Instagram photo by Coy Davidson • Oct 18  2013 at 12 17 PM

WeWork, the New York based coworking phenom, raised eyebrows recently when it announced another round of funding and an astronomical valuation. After raising $355 million in VC funding last year, giving the company a $5B valuation, they recently announced another $433 million round of funding. The latest influx of capital gives the company a soaring valuation of $10B, making it, without a doubt, ‘the mother of all coworking businesses.’ Is this merely another tech-driven bubble, bound to burst like previous bubbles, or is there something fundamental about WeWork’s business model that we should all pay attention to? And, what are the implications for the CRE industry generally?

First of all, let’s look at some of the numbers and try to make sense of them. Currently, WeWork operates 35 locations, leasing around 3.5 million square feet of space. While the company is closed-mouthed about its financials, people close to the company have provided a sense of the company’s performance. It is thought that the average lease terms of its portfolio is between $40-$50/sq ft. Observers also estimate that WeWork is able to earn near $100/sq ft. across its portfolio, given its membership rates and the volume of traffic it currently experiences. For anyone in the CRE world, these are truly eye-popping numbers. This, it would seem, is what gets investors excited.

Using rough estimates, WeWork appears to generate around $150M annually in revenue, meaning that it’s $10B valuation is nearly 100 x earnings. At $10B WeWork is larger (by valuation) than all but three of the large office landlords, coming in at around half the valuation of the largest- Bostin Properties Inc. Mort Zuckerman, of Boston Properties, says he is bullish on the WeWork model and is an enthusiastic investor in the enterprise.

If only it were that simple. As in all other areas of life, what goes up usually does come down. How can a company that leases, but does not own, the hard assets at the core of the CRE industry, justifiably become worth more than the hundreds of competitors that do own their buildings? Secondly, some critics wonder about WeWork’s long-term viability. Not only is WeWork a current beneficiary of buoyant capital markets, so are many of its members. That is, thousands of independent and start-up businesses are capable of paying for their memberships because of the same frothy attitude shared by investors generally. What happens, critics ask, when interest rates rise, capital becomes more expensive, and fewer and fewer would-be members can afford the $300-$600/month fees? At such time, WeWork will still be sitting on millions of square feet of 10-15 year obligations and a decreasing pool of qualified members. In that scenario $10B seems quite high.

However, despite the bubble-ish nature of the WeWork case, one would be naïve and short-sighted to assume that, therefore, the coworking movement has no relevance to the traditional real estate business. The CRE industry faces the classic case of the “innovator’s dilemma.” If you move too quickly into the unknown you risk losing those advantages that have made you successful to date, and in doing this you jeopardize your business. If you bury your head in the sand and assume that coworking is just a fad and you will be able to continue to lock down anchor tenants in long term leases for ever and ever, then you also might be jeopardizing your business. What to do?

Interestingly, the opportunities might exist in the least likely places. Adam Neuman, of WeWork, has famously said that he is focused on High IQ cities, such as San Francisco, New York City, Austin, Seattle, London, Chicago, Paris, etc.   Not only is this a bit arrogant, it also allocates WeWork’s capital in the most expensive cities in the world, meaning that the whole WeWork enterprise depends on riding the bubble. Meanwhile, in second and third tier markets around the world, where solid business fundamentals often prevail over hype, there are open opportunities for CRE professionals to experiment with new offerings on a much smaller scale at much lower levels of capital commitment. That is, even if (and some would say when) WeWork flames out, smaller, more sound, and modest alt-work operators will likely be providing affordable and compelling workplace solutions to unsung professionals around the country.

This guest post was Co-authored by Drew Jones, Ph.D. and David Walker, Coworking Pioneers & Founding Partners at The OpenWork Agency – a coworking strategy consultancy.

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