The emergence of co-working companies such as WeWork are based on a simple business model: Sign a long-term lease then turn around and sublet parts of the leased space for short-term durations in exchange for higher rent premiums.
Because of the strong economy, low vacancies and an increase in the number of startups, the above business model has enabled WeWork to record solid growth rates and enticed others to create their own co-working brands. Between late 2014 and late 2016, WeWork raised more than $1 billion from investors, most recently at a $16.9 billion valuation.
But although the fundraising went according to plan, little else did, according to an article in the Real Deal. “Over the course of 2016, the company cut its profit projections dramatically — by a whopping 78 percent.”
As the stock market starts to move erratically and concerns over the economy grow, many observers are concerned that co-working companies may get stuck with long-term lease liabilities without the benefit of short-term rentals. This asset-liability mismatch is starting to drive companies such as WeWork away from their traditional co-working business model and towards a building operator model, similar to that of hotels. David Fano, WeWork’s chief development officer, referred to the business model as “WeWork on site.” Depending on a firm’s needs, the co-working company could build out the offices of a major firm and manage them for a flat fee, he noted.
As the article in the Real Deal succinctly puts it “just as Uber refrains from buying its own cars and Airbnb typically refrains from buying homes, co-working companies are increasingly dodging the expensive liabilities that come with owning or leasing office space.”