Okay, so I may have underestimated WeWork as a very dominant beast in the co-sharing workspace market. However, the endorsation of big business may be based on the core socialism that WeWork is building. When you're up with the biggest company in the world with the biggest market capitalization in history, what are you able to do? The unicorn is indeed elusive.
Millennials and Generation Z have novel needs and behaviors that are fundamentally shifting the way people consume, work, and live. Essentially, they drive the freelance and sharing economy versus the past generation that was less willing to share workplace space and ideas with people sharing similar interests. This has led to newer generations clustering in more highly developed urban areas to partake in cultural events while reaping the reward of social amenities including intellectual and financial sources. At the forefront of this stands convenience, value and experience which all feed in to consumption decisions.
The real environment of WeWork is based on the male-dominated transgressions involving alcohol, playing ping-pong, and partying. Individual entrepreneurs and freelances are quickly developing in the new economy. This has led to the rise of an independent workforce trending towards small businesses rather than large corporation. Unlike the previous generation that has no clue how to utilize Instagram, Facebook, and their social network to build their businesses, the new generation is allocating more time in the social network world developing their social hierarchy rather than their business itself.
Over the course of 10 years, I myself had to fire 15 employees that were constantly maneuvering themselves in the social network in order for them to keep in contact with their friends, enemies, and colleagues. What corporate America doesn't realize is the fundamental metric that social networks need constant updates in order to promote their individual brand. All these macro shifts are changing the traditional office real estate market and boosting the development of co-working spaces.
In the event of an economic downturn, the collapse of a particular tenant industry is highly detrimental to spaces with a single primary tenant source. The collapse of a real estate market however creates a finishing opportunity for co-working companies that think they are more financially prepared. They also think the flexibility of co-sharing memberships makes the space more attractive and affordable by separating online and physical access. This is complete nonsense because the virtual workplace and 5G technology will make everyone interconnected with respect to technology moving thing more quickly and efficiently.
If you go on LinkedIn, the members of WeWork are advocating how great the space is, how unique the space is, and how the technology in these offices simply boggles one's mind. Co-working companies leverage economies of scale by facilitating meaningful connections among members through offline events and online platforms. WeWork shares profits with the landlord in negotiation for a free rent period, reduced despots, and tenant improvement allowance.
WeWork's co-working ecosystem is based on one aspect: propelling the growth of its members marketplace. The growth has to facilitate meaningful connections that inherently creates growth value that becomes mutually beneficial with regards to reinforcing its members inadequacy. This is why WeWork continues to have its own personnel pushing the company's false hopes onto millennials and Generation Z in order to generate more memberships and revenue.
Service Fee is what members pay to have the personal and business services provided by the co-working company and service partners. It's usually charged upon use and depends on the co-working company's ability in understanding its members' needs as well as their ability to negotiate with service providers. Many of the biggest property owners are limiting their exposure with WeWork. The reason why is because WeWork is able to raise capital from Softbank and some of the Middle Eastern countries that negotiate below-market rates for members and ensure profit-sharing arrangements with property owners. The property owners think the higher-margin with membership fees will compensate the reduced mortgage and inflation rate when the economy goes south.
WeWork's only aspect in their behavior modification and business model is based on the dedicated desk in shared office spaces that influences the sustainability of their members generating even more members. The problem with the business cycle is that it doesn't give flexibility with respect to higher rates or commissioned rates to bring more members. WeWork's average unit construction cost of equipping new offices is about $130 per usable square foot. However, they want to do bring this down to the $65 to $75 range which they think is the norm in churning a profit.
Again, the real world works much differently. For example, if property owners were able to reduce their cost in order to secure future profits then asset prices may not have sufficient leverage in a downturn market. Some analysts have stated that during recessions, companies that had co-working spaces were making money hands over fist. This is simply not true. In a recession the corporations that made long-term leases were able to capitalize on a substantial profit when the market changed. After 2009 the bull market took off and interest rates dropped and corporations were able to make enormous amounts of profit with their long-term leases that were acquired at the lowest points in the market.
WeWork wants to tell investors that the total cost of co-working space can be estimated on a square footage basis. The smaller space ultimately has less cost as opposed to a larger space. However, the smaller space takes more memberships to sustain itself. The only way that costs could go down is with enough memberships that become sustainable in both good times and bad times. If WeWork's EBITDA margin is 26% and drops to 13% then I would suspect the property owners would want their profits.
WeWork's corporate economic environment is based on economies of scale and is certainly a key driver to its business profit model and expectations. With higher interest rates, the bargaining power of WeWork will be diminished. The best scenario is that the competitors of WeWork, whether in Asia, Europe, or the US, are acclimatizing towards the same social membership to fight against WeWork. The real problem is the unicorn. The unicorn is elusive and there will always be warriors to go into battle in order for the unicorn to never be captured or destroyed; that is their myth.