WeWork: Venture Capitalists Take Real Estate to Ludicrous Heights


Do you like the idea of hanging out with people in a laid-back environment where you have free WiFi, beer, and ping pong? Hell yes. Do you want to work in this environment? Hallelujah.

WeWork sounds like a cool co-working concept where users pay fees for differing levels of access and services. But when I saw that venture capitalists have valued the company at $5 billion, I needed a beer of my own to wash down this slice of fantasy.

Source: Bloomberg

Here’s the founder quoted in Bloomberg’s article:

Adam Neumann, WeWork’s Israeli-born co-founder, has called the company a “physical social network,” and it makes every effort to lubricate connections. “We gave 90,000 glasses of beer last month,” he said in a recent onstage interview at TechCrunch Disrupt NY 2015, “which is a number we’re proud of.” 

I get the general concept, and it is appealing: there’s probably enough people in New York, LA, Chicago and San Francisco who would rather pay a la carte for office space. There’s a cool factor as well. These aren’t beige-carpeted Regus office centers with a Bunn coffee maker in the corner. Non-dairy creamer is probably disdained at WeWork.

But a $5 billion valuation is preposterous.

There are many flaws in the venture capitalists’ assumptions:

First, they make the old Pets.com argument that X is a multi-billion dollar market, and if we can just capture Y, we’ve got a home run. In this case, they estimate the size of the office market as being $15 trillion, so their whole value is based on the idea that they can capture just a thimble-full of the market. Unfortunately, capturing a market of users does not necessarily translate into profits.

The doubts pile up quickly:

A. Sorry, there’s just not that many freelancers. I know we’ve all seen the hype around start ups, but most new tech businesses generate zero cash flow for many months or years and are purely boot strap operations that can’t stomach a posh rent in a highrise office space. There’s a reason why a lot of Silicon Valley success stories got started in garages.
B. So where do most small companies and freelancers work?Their homes. Why pay double rent?
C. Open floor plans suck if you need to complete tasks that require focused concentration. I’ve tried it. It’s hell.
D. There are already competitors (and will be more)…including building owners themselves.
E. There’s a little place called Starbucks that has free WiFi. I’ve heard they have some locations around.
F. WeWork has no assets and relies entirely on leased space. Leases are a contractual obligation akin to debt. They may not get capitalized on a balance sheet, but they should be. The company will immediately be an over-leveraged behemoth with tremendous fixed costs.
G. Ping pong and beer are amenities, they’re also distractions for the others who actually need to work. Go to a bar.
H. They will need to hire a staff to maintain the spaces.

Here’s my biggest gripe: The article references Uber as a comparable. The logic goes something like this: workers share spaces and more efficiently utilize a common area by making use of what would otherwise be spare capacity. But is WeWork really like Uber? In the case of Uber, individual drivers carry all the risk and Uber only acts as a technology infrastructure for sharing transportation. If there is no one to pick up, its the driver who doesn’t make any money. In this model, WeWork carries all the risk.

If I was going to create an “Office Uber” I can see a better market where companies with existing leased office space (an advertising firm or insurance company) post available cubes and conference rooms for rent when they are empty. You probably have offices that only run at 50-75% capacity on a daily basis (ie, Don Draper heads to California for a few weeks), so there’s a lot of spare space that can be posted. I’m sure someone has already thought of this concept.

On the positive side for WeWork, there’s probably a health club model here – sign up tons of people at $40 per month and know that they only show up a fraction of the time of what they thought.

But $5 billion is a bridge too far.

Kilroy Property Trust is one of the biggest office landlords in San Francisco (if not in the the entire US) and their market cap is $6 billion. Ping Pong and beer are probably not included in Kilroy’s market capitalization, however, so there’s tons of upside.

OWH: Aksarben Village has another $82 million in development planned



By Cindy Gonzalez / World-Herald staff writer

An additional $82 million in new construction projects headed to Aksarben Village — more office, retail, apartment and parking structures — will close up a couple of the biggest gaps left at the 70-acre midtown Omaha campus.

Not all of the tenants have been secured for those proposed properties, but developers say the village’s history suggests that won’t take long.

And except for a few hitches, such as the scrapping of a plan for owner-occupied town houses, the ongoing transformation of the old Thoroughbred racetrack grounds near 67th and Center Streets continues better than expected, said lead developer Jay Noddle of Noddle Cos.

So far, he said, the investment on projects built, under construction or planned at the village totals about $500 million. Original estimates a decade ago were about $150 million. That is just the village portion, not First Data Corp. or university-related buildings on the larger former Aksarben site.

City Planner Bridget Hadley said spinoff activity and property improvements in and around the village are what the city had hoped for: “Not only bringing forth more density, but a vibrant mixed use of work, play, entertainment and living options,” she said.

The latest changes, according to documents submitted to Omaha planners, total more than $82 million and seek $9.75 million in tax increment financing. The plans call for:

» An 80,000-square-foot office, retail and restaurant building on the corner of 67th Street and Mercy Road. A large corporate user reportedly has committed to occupying the top level of what would be a three- or four-story structure.

» A four-story retail and residential building fronting Frances Street that would have 10,000 square feet of retail and apartment lobby space on the ground floor; upper floors would contain 21 apartments.

» Another four-story building with 40 apartment lofts, facing west with a view of College of St. Mary softball fields and campus.

» As announced six weeks ago, a five-story building with Pacific Life Insurance Co. as anchor on the northeast corner of Mercy Road and Aksarben Drive. Restaurants, other retail shops and offices would occupy the rest.

» An 880-stall, four-story parking garage, replacing an existing surface parking lot and connecting by sky bridge to the Pacific Life building.

» About two blocks to the east, southwest of 64th Avenue and Frances Street, two apartment buildings. The largest would have four levels, 45 units and 31 parking stalls. A three-story eight-plex is designed in a “walk-up” style. Parking for both would be available in an existing garage servicing nearby businesses.

Construction on the Pacific Life building and connected parking garage are to begin soon, with opening of the office structure expected late next year, planning documents said. The other office and housing structures in the entertainment zone are to be done either next year or in 2016.

The other apartments are to be completed by fall 2016.

The TIF funding, a tool that allows property tax revenue from new construction to pay some redevelopment costs, is to be a topic at today’s City Planning Board meeting.

Alchemy Development, which is planning the new apartments at 64th Avenue and Frances Street, already has developed 183 other units at Aksarben Village. The next group would resemble the existing Pinhook Flats buildings, said Alchemy owner Bert Hancock, but have a distinct name and feature red and bold color elements to complement the neighboring DLR Group.

“We want to have an impressive corner element so when you’re looking from the new arena it will really attract people’s attention,” Hancock said, referring to the $88 million sports arena that the University of Nebraska at Omaha is to open next year at 67th and Center Streets.

Earlier plans by Noddle Cos. had called for the Alchemy site to be 21 upscale “live and work” town houses, the first owner-occupied residences in the village. But Hancock said people who could afford the homes typically are older and don’t like all the stair-climbing.

“If everything had gone as planned, there would have been more town homes, but that market really evaporated in the recession,” Hancock said. “We adjusted course, added apartments and everybody is happy. It has added to the amount of people that live and work in the area.”

The other proposed apartments and office/retail structures are projects primarily of Magnum Development and McNeil Co., which previously partnered on Aksarben Cinema.

John Hughes of Magnum said that new chunk would, for the most part, finish off the 8-acre entertainment “Zone 5” bordered by Stinson Park, Aksarben Drive (parallel to the Keystone Trail), 67th Street and Frances Street. (Also in that zone is the theater and businesses including DJ’s Dugout and Aspen Athletic Club.)

Securing TIF funds is an important part of making the proposed parts fall into place, Hughes said. He said he is in negotiations with various tenants to fill the space.

The land remaining lies mostly in Zone 6, the vacant block where the $50 million Waitt Plaza is to rise. Announced six months ago, the eight-story office and retail building with a parking garage is scheduled to be completed at the northeast corner of 67th and Frances Streets by early 2016.

Plans for that block call for two other office/retail buildings. Noddle said marketing and tenant recruitment for all three has ramped up.

A few property patches “here and there” remain and could become homes to various users as the village further matures, said Noddle. “It’s those little eclectic pieces that get filled in and really round out the mix in the village.”