale, they can have most of that into effective processes. They are the only one who will have international comparison and dozens of addresses inside a city, so they can tell what to do near the historical center vs. the up-coming industrial run-down.
Having a great place to work is increasingly important and as you say, it’s hard to do. But it’s the one thing that you can do to attract workers that isn’t paying 5% more than competition — so unless WeWork isn’t 5% of salary more expensive than having your own office.
On a more cynical note, companies have been trying to treat support staff and strategic-decision-making executives differently: the cleaning staff, cooks at many tech companies are external contractors seemingly for that reason. That separation is being disputed when there’s a close tie between support and the main company. Having a brand like WeWork would severe that tie.
I don't think this is the case in a lot of WeWorks anymore, i work in a WeWork and the majority of companies are now bigger corporates.
Goldman Sachs just took 2 floors in the WeWork next to us.
It's actually quite hard to find a largeish Co-Working space in London as it moves so quickly and so much space is being taken by corporates buying entire floors.
As far as I can tell, WeWork is not really a coworking business. It's a large-scale office space leasing business that uses coworking as advertising.
A friend in ICT who will remain nameless has found a bookshop in a disused chapel near his home (and mine!) which holds great promise, but as a space its limited to maybe 2-5 people and would never be economically viable. But still, towers of books outside, and a congenial bookshop keeper to bum coffee off..
 - https://www.curbed.com/2019/3/26/18280774/wework-real-estate... for instance
It's the only way to get tenants that will stick around long-term, thus solving the retention problem.
With this in mind, I can see their approach being to offer a Google/Facebook-like full-service campus-style workplace, but for companies that are way too small to provide this themselves.
We'll see if it works!
Traditional office space is long term leases.
Coworking spaces give you month-to-month.
With traditional office space, you're responsible for maintenance, like cleaning. You have to hire people and manage them.
Coworking spaces do cleaning for you.
Coworking spaces also try to do more things for their customers, like hosting events.
Yes, you probably pay more (although there are economies of scale) but the product you get is different enough that direct price comparisons are not applicable.
Personally, when I entered a WeWork for a meetup I felt it's interesting design etc, but it feels like it sucks out your soul. It's like comfy and cold at the same time. Premium Mediocre maybe is the right term for that, not sure.