If you take a ride on the London Eye and crane your neck east towards Waterloo railway station, you can catch a glimpse of one of the U.K. capital’s newest landmarks—the world’s largest co-working office space.
That might not exactly set sightseers’ pulses racing, but it is an eye-catching example of how WeWork, the U.S.-based space-as-a-service provider/technology company/supplier of free beer has transformed the London commercial property market.
WeWork Waterloo—which opened its doors (and beer taps) for the first time in August—is one of more than 50 office locations WeWork operates across London. The company’s growth has been staggeringly rapid. It only leased its first London office in 2014, but by the end of 2017 WeWork had already become London’s largest private sector office tenant.
Its 3.5 million square feet of occupied space dwarfs its nearest and far more established rival Regus by 1.4 million square feet, according to data from commercial real estate services firm JLL. London is WeWork’s second largest market by number of buildings after New York.
Now, the rapid growth of WeWork’s London market could prove to be the biggest test of its business model so far, as its parent—the We Company—navigates challenges both personal, and political.
Big offices, short leases
On Monday, the company announced it would delay plans for a September initial public offering, saying it expected to offer the listing by the end of this year, after it had reportedly been pressured by Softbank Group Inc. to delay the IPO. That has already put into question the sale of two buildings that WeWork is leasing in London as potential buyers get nervous about owning property where WeWork is a majority tenant, Bloomberg reported on Thursday.
Meanwhile, it is also staring down the deadline for the U.K.’s departure from the European Union on October 31, with fears of a “No Deal” Brexit mounting amid dire warnings about the potential impact on the British economy. WeWork identified a downturn as a risk factor in its IPO prospectus; such an event “could adversely affect the results of operations,” it said.
But as WeWork’s future in the U.K. and London in particular become more uncertain, the city does offer it advantages that its other markets don’t.
The main reason why WeWork’s business model has been disruptive—aside from the alcoholic perks and savvy branding—is that the company recognized it can drive economies of scale by leasing much larger buildings than flexible office operators have traditionally taken, says Emma Swinnerton, head of flexible leasing solutions for Europe, Middle East and Africa at Cushman & Wakefield, a commercial real estate services firm.
That trend has been particularly prevalent in London. In the past, flexible office operators would typically lease around 20,000 square feet of space, Swinnerton says. Now, WeWork is taking on buildings in excess of 200,000—the Waterloo office, for example, is a whopping 280,000 square feet.
The larger footprint means WeWork must expand beyond its original target community of freelancers and start-ups by seeking to woo a host of big name corporate enterprises. HSBC, for instance, has taken up more than 1,000 desks in the new Waterloo building. Deloitte has installed its U.K. innovation team in WeWork’s Moorgate office. Facebook is even renting an entire building from WeWork in the heart of London’s theatre district. Corporate enterprises now make up about 40% of its global membership—up from 20% in March 2017.
WeWork has also tapped into a kink in London’s office market—traditional landlords there have historically imposed long and inflexible leases on office tenants compared to elsewhere in the world. According to Mat Oakley, director of European commercial research at real estate company Savills, ten-year leases are not uncommon.
“Even if there is a wobble with regard to what WeWork does next, much of the logic they have set out in terms of how they think people will work isn’t going to go backwards,” said Andrew Allen, global head of investment research for real estate at Aberdeen Standard Investments. “There are clearly very many occupiers who do want flexibility of their space and are willing to pay for that.”
The trend towards a new style of office space is, nonetheless, mixed: the occupancy rate for flexible office space in London is around 85%, down from around 90% five years ago.
But while general occupancy rates might be on a downward trend, WeWork has an edge over other operators in this sector because most are smaller and can only compete on price, says Oakley. Given that WeWork has deeper pockets, it can afford to give away better incentive packages, helping to sustain demand.
“The biggest challenge for them in London is probably going to be there just aren’t enough buildings being developed that they could take space in,” he said.
A delayed IPO—and Brexit
On the other hand, the decision to postpone the IPO, is both embarrassing and could scupper a critical source of credit financing that would have resulted from a successful listing. And Brexit could also complicate matters at a time of increased scrutiny into its business.
Elaine Rossall, head of U.K. offices research and strategy at JLL, says all the unanswered questions surrounding Brexit so far have actually been positive for most flexible workspace operators as companies looking to rent office space have wanted the option to be more nimble in the event of any volatility.
Brexit has even contributed to one of WeWork’s biggest deals to date—leasing 12 floors of a 20-story office tower in Canary Wharf that were vacated by the European Medicines Agency.
While the company declined to comment further on its Brexit strategy, WeWork’s director of European expansion has previously said that volatility is inherently good for its business.
But should Brexit cause any prolonged economic weakness, it could have an impact on both occupancy levels and rent prices, and that could squeeze WeWork’s margins. The big question for WeWork’s business model, therefore, is how its corporate enterprise members respond to any Brexit-related stress.
“Will they retrench back to their head offices and give up their flexible workspace or will they need more flexibility and so leverage their flexible workspace more in a downturn?” said Swinnerton. “That’s the real unknown.”
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