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WeWork would be hard pressed to convince investors that it was better than the $ 47 billion value it had obtained during its last round of private financing.
Here is another reason why they should be skeptical: the company has probably greatly overestimated its potential market.
According to WeWork, in its recently issued initial public offering documents, its current members represent only 0.2% of what it considers to be its potential customer base and its potential market represents approximately $ 3 trillion per year.
"We believe that our leading position in this market, which we hope will benefit from the trends to reinvent the work, provides us with a solid platform for further development," said the co-coworking giant. IPO file.
WeWork may continue to post strong growth as it moves into new cities and opens new sites, Real Estate experts told Business Insider. But the company seems to imply that its potential market includes just about all office jobs in the cities in which it already operates or in which it plans to open a futures space. And the market, as it defines it, seems to include not only the dense urban cores of these cities, where almost all of the WeWork space is so far, but also their surrounding suburbs.
Jeff Langbaum, a real estate analyst at Bloomberg Intelligence, said that he had taken with a grain of salt estimates of WeWork's market size because they were "so far away".
"I do not disagree with the premise that there is an opportunity for them to continue to grow," Langbaum said. "I do not think it's anywhere near that $ 3 trillion."
WeWork says that he has tremendous potential
The reports published this week in the Wall Street Journal and Bloomberg indicated that WeWork's planned IPO was facing significant skepticism on the part of potential investors. According to reports, the company plans to become a company with a market capitalization of only $ 20 billion, less than half of its last private valuation, or even to completely set aside its IPO.
The company faces many questions about its operations and governance, including how it could survive a recession and the level of investor confidence in its CEO, Adam Neumann, after a series of moves and amazing deals.
Read more: Here's how WeWork answered the top 5 questions about its business – and why analysts are still worried about its IPO
WeWork's proposal to investors is based primarily on the idea that it has only touched the surface of a huge market. He mentions his estimate of 0.2% market penetration on page 4 of his IPO document and his $ 3 trillion total addressable market on page 6.
"We have just started, "the company said in its document.The text in italics for the emphasis is in the original filing.
According to the document, WeWork operates its coworking spaces in 111 cities today. But it plans to eventually offer offices in 280 cities around the world.
The company appears to be defining its addressable market in the US to include all those who work at an office position in one of the cities in which it already provides space or plans to do so. Outside the United States, potential WeWork members include people in his current or target cities who have a wide variety of white-collar occupations, including managers, professionals, technicians, associate professionals, and employees. Office.
"We assume that these people need a workspace in which they have access to an office and other services," said the company in its rankings. "We view this market as an addressable market due to the wide diversity of professions and sectors among our members, the extent of our solutions available to individuals and organizations of different types and our experience in development. new solutions that meet the needs of our members. "
WeWork estimates that there are 149 million workers in these occupations in the cities where it operates. There are 255 million in the 280 cities he wants to be. About 527,000 people, or about 0.2 percent of those 255 million, are working today in a WeWork space, the company said. Even in its most advanced markets – New York and London – only around 1.2% of office workers work in a WeWork space.
The company estimates that companies in the cities in which it intends to operate spend about $ 11,700 per year and per worker on office space. By multiplying this figure by the 255 million office workers he thinks he can eventually serve, WeWork manages to seize a $ 3 trillion market opportunity.
"We believe that these total opportunities reflect the amount that employers are willing to spend and represent for us an opportunity to capture a larger share of the portfolio," the company said in the ranking.
Not all workstations are likely to switch to a WeWork space
But real estate analysts think WeWork is greatly increasing its chances.
The company does not specifically list the industries or types of workers that are included in the estimate of 255 million potential members. It is therefore difficult to know how accurately this number is expressed in terms of the number of office workers in the areas in which it intends to operate. WeWork spokesperson Erin Clark declined to comment on this article or provide more details on how the company defines its potential customers.
But even if the WeWork number is a fair estimate, it is highly unlikely that all of these office workers actually represent potential customers, analysts said.
A receptionist in a medical office is an office job, but it is not at all obvious that a doctor wants to settle in a WeWork coworking space. Similarly, lawyers are usually tied to an office, but it is not clear that a law firm wants to set up in a coworking environment, given the confidential and sensitive information they manage.
Even with specialized offerings, in which WeWork customizes entire floors of buildings for individual businesses and manages facilities management, its sublease model is not suitable for everyone.
A company is not likely to want to put its research and development department, responsible for developing proprietary technologies, into a WeWork space, said Walter Johnston, who focuses on the real estate market as vice president of credit ratings at the Morningstar research firm.
WeWork's business model includes concentrating more workers in a given space than a commercial real estate agent. This is so that she can advertise to potential customers that her spaces cost them less – at least per employee.
But many companies may not want to crowd their workers into such tight spaces, Johnston said. WeWork said that every office worker could work in one of its offices, it's a bit like a van manufacturer saying that every car driver is a potential customer, he said.
"All office work is not suited to a WeWork-like environment," said Johnston. "There are some types of offices that are simply not serviced by WeWork, at least for now," he added. [unclear] if they could ever be "
It's unlikely that Apple entrusts its "spacecraft" to WeWork
WeWork's estimated market size poses another problem: while many office workers may be in its markets, its ability to provide office space is likely limited. The company has few properties. He rents them rather to other owners. And it competes for these spaces, not only with traditional tenants, but also with other coworking companies, such as Regus and Industrious.
At least some figures, such as real estate mogul Sam Zell, are starting to talk about the need for the sector to limit the space that it rents to coworking companies, fearing that these activities are not ultimately sustainable.
In addition, many companies employing office workers already have their own buildings or properties. It is highly improbable that they want to entrust the management of these offices to WeWork in one way or another, or that WeWork redesigns them to its own image.
Take Apple, which recently spent $ 5 billion for a new headquarters in Silicon Valley. Most employees of his new "spaceship" campus are likely to have clerical jobs. But Apple does not seem to have any incentive to turn the spaceship into a WeWork space, Johnston said.
"Apple just spent all this money on owning its own building," said Johnston. "Right now, they are the owner, they are the owner and the tenant.They have no reason to insert someone in the middle."
We do not know if WeWork works in the suburbs
WeWork does not give a precise definition of what "cities" means when it talks about the areas in which it operates or plans to open a space. Clark, the spokesperson for the company, refused to give an explanation.
However, society seems to be interested not only in urban areas, but also in the surrounding suburbs.
For example, he stated in the record that, when discussing his market penetration in San Francisco, he included the spaces he operated everywhere from the financial district of that city to the suburbs of Oakland and California, such as than Mill Valley and Mountain View. Similarly, the WeWork market in Los Angeles includes the areas it operates in El Segundo, Costa Mesa, Orange County and Pasadena.
Although WeWork can operate some buildings in such remote locations, it is unclear whether its model really works in this location, or for most suburban office spaces, analysts said. To date, most of its success has been recorded in dense urban areas, said Tom Smith, co-founder of Truss, an online commercial real estate market. In New York, for example, almost the entire WeWork space is in Manhattan, he said.
Regus, who pioneered the coworking industry and is WeWork's main rival, has had success in the suburbs, Smith said. But he does not try to gather as many people in his spaces as WeWork. And WeWork did not show that his own model would work outside city centers, Smith said.
"I do not necessarily know that WeWork [model] is also playing everywhere, which would severely limit their ability to enter the addressable market they are referring to, "he said.
And then there's the $ 3 trillion dollar figure of market size – a staggering number, no matter what the measure (for reference, there's only $ 1.7 trillion in US physical currency in circulation, according to the Federal Reserve). The $ 3 trillion figure would obviously be smaller if it turned out that there were not really 255 million potential WeWork members.
But there is another problem with this number, analysts said. WeWork says the $ 3 trillion figure represents what businesses spend on premises for the company's 255 million workers. Part of the attractiveness of the company lies in the fact that it charges space costs per worker much lower than the average amount currently paid by the companies. While WeWork is likely to be able to raise rates, it's not at all clear that it could raise rates to the point where companies pay somewhere else, analysts said.
WeWork seems to be talking on both sides of the mouth, Johnston said.
The company seems to be saying, "The product we offer is cutting costs and our market opportunity is eliminating those savings," he said.
If you add up all these factors, the market opportunities for WeWork are much smaller than what is indicated in the documents relating to its IPO, analysts said.
WeWork's estimate of its market penetration – 0.2% – "could be grossly underestimated," Smith said.
Do you have any advice regarding WeWork or another company? Contact this reporter by e-mail at [email protected], send him a message on Twitter @troywolv, or send him a secure message via Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
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