Davidson analyst Barry Oxford explained after news broke that WeWork would delay its IPO. “By leasing space on a short-term basis, the company is able to charge a premium, which has fueled growth, but in a potential slowdown, the mismatched duration may put the company at risk.
And that’s what makes the short-term, shared-office space business so risky. “We is highly susceptible to a recession, as the company signs long-term leases with office landlords and then sub-leases to tenants on a shorter-term contract,” D. A.
Boston Fed President Eric Rosengren flagged this in a speech he gave on Friday (h/t Yahoo Finance’s Brian Cheung): “This structure may allow the co-working company to potentially walk away from unprofitable lease arrangements in an economic downturn without the property owner having recourse to the ultimate parent, the co-working company.
It’s not unlike how a business will let go of its freelancers before its full-timers, which is meta because WeWork’s risk section notes: “A significant portion of our member base consists of small- and mid-sized businesses and freelancers who may be disproportionately affected by adverse economic conditions.
It’s great for the small business that doesn’t have the time or money to build that office from scratch, and it’s great for the large business that needs a little bit of extra space for a short burst of time.
We’ve gone from talking about a risky business model, to mapping out what happens in a recession, to explaining why WeWork-like businesses can exacerbate a commercial real estate crisis.
For a little bit of money, The We Company will set you up with a cool desk, a cool office, or even a cool headquarters with “custom art and furniture designed for creativity, comfort, and productivity,” and all of the necessary comforts of the working creature like “fresh fruit water, micro-roasted coffee, and tea.
Fortunately, there are service companies whose whole business model is about supplying flexibility and insulation from risk. Like WeWork.
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