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WeWork 'paying for aggressive growth,' other flex models more durable

WeWork Cos. Inc.'s troubles following its failed IPO bid can be largely traced to the pace of its global expansion, which has fueled losses running into billions of dollars in recent years, according to a senior figure in the U.K. flexible office market.

Speaking during a panel discussion at the MIPIM U.K. Summit in London on Oct. 15, Tom Dugarin, U.K. general manager at Knotel Inc., a multinational flex space provider that recently closed a $400 million funding round, said investors could not ignore the scale of WeWork's losses and the role of its former CEO Adam Neumann in overseeing them.

"They are clearly somewhat paying the price for a very aggressive growth strategy," said Dugarin. "And guess what? The market cares about a path to profitability, it cares about governance, it cares about disclosure. These are things which a public equity market investor has to focus on."

WeWork postponed and then canceled its plans to list the company publicly after failing to attract sufficient interest from investors, who were reported to be put off by revelations in the company's IPO prospectus. Neumann resigned shortly after the decision to halt the IPO amid questions around his financial relationship with the company and his leadership approach.

The failure of the IPO has put pressure on WeWork's finances. The company's largest backer, SoftBank Group Corp., and JPMorgan Chase & Co. were reported to be in talks on a multibillion-dollar emergency financing package. WeWork doubled its losses in 2018 to about $1.9 billion despite its revenues also doubling to about $1.8 billion.

Tarred with the same brush

But Concerns about the viability of the flexible office space model in the aftermath of WeWork's turmoil are unfounded, said Dugarin. WeWork's coworking model, which involves many small or individual clients on short leases, is "very different" from flex providers that target large corporates who take space for much longer periods, he said.

"[WeWork's] coworking model is spend a lot on the way in, take a big white cube and turn it into 500 little white cubes, which costs a lot of money, and then have customers who are there on rolling monthly contracts, who, if they're a one- to five-person business, can easily turn around and say we don't want to work here anymore, and can go back to work in Starbucks, or wherever it might be," Dugarin said.

Knotel plans to "stick to what we're good at" in the face of the WeWork controversy, Dugarin added. "We are going after a more mature audience," he said, adding that its business will be more resilient in a downturn than companies with a similar model to WeWork as its clients take longer lease terms of two years or more.

Meka Brunel, CEO of Gecina, one of Europe's largest listed landlords that has launched its own flex space business called YouFirst, said flex providers who can achieve scale based on a model that targets large corporate clients were the most likely to survive a downturn. "That's why size matters," she said. "Of course, if you have one building and your tenant is leaving, this might be a disaster, or at least a couple of years of scratching your head. But if you have 200 buildings, and this is [Gecina's] case, you won't have 200 people leaving at the same time."

Brunel added that, despite WeWork's difficulties and the focus on some of the more questionable aspects of its model, the company had been instrumental in transforming attitudes to work and workplaces, and that this shift was permanent. "It's not just about gadgets," she said. "It's not about free beer; who cares about that? It's about a new way of working."

Responding to an audience question about the real "elephant in the room" being the conflict between real estate lenders who want secure, guaranteed income through long-term leases and occupiers who want the opposite with flexible short-term leases, Dugarin said the industry would have to adjust as the flex market grows.

"We're really at the start of this journey," he said. "And if we are talking about the current market representing low single-digit penetration, but getting up to 20% to 30%-plus [as forecast by industry research], valuers are going to have come along on that journey, too. And I don't think that'll happen tomorrow, but it's coming in the short term."