Supertrends & disruptors
Could WeWork disrupt offices like Amazon disrupted shopping?
Office space provider WeWork has generated headlines recently with its plans to list on public markets. While the listing has been abandoned amid doubts over governance and valuation, we see the company as a significant disruptor of the office market across global cities. In fact, we think WeWork’s impact on how people work could be comparable to Amazon’s impact on how people shop.
Flexibility is crucial
Successful companies offer a product that meets their customers’ needs. The traditional office rental market involves companies signing leases for a long period of time, sometimes 15 or 20 years. This doesn’t suit the needs of many companies.
Start-ups may never make money and therefore can’t take on a large long-term liability. More established small companies also need the flexibility to grow. And even large firms want to be able to manage their offices flexibly as their need for space may change. Signing a 20-year lease doesn’t suit anyone.
What WeWork has done so successfully is allow all of these businesses – from the two-person start-ups to the multinational firms – to rent the space they need for the length of time they want. It sounds straightforward, but WeWork’s rapid growth shows how more traditional office providers have been complacent and slow to react to customer demand for flexibility.
This demand will continue to grow as more companies enable their employees to work remotely. Advances in digital technology mean working from home is now possible for many employees. The rise in working from home, combined with the usual absences for meetings, annual leave and illness, means many companies have found themselves in buildings that are significantly under-occupied most of the time.
Such under-occupancy is clearly inefficient, and leaves companies paying rent on unused space. If chief financial officers see an opportunity to switch a fixed cost into a variable one, they will take it.
Some companies can find suitable new buildings for themselves. Here at Schroders in London, we moved last year to a brand-new building where hot-desking and remote working are the norm. But across the road is a WeWork office and it clearly provides an answer for many other companies.
Relaxed spaces = happy workers
Flexibility isn’t the only factor behind WeWork’s success. Competition to recruit and retain employees is fierce in many sectors and offering an attractive environment for employees to work in is part of that.
The latte-drinking, yoga-practicing millennial may be a cliché, but it’s true that employees now are more demanding of their workplaces than in the past. “Perks” such as in-house gyms, informal communal areas and decent coffee are essential if companies are to keep their employees happy.
Members can also use WeWork offices in other locations where their company may not have its own office. WeWork has 588 buildings in 111 cities, offering workers a “home from home” when they travel, the company said earlier this year.
All of this clearly helps with customer retention; WeWork’s retention rate is 119%, which is explained by existing members taking on more space when they renew, the company told Schroders earlier this year. And these benefits do not just appeal to small companies. Around 40% of WeWork’s member base is “enterprise”, or large companies, including the likes of Google and Facebook, the company said.
Location, location, location
WeWork’s laser focus on finding the right buildings is a big part of its success. Its city-focused strategy means it is in locations where its offices can be reached by a large number of people. Proximity to transport hubs is all-important; for example, HSBC is taking space at a WeWork building next to Waterloo station in London – a key rail hub for the south of England.
Even as more people work from home for part of the week, there will still be a need to come to offices for meetings with clients and colleagues. WeWork provides conveniently located, flexible and attractive spaces for those meetings to take place.
The informal spaces within the buildings are designed to allow people to interact. There’s no hierarchy, unlike the old-fashioned layout of corner offices and typing pools. In short, they offer people a modern way to work.
Great ideas don’t always make great investments
Companies can hit on an enormously successful idea without necessarily being good investments. We think WeWork is already having a profoundly disruptive impact on the office market in many cities and that this will only increase. Once employees have experienced working in modern, comfortable environments, they will be reluctant to go back to the rigidity of an old-fashioned office. And likewise for CFOs who find they can manage their costs more effectively.
WeWork is expanding rapidly but its success is also sparking copycats. We believe its disruptive influence will be felt in the office market around the world, but whether WeWork itself will continue to lead the way is another question.
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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