With WeWork now worth a cool $16 billion and Regus’ Spaces coworking brand on the expansion trail, is this an indication of a healthy sector or a bubble on the brink of bursting?
Earlier this month, WeWork’s valuation soared again. The New York based flexible workspace operator is now valued at $16billion following a round of financing led by Chinese investors, in which a further $430 million was raised.
This latest feat makes WeWork one of the world’s most valuable startups, placing it on a par with Snapchat.
Indeed, WeWork is now snapping at the heels of Asia’s flexible workspace market after this latest funding round, with its sights reportedly set on China, South Korea and India, among other countries.
Not for the first time, flexible workspace operators have responded with a note of caution.
Speaking to Eliot Brown for the Wall Street Journal, Avanta founder David Alberto commented: “It is just not possible to grow that aggressively … and maintain those sorts of margins. I honestly think it’s a bubble.”
Brown, a commercial real estate reporter, also cautions against further fundraising as “a chill descends on the once-searing world of startups and venture capital”. He notes that money managers have “grown cautious and marked down the valuations of their holdings in numerous late-stage startups”, and warns that such “down rounds” are increasing in frequency.
Regus steps up Spaces coworking portfolio
Like many other operators and commentators involved with the flexible workspace market, Brown questions WeWork’s lofty valuation relative to the likes of Regus.
“It has many in the real estate sector scratching their heads… rapid growth is difficult to maintain, and the company’s business model leaves it on the hook to pay fixed rents to landlords even if the rents WeWork can charge to companies fall. Regus PLC, for instance, controls more than 40 million square feet of office space globally that it subleases out through a similar business model, though mostly with more traditional office space.
Yet Regus—which had similar hopes for rapid expansion before the dot-com bust—has a market capitalization of only about $4 billion. By that ratio, a $16 billion serviced-office company would have about 160 million square feet of space. As of early this year, WeWork had more than 5 million square feet open, although it has said it receives considerably more income than Regus a square foot, and it has a cultural appeal that differentiates it.” – Eliot Brown, Wall Street Journal, March 10th 2016
While Regus continues its own global serviced office growth seemingly unabated, its barely recognizable coworking brand, Spaces, is also stepping up its workspace footprint.
Currently Spaces, which was founded in The Netherlands and acquired by Regus in 2015, has locations in Amsterdam, Rotterdam, London, New York, Melbourne and Sydney. New Spaces locations set to open in 2016 include Silicon Valley, San Francisco and Dallas, while fresh new signings reported so far this year include Santa Monica and Los Angeles.
Spaces and WeWork operate in the same market. Backed by Regus, Spaces has the advantage of many more years’ experience within the flexible workspace sector, yet both brands – and the sector at large – face the same risk of taking long lease property commitments in an industry famed for its short memberships.
Speaking to property correspondent Judith Evans for the Financial Times, John Lutzius, managing director at Green Street Advisors, describes long leases versus short rent as “a classic worry in this space”. Evans commented:
“Regus has sought to mitigate this risk by entering into profit-sharing partnerships with landlords. WeWork has also signed some profit-sharing deals, although it has drawn scepticism from the property industry by taking out a series of major leases at a time when office rents in its biggest markets are at record highs.” – Judith Evans, FT.com, March 15th 2016
Ultimately, investors and operators like WeWork and Spaces are betting that their workspace model will be a dominant form of office space in the future. Indeed, who can argue that flexible workspace in its many forms – from coworking and serviced offices to managed space – is continuing to gain in recognition and strength?
But regardless of current demand, external forces are always at play.
i2 Office founder, Philip Grace, recently warned of a challenging year ahead for the commercial property industry amid global factors like oil prices and China’s economic slowdown. And while a downturn could arguably spell good news for flexible workspace operators, no industry or business is failsafe.
The stakes are high and if this is indeed a bubble set to burst, it could serve ill for the industry at large. For now, indications suggest that the market is growing rapidly and many operators – WeWork and Spaces among them – are growing with it.
As Evans concludes: “As long as the good times continue, space exists for all.”