Is It Worth It To Invest In Coworking?

• The prices of the two principal coworking companies, WeWork Inc. and IWG PLC, are down 76.5% and 59%, respectively, since November 2021.  
• The number of coworking centers is increasing rapidly despite these high-profile losses.  
• When done well, the provision of coworking centers can be a very profitable business. Buildings in smaller cities or suburbs provide an even bigger bang for the buck. 

Is it worth investing in coworking? Not if you are a stock market investor where the performance of the listed shares has been truly dismal. The prices of the two principal quoted companies, WeWork Inc and IWG plc, are down 76.5% and 59%, respectively since November 2021.  

Despite WeWork’s revenues increasing 7% during Q2 2022 and 37% year on year, the company made a net loss of $635 million in the second quarter, and, for what it’s worth, an adjusted EBITDA loss of $134 million, whereas IWG made a net loss of £77 million on revenues of £1,287 million. 

On the bright side, in terms of cash flow, IWG did see a positive free cash flow of £189 million while WeWork was unable to stem the flow and $405 million drained out of its coffers.  

WeWork’s much worse share price performance can probably be explained by a combination of the weak cash flow position, and IWG’s larger size and smaller losses, plus the fact that the WeWork price had farther to fall, having launched with an overvalued de-SPAC IPO last year. 

This is not the end of the article however, because the track record of the quoted coworking operators is only the first half the story, and the second half is much more uplifting. That this should be true is not surprising, if you stop to think for a moment, because if coworking were as unprofitable as WeWork and IWG suggest, why would the number of coworking locations be increasing so fast? 

The answer is that when done well, the provision of coworking space can be a very profitable business indeed. The best explanation of the underlying rationale for the business that I have heard recently came from Toby Coulthard of Great Portland Estates (GPE), one of London’s traditional great landlords, and not an organisation you would have associated with coworking even ten years ago. 

During a recent CoStar webinar on flexspace, Coulthard made the comment that: on a cash flow basis, GPE was targeting a premium of 35% from its flexspace offering compared to the cash flow from the same amount of conventional space. And, on a net rent basis, the difference was even higher — the company was looking for a premium of 50% more than the net rent from conventional space.  

Those numbers are noteworthy enough, but he then went on to say that the company was beating both targets easily, with an actual cash flow premium of 43% and net rent premium of 75%. 

Another panellist on the same webinar was Helen Causer of Related Argent. Causer is in charge of the largest urban redevelopment in the U.K. at London Kings Cross. She said that the group was building a 170,000-square-foot building wholly dedicated to coworking that would be operated by The Office Group, a well-known U.K. coworking company.  

It is noteworthy that the all the other office buildings in this redevelopment are 100% let already. The new building could easily have been let conventionally if the developer had wanted to, but it preferred to have a significant coworking facility on the site. 

Speaking from my own experience, the premium to be gained from using space as coworking rather than conventional space is even larger than the numbers quoted by Toby — if the underlying cost of the space is lower, because, for example, the building is in a less favored location.  

So, buildings in smaller cities or suburbs, where the space may be rented on a traditional lease for only a quarter of the square-foot-cost of prime city centers, provide an even bigger bang for the buck.  

Using Toby’s measure of the net rent, it is possible to get a 100% premium or more in a second-tier location by using the coworking model. Of course, it is much harder work, so the premium is not free of charge. 

In the past, it was this requirement for hard work and the need to deal in much smaller spaces that put the traditional landlords like GPE, Land Securities or British Land off investing in serviced space. They were simply too lazy to be interested, and life was too easy in the conventional leasing world. How times have changed. 

Back to WeWork and IWG for a moment: the advantage of coworking business in secondary locations, small-city premium if you like, partly explains why IWG performs less badly than WeWork. It simply has many more small city buildings than WeWork does and fewer of the prime trophy locations that lost money hand over fist during the Covid lockdowns. 

Even allowing for the small-city premium, it does not explain why the two giants are losing money so heavily when smaller coworking operators are enjoying a great time with record-high occupancy.  

We must look elsewhere for the answer to that question, and I cannot help wondering if it is simply that WeWork and IWG are not that good at what they do?