9 ms·

It's a 1920s (pre-FDIC) bank, or a 2008-style risky financial instrument, like an Auction-Rate Preferred. WeWork's business model is "borrow short, lend long."

• nostromo 7y ago
  This isn't that dissimilar from lots of industries. Every airline that takes a loan to buy a plane is banking on future demand for air travel, for example. Or take Amazon Web Services, which is building data centers to lease out on a short term basis. Yes, there are tremendous risks involved, depending on the lease terms. But it's not at all unusual.
  • munk-a 7y ago
    I don't really buy that, WeWork is benefiting off of a demand that is constantly shifting hands - people who are using the workspace should be using it temporarily - maybe they're a contractor on sabbatical, maybe they're starting a company and don't have the momentum and size to consider a lease... but those needs will change. Airlines live an entirely different business, nobody but the super ridiculously rich will ever own their own plane - and AWS benefits from economy of scale, they can deliver computational power below the cost of inhousing the ops cost in all but the most extreme circumstances, running a room full of servers has a lot of costs that don't scale down gracefully. WeWork might be able to survive long term on two factors 1. Prestige & Environs - working in this sort of shared space may be viewed as luxurious in the long term due to rubbing elbows with other well-to-do folks, sorta like going to the opera. 2. Reliability of cost - Owning a condo is a strictly better decision than renting an apartment, but there are spikes in costs when appliances break down and building work needs to be done... though I think to properly reap the benefit of this WeWork needs to be and remain extremely proactive in maintenance, if some vulture capitalists get into the decision making process and let maintenance slip for a bit it'll erase all of this value by forcing the cost (in terms of inconvenience and unavailability) onto the consumer - it's possible this could also be lost if they fail to keep a nice margin of capacity above usage... again, as soon as someone wants to go to work and is unable to secure the space and is forced to either rent or lease conventional office space their competitive edge will dissolve. I am highly skeptical of the long term prospects if WeWork fails to maintain their prestige and banking your company on prestige is an inherently risky approach IMO.
    • sharadov 7y ago
      Your assessment of environs is right, they bought Meetup.com for that.
      • mattrp 7y ago
        Does meetup have a revenue model?
        • sharadov 7y ago
          Subscription-based https://techcrunch.com/2009/09/15/leaked-shareholder-docs-meetup-hits-profitability-and-9-million-in-revenues/ https://techcrunch.com/2009/09/15/leaked-shareholder-docs-me...
  • strange_quark 7y ago
    It is dissimilar though. In the examples you gave, the airline or Amazon are taking on debt to purchase a plane or a bunch of servers themselves, so if the demand decreases in the future, they can sell off those assets. They would probably incur a loss, but at least they could recoup some of their investment. WeWork on the other hand is not a landlord and does not own anything other than the furniture in the offices. If (when) the market turns down, they're going to have a really hard time unloading those liabilities because who's going to want to pick up their lease?
    • megaremote 7y ago
      Whose going to want to rent a plane? You are really pushing this point hard, when it does not fit.
      • goatinaboat 7y ago
        Umm, everyone? https://en.wikipedia.org/wiki/Aircraft_lease#Dry_lease https://en.wikipedia.org/wiki/Aircraft_lease#Dry_lease
    • xyzzyz 7y ago
      If (when) the market turns down, they're going to have a really hard time unloading those liabilities because who's going to want to pick up their lease? I don't see why it would be any harder than selling off a plane in case of market downturn. Both are hard, and in both cases the owners of the asset (whether it's a lease or a plane) will likely incur a loss, so I don't really see any difference here at all.
  • CPLX 7y ago
    Investing in airlines is the worst idea in history, so perhaps that analogy is sound. The Amazon example is less relevant on that specific point as AWS owns and operates its own equipment.
  • morpheuskafka 7y ago
    AWS is really a good comparison. It turned buying a server and getting an annual colo lease into "per-second" billing, and WeWork offers per-day pricing for office real estate instead of an annual lease.
    • mattrp 7y ago
      That’s the aws of 2008. If you think that’s still what they do I would suggest revisiting your view. It’s not a very good comparison. I’d prefer to think of wework in the same ways that some might of thought of Enron.
    • hn_throwaway_99 7y ago
      Except AWS does a whole lot more than just let you rent generic EC2 instances by the hour. They have sooo, sooo, sooo many custom services that their lock-in is huge. It would be extremely painful for any sizable customer on AWS to switch (my previous comment on the subject: https://news.ycombinator.com/item?id=20339381 https://news.ycombinator.com/item?id=20339381). No such lock-in exists with WeWork. In fact the entire reason for WeWork's existence is it doesn't have lock-in.
      • icelancer 7y ago
        >> No such lock-in exists with WeWork. In fact the entire reason for WeWork's existence is it doesn't have lock-in. This isn't true for their expanding customer base: Businesses who are paying for blocks of co-working memberships to expand through services rather than finding new leases themselves. There is significant lock-in when this occurs, as people may move close to those WeWork locations, arrange their life around it, etc.
        • mtremsal 7y ago
          That's also my understanding of their pitch; have we seen any evidence it's actually happening?
          • 7y ago
• 99052882514569 7y ago
  Their business is structured in such a way that the leases they signed on their locations aren't really enforceable against WeWork itself, but rather against "special purpose vehicles", I'm guessing one per lease?[1] It costs a bit in insurance but substantially limits their liability. So, in a downturn, even if "short termers are done", they can shed properties too, basically with impunity. [1] https://stratechery.com/2019/the-wework-ipo/ https://stratechery.com/2019/the-wework-ipo/
  • CPLX 7y ago
    Sure, assuming you assume away the reputational risk. They’re going to have a tough time finding future counterparties if they walk on a lot of leases.
  • polygotdomain 7y ago
    Each WeWork office has an SPE that's just for that lease. Every landload wants WeWork on the lease, but won't get it, as WeWork tends to have significant leverage with either the space that they're going after or the desire to have WeWork on the rent roll. When things are booming, WeWork is advantageous for landlords, and appraisers/the market/potential buyers will underwrite that space positively. However, there's minimal guarantees that WeWork will actually pay long term, or that you'll have any legal recourse. On top of that there are significant capital costs to a WeWork lease that landlords have to shell out up front. Their leases are typically structured with a lot of free rent up front, so the break even point for a landlord may be many months or years farther out than a typical tenant leasing comparable space. The losers in the WeWork deal are the landlords, as they're bearing a lot of the risk, and get minimal upside. I'd expect to see a high degree of correlation between WeWork's IPO/stock price and REIT valuations. Underwriting will push the value of a WeWork lease if they can, which will only give more momentum to the bubble. Source: Worked at a nationally invested REIT that had several WeWork leases in our portfolio
    • secabeen 7y ago
      Are those SPEs durable against legal challenges that pierce the veil and eliminate the protections for We?
• whoisnnamdi 7y ago
  I might be confused, but isn't it the opposite here? Borrowing long (long-term leases from suppliers) and lending short (month to month leases to customers)? You yourself said "long term promises to suppliers keep going", which sounds like borrowing to me? I could just be dense here, feel free to correct me
  • human20190310 7y ago
    I think you are correct and the original poster has it backwards.
  • goatinaboat 7y ago
    Maturity transformation, to give it its proper name, isn’t inherently a bad business; it’s how your bank transforms your weekly or monthly pay packet into a 25-year mortgage. But - and here is the crucial point - it is not tech.
    • SilasX 7y ago
      It is a bad business generally, because it requires an unfailing entity to exist as a stopgap ("lender of last resort") who will take the hit to prop you up as the short term payment becomes due, for the inevitable times when the payments don't line up. WeWork doesn't (yet) have that.
      • goatinaboat 7y ago
        True, but that is a general property of fractional reserve banking, not specifically of maturity transformation. There is a lot of ideology around homeownership both for and against, I am on the for side, so when asked about the social value of banking, that’s my go-to answer.
        • SilasX 7y ago
          >True, but that is a general property of fractional reserve banking, not specifically of maturity transformation. But maturity transformation requires FRB.
• megaremote 7y ago
  > That is, they accept very short term promises to pay (month to month leases from customers) No, that is the market. Just like airbnb compared to normal renting.
  • tdaltonc 7y ago
    Except AirBnB does not have any long term obligations wrt the properties. If the market for short term residential renting takes a dive, AirBnB has to fire some people. If the market for short term office space takes a dive, WeWork is stuck holding a bunch of property and lease agreements that they have to fulfill.
• tompetry 7y ago
  It's a very interesting thing they are doing though, one must admit. It really highlights to me the fact that pricing long-term leases is really hard. Companies (the tenants) are living, breathing things that change and evolve. Their staffing and office needs are constantly changing. Not to mention changes in remote working, be it 100% remote companies, or satellites within larger companies. This makes matching supply and demand difficult, and it's a problem for owners of commercial real estate that isn't going away. Lost revenue due to vacancy is uncomfortable for them to stomach - they will pay a premium for known cash flows. You are right in that there is risk to what WeWork is doing, but if it's a hard enough problem, the premium paid by owners may be big enough to provide an acceptable margin of error. Secondly, perhaps there is a valid hedging mechanism? Third, does their large network and brand give them a competitive advantage at top of the funnel such that they can charge a higher risk-premium (spread) to owners? We shall see.
  • mattrp 7y ago
    Ive long held the view that there’s zero reason for them to be valued any higher than a REIT. Of course Reits typically generate a dividend and I don’t see we work doing that.... ever? Ps, I’ve also held the view since at least 2010 that Netflix shouldn’t be any higher valued than Lionsgate or hbo if it were its own entity. So you see where holding these views have gotten me. Ps, Spacex is a tech company.
• momokoko 7y ago
  Because someday, if it works out, they won't be on the lease at all. Real estate owners will pay them a fee for their facility to be in the WeWork network. The current leases they hold are there to get the flywheel going on the network effect.
  • hn_throwaway_99 7y ago
    Is this satire?
• sytelus 7y ago
  I'm not sure why all these negativity. WeWork's business model is no different than buying wholesale and selling retail. Or owning a mall and selling pieces to individual shops. It's an old idea and old business model. WeWork is able to sell 200 sq ft for $5000/month. Think about that for a bit. Their strength is diversification by multi-tenancy which means even if x% of customers fissals, you got others to pay for the cost. They are tech company in a sense they enable instant on-demand exchange of goods online just like on-demand renting of cars or scooters. They are fast movers and online-first company. We don't know if they are losing money just in growth markets or also in mature markets. If later is true then I would be worried about their cost structure and long term viability. Otherwise at their current ability to successfully convince customers to pay top dollars, they should be awesomely profitable once they stop bleeding in growth markets.
  • robryan 7y ago
    The negativity is around how they are asking to be valued. They want to be valued at tech company revenue multiples but are running a real estate business. As the article evaluates unlike a tech company there is really no opportunity for exponential growth without also adding a proportional amount to their costs.