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As WeWork keeps pushing, landlords and rivals push back

Blackstone Group and Tishman Speyer are venturing into their flexible-space offerings

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WeWork has built itself into one of the world's most valuable startups through a global leasing spree. It had more than 300 locations in 83 cities as at the third quarter.

Washington

WEWORK is increasingly stepping on the turf of landlords and real estate brokers - and the industry is starting to push back.

The office-sharing giant, valued at as much as US$42 billion, is getting a greater portion of its business from the large companies that property owners usually court.

It is also building an investment division to buy its own sites, according to people with knowledge of the matter.

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At the same time, big real estate names such as Blackstone Group and Tishman Speyer are venturing into flexible-space offerings of their own. Brokers, meantime, are growing wary that WeWork is cutting them out of deals.

WeWork's widening ambitions threaten to further upend the industry that it has already reshaped in its eight-year existence.

Few in the property business are willing to talk openly about the company, given its clout. Privately, more than a dozen real estate and banking executives interviewed by Bloomberg expressed misgivings about working with the closely held startup.

The question is whether WeWork can keep up its breakneck expansion - and its lofty valuation - if friction grows.

"By participating in virtually all the elements of the real estate food chain, WeWork will find themselves in deeply competitive situations with others," said Cedrik Lachance, director of research on real estate investment trusts at Green Street Advisors. "It may limit their ability to have access to some buildings."

Backed by Japan's SoftBank Group, WeWork has built itself into one of the world's most valuable startups through a global leasing spree. It had more than 300 locations in 83 cities as at the third quarter, and said that it is the biggest private office user in Manhattan, London and Washington.

In many ways, it has been a boon to the real estate industry by helping landlords fill spaces and generating big fees for brokers.

The company started out taking 10- or 15-year leases, redesigning the interiors, and renting individual desks or small offices to startups.

But in recent years, WeWork has expanded to much larger customers: more than 30 per cent of its members now work at companies with 1,000 or more employees.

It designs and operates entire multifloor offices for its biggest users as part of its enterprise business, blurring the line between it and traditional landlords.

"A lot of people originally thought of the shared office-space providers as bringing tenants," said Tony Malkin, chief executive officer of Empire State Realty Trust, owner of New York's Empire State Building.

"But I think now we've seen - particularly with WeWork and other providers' expansion into the enterprise solution - that it's really much more about disrupting the relationship of tenants to landlords, of tenants to brokers, of brokers to landlords."

WeWork has dipped its toe into real estate ownership through deals such as purchasing Manhattan's Lord & Taylor building with private equity firm Rhone Group.

Now, it is delving further into property buying. The company is raising a separate real estate investment fund, called ARK, for acquisitions, said the people familiar with the matter, who asked not to be named because WeWork has not publicised the effort.

The company tapped Wendy Silverstein, the former head of landlord New York Reit, as chief investment officer, as reported last month by real estate news outlet The Real Deal. It has hired at least four real estate acquisitions veterans since May.

WeWork declined to comment on ARK or Ms Silverstein. Granit Gjonbalaj, the company's chief development officer, said that the hires are part of an effort to diversify its coworking spaces beyond its usual long-term leases.

He said that WeWork brings value to buildings by filling them faster, and it wants to capture some of that upside.

WeWork woos brokers with big commissions to bring in tenants - but it is also starting to compete. As part of its new Space Services programme, the company will take small and mid-sized businesses that were interested in WeWork but could not find the right match and refer them to landlords, collecting a fee.

"I don't think of it as a broker service," said Mr Gjonbalaj. "It's: 'How can we add value to potential members coming and inquiring about coming onto the WeWork platform but who are, for whatever reason, unable to do so?'"

Still, the company has angered brokers by going around them for deals, said people at two large brokerages, who asked not to be named because WeWork is a client.

Others in the industry have baulked at leasing to the company or lending on properties where it is a major tenant, based on its credit risk.

There is also concern about what happens if the economy turns. WeWork forms a subsidiary to represent each lease deal, which means that individual locations could fold without leaving the company itself with much risk.

The parent company only guarantees the lease for about six to 12 months on a 15-year agreement, according to documents associated with WeWork's inaugural bond offering.

"If you're going to commit your space for a term of 10 years, you want to make sure that your tenant is credit-worthy and they're gonna be there tomorrow, the next year and the year after that," said Michael Emory, CEO of Canadian office owner Allied Properties Reit, who will not lease space to WeWork.

Wall Street investors are cautious on WeWork as well, with its bonds struggling since they were issued in April.

The US$702 million of 7.875 per cent notes dropped below par almost immediately after the sale and now trade at 92.75 cents on the dollar, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

For its part, WeWork said that it is a partner to landlords in helping to improve buildings, and argued that its presence can increase property values and rents.

The company has many fans in the real estate industry, and a big backer in SoftBank, its largest investor. Last month, SoftBank signed a US$3 billion warrant to buy more shares in a deal that would value WeWork at at least US$42 billion - more than double the value of any publicly traded US office landlord.

WeWork is having no problem leasing space. As at June, it was adding 500,000 to one million square feet of new space globally each month, according to tech market intelligence platform CB Insights.

"They're a good tenant - tough and exacting on their lease and space requirements, but they generally improve the image people have of a building," said Sonny Kalsi, a founder and partner of GreenOak Real Estate, which leases to WeWork at properties in New York and Tokyo.

The biggest risk to WeWork may be large, experienced real estate companies jumping in to compete. Brokerage CBRE Group in October launched a business called Hana that will help landlords create their own flexible offices. Owners want to be a part of the rising demand for that type of space, said Andrew Kupiec, Hana's CEO.

They want it "done in a way that they're put in control and they have transparency", he said. Hana will operate separately from CBRE's brokerage business, where WeWork is a client.

Tishman Speyer in September started a coworking business called Studio, bringing flex space to properties including New York's Rockefeller Center. Landlords including Silverstein Properties and Land Securities plc have also made forays into the area.

Blackstone and Brookfield Property Partners, meanwhile, have leased to WeWork but have partnered with coworking providers such as Industrious and Convene to manage flexible offices in their buildings.

In the US, WeWork traditionally leases space from landlords and keeps the upside if things go well, but rivals often structure their deals as management contracts, where they split profits with the landlord.

WeWork's Mr Gjonbalaj said that the company is also pursuing more management agreements in the US. As at October, the company was in talks for as many as 30 over the previous month. WP