Andrew Ross Sorkin, author of “Too Big To Fail,” has argued that WeWork was quite literally too big to fail, as the coworking operator continues to expand rapidly across the world. His argument stated that landlords could not afford to kick out the company over unpaid rent or will be left with empty buildings.
WeWork makes money from short-term leases with members, so its income can be adjusted based off the market, but the rent it pays landlords cannot.
“We feel the lease-based nature of this industry is unnecessarily risky,” said Jamie Hodari, CEO of co-working company Industrious. “It produces bad incentives.”
Many coworking companies, including Industrious, are shifting away from leases and moving to management agreements that allow operators to share a portion of their revenue with landlords.
WeWork’s New York locations mostly work through lease arrangements. Additionally, 13% of Knotel’s locations offer management agreements.
Mortgage lenders are most likely the cause for coworking spaces to continue with the long-term lease model, which promises a consistent source of income for landlords and banks.
“Long-term leases provide – in general – more stable and predictable cash flow,” said George Doerre, a vice president at M&T Bank. “Whatever benefit may come from exposure to the higher revenues from coworking may be undone by the need for greater cushion and downside sensitization due to the more volatile income stream.”
Banks are minimizing the risk of a loan default by asking for 15 to 20-year leases, which gives borrowers a stable income. Despite this, coworking providers can only pay rent so long as they have enough members. This leaves landlords to choose between cheaper mortgage rates or a profit-sharing arrangement that offers compensation.
Hotel owners once faced this same choice with global brands such as Hilton and Marriott that caused the industry to split between companies that own hotels and companies that operate them.
WeWork offers various agreement options, including joint ventures, profit sharing deals, and management agreements.
