WeWork's looming IPO lights the path for rivals

Toronto

WEWORK took the real estate world by storm on its way to an initial public offering (IPO) that's set to be among the year's biggest. It's not the only co-working firm that's primed for new heights.

More and more companies are vying to meet global demand for hip, furnished offices without the commitment of a long-term lease.

Some, such as IWG's Regus, preceded WeWork. Others followed in the footsteps of the powerhouse that's raised more than US$12 billion and opened locations in more than 100 cites.

For many firms in the sector, the IPO, planned for next month with a target of US$3.5 billion, proves co-working is here to stay.

In the US, the flexible-office sector has grown an average of 23 per cent each year since 2010, the year WeWork was founded, Jones Lang LaSalle reported. By 2030, such firms could account for 30 per cent of office stock, up from less than 5 per cent today, the brokerage projected.

WeWork's IPO will serve as a benchmark for the valuation of the entire co-working sector, according to Danny Ismail, an analyst at Green Street Advisors.

Public information on the profitability and sustainability of its business has been limited, so the limelight on WeWork's financials is likely to reflect on its rivals as well, he said.

"WeWork's competitors need to continue raising capital to grow their business," Mr Ismail said, "and depending on how WeWork is received by the public market, it could help or hurt their peers" .

In the past few years, IWG has invested heavily in its Spaces brand, which caters to millennial workers with trendier offerings like warm colour palettes and coffee from local roasters.

Well-established brokerages and landlords, including CBRE Group and Tishman Speyer, have launched their own flexible-office options. Startups that have sprung up to capture niche segments are attracting large institutional and private equity investors.

There are some of the firm's top competitors, based on footprint and the amount of funds raised:

IWG

Switzerland-based IWG, which owns multiple flexible-office brands, is the biggest company in terms of space, with close to 60 million square feet globally. WeWork, by comparison, had 45 million sq ft as of March.

Unlike its upstart rival, IWG's Regus has survived multiple recessions, including the dot-com crash, which forced it into bankruptcy in 2003, less than three years after the company went public.

Founder and chief executive officer Mark Dixon sees the positive side of having such an aggressive competitor: WeWork's rapid growth and high profile have helped trigger a boom in demand for flexible space. "We have the biggest network, so we are the biggest beneficiary from WeWork," Mr Dixon said in an interview, adding that IWG's US business has seen a jump in revenue growth.

"That's a market that's deemed to be very competitive. It is the home of WeWork, so by WeWork and others talking more in the market, it generates more business for us."

The IPO will also provide a good comparison for IWG, especially its expanding Spaces brand, which has been doubling its revenue rate each year, Mr Dixon said.

"Public company disclosure rules in the US are onerous, so therefore the playing field will become level."

Convene

New York-based Convene, which specialises in flexible meeting, events and office space, has attracted high-profile investors including Brookfield Property Partners and RXR Realty.

The firm, with 30 locations, has raised US$260 million since its founding in 2009. It's in the midst of exploring additional financing, said CEO Ryan Simonetti, who declined to elaborate. "If WeWork's IPO does really well, it's a huge lift to the industry," he said. "It's just further validation that the real estate industry continues to evolve and change, and companies like ours continue to benefit from this change."

Industrious

The six-year-old firm, based in New York, teams up with landlords such as Blackstone Group Inc's EQ Office to manage flexible offices in their buildings and split the profits.

It has 84 locations and US$142 million in investment from firms like QuadReal Property Group and Wells Fargo Strategic Capital.

Industrious's model contrasts WeWork's usual method of leasing space from landlords to keep the upside if things go well, though WeWork has recently begun pursuing more management contracts, too.

"The management-based partnership model that we've pursued is a lot less risky and a lot safer for everyone involved" in case of a downturn in the market, Industrious' CEO Jamie Hodari said.

Knotel

Three-year-old Knotel has been expanding rapidly across the US, Europe and Latin America since its founding in 2016. The New York-based firm, which builds and runs flexible work spaces for larger tenants seeking shorter-term leases, has more than 200 locations globally and US$160 million in funding.

Knotel says its edge in the market is that it caters to established companies with 100 or more employees, not the much-smaller businesses that would typically use co-working spaces.

That focus "is why our business has grown faster and more efficiently than anyone," co-founder and CEO Amol Sarva said.

Breather

Founded in 2012, Breather has expanded across 500 locations with US$123 million in funding from investors including Caisse de Depot et Placement du Quebec, one of Canada's largest pension funds.

The Montreal-based firm differentiates itself by making its short-term offices and meeting rooms bookable on-demand, "as easily as an Uber".

Its private-office service, which had a 300 per cent increase in revenue in the past year, now accounts for half of Breather's business, up from 30 per cent in the beginning of 2019. The firm aims to continue raising funds for growth given the strong interest from investors, according to CEO Bryan Murphy. BLOOMBERG