*OPINION: Jeff Reinstein, CEO of Premier Workspaces, Opines About the Recent Announcement of WeWorks’ IPO
WeWork recently announced an IPO with a stunning $47 billion valuation.
As an industry expert with more than two decades of experience, and the CEO of Premier Workspaces (formally Premier Business Centers), one of the largest shared workspace/coworking companies in the United States, I’m often asked to share my thoughts.
I think it’s easier to share the vantage point from which I view recent changes first. I’ve led two successful shared workspace providers with a combined footprint of more than 150 locations. My focus has always been on generating free cash flow and sustainable self-funded growth. The two shared workspace companies that I have managed have never had an unprofitable year – even in times of economic downturn – and expansion has been self-funded with cash flow.
When I look at recent activity within the industry, I see a lot of pomp and circumstance. Companies are soliciting hundreds of millions or even billions of dollars to maintain basic day-to-day operations and grow – often at the expense of cash flow and basic investment return. They are using investors’ money to buy revenues without any regard to cash flow or profits.
Premier Workspaces, has followed a measured discipline which has allowed it to grow (an average of one new location every 45 days for 17 years) and maintain positive cash flow. We’ve reinvested a portion of those profits into new locations, which is why we were able to create one of the largest shared workspace companies with 91 locations on a $4.3 million investment (yes million, not billion).
While our company has prospered over the past 17 years, several other operators have failed. We have acquired 50 other shared workspaces companies in that time period, many of which were distressed. We used our marketing muscle and economies of scale to reposition those companies and make them profitable.
Large operators with more than 30 locations have also failed. They all seem to share a common theme that’s hallmarked by rapid expansion, too much space per location and/or too many leases signed at the top of the market.
I’ll leave it to you decide if this is applicable to WeWork. In my experience, it’s difficult to maintain high occupancy levels in large centers – particularly in times of economic downturn. If you have fewer offices to rent, you also have more pricing power. Commercial office rents are currently at or near-record levels in many markets and have been for several years, so over expansion in this climate could prove fatal.
Where are we headed?
WeWork has done a lot of great things for the industry and I hope that their IPO is a success. It would be good for our industry and greatly enhance the value of our company. WeWork innovated and improved our industry in many ways, most notably by increasing product awareness, improving center design, and adding an element of “coolness” that has transformed the traditional commercial office landscape.
However, if WeWork is already losing almost $2 billion a year, their master lease rents and/or CAM expenses are increasing every year, and the membership rates are decreasing, won’t their losses just keep growing?
Also, how is WeWork worth more than IWG (which owns Regus and Spaces)? They basically do the same thing, but IWG only has a $4 billion market cap even though they have roughly 5 times more locations than WeWork and are profitable. If the thought is that margins will increase with scale, I have found that isn’t true.
In the press, I see people trying to forecast what will happen in the next recession. In the Great Recession, our master lease rents increased at the same time our revenue decreased which reduced margins to single digits levels. Clients defaulted on their agreements or asked for rent relief, demand for offices decreased and so did pricing. Large clients gave up short term space
, since they couldn’t give up long term spaces. On the flipside, the Great Recession was the best time to expand. Master lease rents were very depressed and landlords offered a lot more concessions , since they were more desperate to make deals to rent space.
The shared workspace business is a great business that can be operated in a profitable fashion, if the focus is on cash flow and tempered growth. It also enhances the value of the property for the landlord
, since it adds a lot of great amenities that can be used by other tenants in the building. The most important benefit for the landlord is that we act as an incubator for small companies that often move into the building as their business grows. On the other hand, WeWork is taking large blocks of space to accommodate large tenants that may have otherwise taken space directly from the landlord.
So, why is cash flow so important? Since we don’t own the buildings and have leases that range from 5 to 15 years, the focus needs to be on cash flow and return on investment, not just growth. With each month that passes, the opportunity to generate cash flow is lost. Even though master leases have options to renew, there is no guarantee that you can renew them at a rent that keeps you profitable. Overspending on the initial construction, furniture, fixtures and equipment may make it difficult or impossible to receive any return on investment during the initial term of the master lease.
So, what is the biggest difference between WeWork and Premier Workspaces? We built our company on a $4.3 million investment, we’ve been able to grow (and continue to grow) with our own capital while generating positive cash flow, we are profitable and always have been.