WeWork, the renter of shared office space, is set to become its own landlord with the launch of its subsidiary, Ark.
Office-space leasing group WeWork lost $264m in the first three months of 2019. This came as a surprise to no one, given the company’s reputation for burning through cash. However, the loss is slightly lower than the one in the same period in 2018. The group also doubled sales to $342m, while its locations and members also rose by 100%, to 485 and 466,000 respectively.
WeWork’s business model involves taking on long-term leases in buildings, and then sub-letting to companies looking for office space. The fact that its losses have begun to fall is certainly a tentative step in the right direction, and a more tangible sign of success than in 2017, when WeWork chief executive Adam Neumann told Forbes that the company’s valuation had less to do with its revenue than its “energy and spirituality”.
If it intends to go through with its proposed stockmarket flotation, WeWork must demonstrate to interested investors that it does have the potential to be profitable one day. This should be possible if it slows growth, said Artie Minson, WeWork’s president, recently.
WeWork’s stratospheric rise has been accompanied both by stories of antics at its achingly cool offices, and by somewhat bemusing business makeovers. While celebrating a 2014 funding deal, Neumann “partied so hard he broke a floor-to-ceiling window in his office…since then, he’s been known to make company-level decisions on what look, from the outside, like whims”, notes Ellen Huet in Bloomberg Businessweek.
He has previously been criticised for the fact that he owns buildings in which WeWork is a major tenant, the implication being that this creates a conflict of interest, because Neumann’s company is paying rent straight to him. Presumably partly in response to this, WeWork has now come up with a new wheeze, says the Financial Times. “The most controversial real-estate start-up on the planet figured out a way to become its own landlord.”
Its new subsidiary, Ark, will raise money to buy property that it will then rent back to WeWork. Neumann has said he will sell the properties he owns back to Ark, for the amount he paid for them, even if they are now worth more. The idea, apparently, is that the value of Ark’s buildings should go up because having WeWork as a tenant makes the buildings more attractive.
Ark will be run as a separate entity, but “there’s obvious room for conflict: if real-estate rates fall in a city, WeWork will want to reduce leases, but Ark may have other ideas”, says Robert Cyran on Breakingviews. There are potential benefits, including the ability to sell a building if WeWork needs money. But ultimately, “the main challenge for WeWork hasn’t changed. Many of its expenses are locked in for the long term, but much of its revenue isn’t”.