Jonathan Price Financial Expert | What Happened to WeWork?

Jo Meunier [00:00:47] Hello and welcome to the Future of Work podcast by allwork space. I’m Joe Mernier, and today I’m speaking with Jonathan Price, a corporate finance specialist and an expert on financing and valuation for Allwork.Spaces, who’s here to talk to us today about the state of the coworking industry. And in particular how the possible collapse of one very well known workspace company WeWork might impact the rest of the industry and the future of work. Jonathan is a regular contributor to Allwork Space and he’s been advising on coworking financing and valuation for over 20 years. He was also responsible for the world’s first ever public fund for investment in coworking space. So, needless to say, we’ve got a great guest for our podcast today. So welcome, Jonathan, and thank you for joining us today.

Jonathan Price [00:01:31] It’s very kind of you, Jo. Wonderful intro.

Jo Meunier [00:01:35] Well, I’m looking forward to our chat today. Obviously, we’re going to be talking a lot about co working Allwork.Space, and as it may have formally been known, serviced office Space. But this is a podcast that’s dedicated to the future of work. So to kick things off, perhaps you could explain why we’re discussing coworking on a podcast that’s focused on the future of work and why coworking is such an important part of the future of work.

Jonathan Price [00:02:01] Yes, well, this has all been triggered or accelerated by the pandemic that we were suffering for two years or so, because people have got used to working other than in a downtown office, and they’ve got used to working from home or working from places more convenient to home. And having had that experience, they don’t want to go back to commuting long distances into city center offices. So the future of work is going to be flexible. There’s a little bit of a tussle going on at the moment between employers and employees as to where they’re actually going to work, but I think the die is cast largely and that they’re not going to go back into central city offices five days a week. They are going to want to work somewhere which is more convenient to them and the best place for working with full work infrastructure and facilities without actually having to commute into the middle of the city is to work in a co working space near where you live and these are booming as a result.

Jo Meunier [00:03:09] And in one of your recent articles for Allwork Space, you said that the co working sector has been in continuous long term expansion for more than 40 years and it looks set to continue. And there are various stats that show all the growth that’s going on, one of them being JLL’s 2021 Global Flex Space Report that said that 41% of tenants expect to increase their use of flexible space in a post pandemic work strategy. However, as we know, there are some companies that make it and some that don’t. And you have known the industry for many years and you’ve seen some companies that haven’t fared so well and of course others that have. And we’re going to be talking about WeWork. But before we get to that, could you tell us about some of the companies in the earlier years of flexible space that haven’t fared so well and why?

Jonathan Price [00:03:58] Well, this is an industry where there are lots of economies of scale, so it does help if the operators have a number of centers and a number of locations. And consistently, the biggest company in the field has always been Regis, which is now part of the IWG Group. But Regis is the brand name which is longest lasting, which has been around since 1989, and there’s always been room in the market for another big player alongside or in competition with Regis. But no company has ever sustainably managed to achieve that status. There was years ago a firm called Allwork.Space, which was formed as a roll up of other independent centers, but they crashed and burned, unfortunately. And even Regis itself had one or two problems after the.com crash in 2001, in that a big chunk of its centers, those in North America, suddenly became unprofitable within a very short space of time and had to be rescued by the UK parent company. So it is a bit of a cyclical business, although perhaps not as much as some commercial landlords would have you believe. But as I say, there is definitely room for another competitor to Regis and we all hope that one will come along. We thought perhaps it would be WeWork, but it turns out not to be.

Jo Meunier [00:05:38] So the big question is why isn’t it WeWork? What’s happening? And why are things not looking so good for them?

Jonathan Price [00:05:46] Well, WeWork was really established on a foundation which wasn’t sensible in the first place. WeWork was set up at a time of boom where there were billions and billions of dollars available for investment in anything that could claim to be a tech company. And WeWork portrayed itself as a tech company and received very large injections of cash from institutional investors, most notably SoftBank. And the money sort of went to their heads a little bit. I think and they did what sometimes happens in situations of essentially hubris, which was they thought they could do all sorts of things beyond or over and above providing good workspace. So they sort of started to have really grand visions of being saviors of the universe and raising the world’s consciousness and things like that, which is not sensible. And they ended up wasting a great deal of money on things weren’t part of the essential operation of the business. That is at its most basic what they did wrong. They didn’t focus on the real business and they wasted a lot of money on superfluous things.

Jo Meunier [00:07:02] Okay, so where do they go from here? Is there a future for WeWork or a massive restructure perhaps? Do you see a way out for them?

Jonathan Price [00:07:13] There’s certainly a future for the brand. It’s a great brand and it has some good locations and no doubt it has some good people working for it as well, particularly at lower levels. And it demonstrated because of the revenues that they’ve got that there is a potential market for it there. So I foresee probably the company going into Chapter Eleven or something like that and then somebody else coming and buying it out and turning it into a viable business with proper cost control. So I would hope that it is restructured in some way, probably under in new ownership, but that we don’t lose the brand completely because it is a great brand.

Jo Meunier [00:08:00] And how might such a high profile fallout affect the confidence of the people who use Allwork.Space and people who invest in it and also the companies that lease the space to Allwork.Space operators? How do you think this might affect their future decisions?

Jonathan Price [00:08:19] Well, when Regis’s US Arm got into difficulty 20 years ago, there were a lot of people who didn’t like the idea of serviced offices anyway, of co working space, who were very quick to announce that as the beginning of the end for flexible office space. And no doubt there will be some who will try and do the same if and when WeWork does go bankrupt. Because there are people with vested interests which make them anti flexible space, particularly people who are big in conventional real estate, conventional office space. So there will be some and no doubt it will do some damage. It’s never good for an industry when a big player goes under, but I think now the industry is much more mature than it was 20 years ago and that it will be able to survive and it will be no more than a blip really. And if somebody does actually move in and take over the brand and put it on a firmer footing, then it could ultimately be good for the industry. A bit of change and a bit of churn is always good.

Jo Meunier [00:09:29] We’ve seen quite a bit of that over the years.

Jonathan Price [00:09:31] Yes, creative destruction. Shampoo called it creative destruction.

Jo Meunier [00:09:37] And who do you think will fill the void? Will it be another big name like IWG? Or do you think that they themselves could also be negatively impacted by the association?

Jonathan Price [00:09:48] Well, they might a bit, which will be very unfair on their leadership, but they might be temporarily a bit. But you see, what you have to understand is that these days it’s not just small users or small companies or startups that use these spaces. Even big companies and governments, public authorities are seeing the advantage of flexible working. Now big corporations who like to enter into big global contracts would really like to see one or two other competitors to IWG so that when they put a contract out to tender, there’s a bit of a competitive process. What they don’t like is having only one supplier. So because there is a big gap in the market there and because business appalls a vacuum, I’m sure that there will be some effort to grow one of these existing businesses in order to compete internationally with IWG.

Jo Meunier [00:10:47] How do you think the flexible space industry might diversify? You mentioned a moment ago that there are lots of smaller users of the space, independents and small companies, but also large departments such as government departments using Allwork.Space. Do you think there could be any other products that come out of this and a need to diversify and serve new requirements?

Jonathan Price [00:11:10] Sure. I mean we’ve already seen within the industry people providing managed workspace which is sort of semi serviced rather than fully serviced, also people providing managed industrial space for people who want workshops on a flexible basis rather than offices. But I see this extending into other things. A big demand at the moment if we could satisfy would be laboratories. There’s a huge shortage of laboratory space and so if people could provide some kind of flexible laboratory space, there would be a huge demand for that. But there’s still lots of growth in offices anyway and things that look like offices.

Jo Meunier [00:11:53] And we’ve seen for a number of years now that landlords and real estate owners themselves have been pushing more into the Allwork.Space operation side. So rather than being a hands off owner, they’re actually quite keen to get in there and manage the spaces themselves. Do you think we’re likely to see more of that, especially now given the highly publicized fallout of WeWork?

Jonathan Price [00:12:18] We will. I’m not sure it’s got much to do with WeWork, but while there were still relatively long leases available, ten years or more than ten years, landlords were very focused on getting good tenants signed up for those leases. That hasn’t really been the case for almost ten years now. And so landlords have finally realized that it’s not coming back and therefore they have to offer what the customer wants. So rather than see the profit from their buildings end up in the hands of co working operators, a number of them have decided to get into this business themselves. Now there isn’t much of a good track record here. Landlords have tended not to make good serviced office operating companies so the jury is still out as to whether they will succeed. The signs are better than they were in the past. But fundamentally, the attitude and the work culture and work ethic has always been quite different between a traditional landlord and a serviced office or co working operating company, because landlords have always regarded their customers as tenants, which is an old feudal idea which implies a sort of hierarchy. Whereas serviced office operators have always regarded their customers as customers and so have always been willing to put themselves out to do what the customers wanted, whereas landlords were very rarely willing to do that. And it will need that attitude to change. In other words, the landlords will need to develop new businesses which are customer focused if they wish to succeed in competing against IWG and the other independent operators.

Jo Meunier [00:14:11] And in terms of the landlords and just thinking about the impact if we work was to fail or go into bankruptcy or if there’s due to be a huge restructure, there could be a huge amount of space that’s then being presumably given back to the landlords and the property companies, potentially millions of square feet. This could be quite bad for the industry, couldn’t it? What do you think the impact is of that?

Jonathan Price [00:14:38] There is definitely a property angle to this. If we were just to go bang and collapse completely without a rescuer then this could be quite serious in some locations. But this is quite geographically specific. It’s clear that in some places the office market is under strain. Manhattan would be an example and various other cities in the US where people have really been very reluctant to go back and work in the center of town. It’s not the same in the UK and I suspect it’s not the same in other offices. I was reading a recent report in the Financial Times which was saying that a particular operator of flexible space had never been fuller and the difficulty was finding space for new clients. So the office market is still quite buoyant in London but not so in New York. So it is very geographically specific. I think if London is running at full speed and New York is still stuck in first gear, the other cities in the world are going to be somewhere in between those two. So there will be tensions in some places but not in others. And WeWork is a huge landlord or a huge occupier of a space in London and a huge occupier in North American cities elsewhere in the world. It’s not so important. So it wouldn’t matter so much if it did have to vacate a lot of space.

Jo Meunier [00:16:10] Okay, and again, this might be a question that’s very geographical, but do you think particularly given the surge in demand for flexible space post pandemic. Do you think we’re facing any sort of overexpansion of the flex space industry or are we still really at the very beginning of what’s to come?

Jonathan Price [00:16:29] No, we’re near it. The total amount of space that could end up being flexible is a question you can speculate about. And there’s no right or wrong here. I’ve always had a gut feeling that it’s around 25%. So 25% of all office space could be flexible, essentially co working, or one of the variations of that. Where are we today in central London, which is the most densely flexible office space market in the world? We’re still at around 10% maximum, so it could be two and a half times as big as it is here. Nowhere else in the world approaches that in terms of percentage, not even New York City. So if we look at the market as a whole, take the UK as a whole, we’re below 5% still and be roughly the same in North America. No, there’s plenty of space to go. I mean, a German academic institute did some research on the use of property by big corporations more than ten years ago, and they reckoned that it should be a doughnut in which 80% would be permanent space and 20% would be flexible space. And they were looking at the world’s largest corporations, the FTSE 100, the S and P 500 type companies. And so we’re nowhere near that. And the reason we aren’t is because the space isn’t there for them to deal with appropriately.

Jo Meunier [00:18:09] Okay, and when you mentioned a moment ago you think we could be looking at 25% flexible space, is that just referring to office space, or does it also include the laboratories and potentially industrial space?

Jonathan Price [00:18:22] Just office space.

Jo Meunier [00:18:24] Just office space. So we could be looking at quite a huge portion of the market being taken up with flexible space in its many forms.

Jonathan Price [00:18:31] Yeah, absolutely, because whereas when I started in this business in 1999, it was still very odd and you had to explain what it was and people didn’t understand and they thought it was very fly by night. Now it’s matured and people know what it is. They may even have an idea how much it costs. They know people who are using it. So it’s become mainstream. But still, it’s got quite a long way to go in growth terms.

Jo Meunier [00:19:01] That’s good to know. And let’s talk about technology just for a moment. You mentioned earlier that WeWork classed itself as a tech company which contributed to its massive valuations. And even though it’s been more co working rather than tech, there’s no denying that technology is hugely important in every workplace now and it makes remote work possible. So what do you think the role of technology is in Allwork.Space? Will it continue to grow? And is there any chance that in future, another workspace company might try to classify themselves as tech?

Jonathan Price [00:19:39] Yes, it is possible. And there is definitely value in tech. We can see this with IWG having merged the tech side of its business with the Instant Group, which was internet based space business right from the beginning. That combination could be quite powerful and I can see other firms going for the same thing because you get two bites at the cherry that way. At least two, anyway. So it’s a good thing to do from a business point of view. So I can see that developing and technology is going to impact the way we all work in almost every occupation. So this is going to be no different from any of the others. The only threat, at least potentially, that might come from technology on the horizon is the Metaverse or something similar. Because if that did take off, and if we did start spending a lot of time working time in the Metaverse, then we wouldn’t physically need office space in the same way, even flexible office space. So conceptually, that could be a threat. But I think it’s quite a long way into the future. Even if Apple’s new system launched earlier this week is as good as some people think it is, it’s still going to be quite a while before it catches on, I think.

Jo Meunier [00:21:01] So this could potentially be one way that the flexible space industry and potentially the real estate market could diversify. They could be looking to get more into the tech side to fulfill that need and make sure that they don’t become obsolete.

Jonathan Price [00:21:13] Yes. The difference between the two is that the traditional real estate industry is hopeless with tech. It’s not used to tech, it doesn’t employ tech people, it doesn’t understand how tech works, which is part of the reason why the future of work exists. Because the future of work exists because some people who did understand tech saw that work was going to change. So, on the other hand, the co working industry and the serviced office industry has always had quite a big tech component to it and has always had to deal with technology issues. Whereas landlords could say, oh, you do that yourself, the serviced office operator always had to do it. And so they’ve been forced to be more technically aware. It’s more in their bloodstream than it is with the conventional landlords.

Jo Meunier [00:22:07] And we are nearing the end of our conversation. But just coming back to WeWork for a moment and their current troubles, what would you say are the warning signs and how might we be able to spot these in the future?

Jonathan Price [00:22:24] Well, I think you can do it two ways. If you just had listened to what Adam Newman was saying and what his wife was saying in public forum, and if you applied a sort of the Emperor’s Got New Clothes test to that, you could tell that it wasn’t really serious. I’m not just saying that in hindsight because we’ve been writing articles since about 2018 saying that it didn’t make any sense so you can do that, you can have a sort of litmus test like that if you want to be sure. However you need to be able to read the accounts and have a look at the accounts in the balance sheet and see how much is being wasted in operating costs compared to what industry peers do. And you’ve got IWG is a very nice comparator there. You can see what IWG spends and you can see what WeWork we’re spending and if you can read those financial statements you can tell. But with their case. I took out a subscription to Apple TV in order to watch. We crashed because it was just such a good story. It’s a ripping yarn and living through it. We were just continuously amazed by the things they were doing, and it just wasn’t sensible.

Jo Meunier [00:23:52] And now, as you mentioned in one of your earlier articles, we can go back to talking about boring things like office plants and chairs.

Jonathan Price [00:23:59] Yes, well yeah, the important things that people that matter and advertising budgets and energy efficiency, all of these things are going to be hugely important in the future. We should do another podcast at one point soon talking about the impact of energy efficiency and ESG on buildings because that’s another story.

Jo Meunier [00:24:22] Yes, that is a great idea, I think we’ll definitely get you back on for that Jonathan. Might need a bit longer than half an hour though. And just to wrap up our conversation today, thinking back of what we’ve talked about, what would be your big expectations for the Allwork.Space this coming year and should we work indeed face a collapse or a bankruptcy at the end of the year? Will this impact the future of work?

Jonathan Price [00:24:50] I’m looking for the coworking industry to grow really fast in emerging economies. I’m particularly looking at Latin America at the moment and I think the scope for growth there is very considerable and so I think some attention should be turned in that direction as to the effect of WeWork collapsing. Well as I say, I think it won’t actually collapse in a big heap, I hope it won’t and I think it won’t. I think somebody will come in with a good management team who understand what they’re doing from within the industry, not from outside, like the people who had been managed until recently. They’re all leaving rats, leaving a sinking ship. At the moment but they were all from outside the industry so an industry based team, people who know about the industry could come in and turn that around if they had the protection of Chapter Eleven and I hope that’s what happens. It would be a shame to have the brand disappear.

Jo Meunier [00:25:51] Yeah, let’s hope, as you say, the right people can come in and turn it around and we know that we can find you on allwork space writing quite regularly about the flexible space sector. If anybody wanted to get in contact with you to talk more about this topic. Where can they find you? Are you on LinkedIn?

Jonathan Price [00:26:09] I definitely am on LinkedIn and that is probably the best place to find me. So, yeah, happy to receive any questions or engaging conversation about the industry. It’s been a passion of mine for 24 years now.

Jo Meunier [00:26:25] Fantastic. Well, we’ll have you back on soon, Jonathan, to talk about ESG and energy efficiency, but until then, thank you very much for joining us today.

Jonathan Price [00:26:34] You’re welcome, Joe. Bye.

Jo Meunier [00:26:36] Thank you.