WeWork competitors multiply, firms may shutter, specialize or merge

As coworking grows more popular, attracting billions in venture capital money, some experts say the field is getting too crowded, and the options in a shakeout may be to merge, shutter, or specialize.

Coworking and flexible office space companies have been around for far longer than nine-year-old WeWork, and the industry has a history of mergers and acquisitions.

An alternative to scaling up is finding a small, specific silver of the market to serve, some industry experts said.

By any measure, the growth in coworking is staggering.

Nine-year-old WeWork, known for tech-enabled, millennial-friendly office spaces, has ballooned to 500 locations and is reportedly planning an IPO as soon as September. New York City alone has more than 16 million square feet of flexible office space, almost 4% of city's total office space. (Flexible office space includes both coworking and the companies who work in segregated spaces managed by companies like WeWork.)

Expectations for continued growth are high: commercial real estate firm JLL has predicted that flexible office space will jump to 30% of US office space by 2030 from less than 5% now.

Entrepreneurs and major companies alike are eyeing this boom, and WeWork's $47 billion valuation in particular. Coworking Resources, a publication for coworking space owners, found that 65.3% of new coworking space every year come from new businesses. This would suggest that more than 1,500 new coworking companies were created worldwide between 2017 and 2018.

And a variety of real estate experts, from venture capitalists who invest in flexible offices to executives who have ridden the market through cycles, say the field could be getting too crowded. Business Insider talked to real estate experts about how the future of the industry could play out, and how for some companies the options may be to shutter, merge, or specialize.

CONSOLIDATE

“You will see consolidation in the industry,” said Brendan Wallace, co-founder and managing partner at Fifth Wall Ventures, the largest real-estate tech venture capital firm.

Fifth Wall has invested in flex office provider Industrious, which was founded in 2013 and has 75 locations across 40 US cities, including 40 new locations since announcing an $80 million Series C fundraising round in February 2018. “I think it's too early to say exactly the specific dynamics of how that consolidation will take place, whether it will be among peers merging together or larger incumbents acquiring smaller competitors.”

READ MORE: We got a peek at WeWork's top landlords. Here's who is most exposed to the fast-growing, but money-losing, coworking company as it prepares to IPO.

While coworking may evoke images of startups renting a few desks at a time, a big driver of growth is coming from large companies who want a third party to manage flexible spaces that are tailored to their needs. About 40% of WeWork's memberships come from companies with 500 or more employees, according to a first-quarter financial presentation reviewed by Business Insider.

The prize of enterprise-sized contracts may entice many flex-office providers because of longer, potentially more stable, lease agreements, but an office provider also needs scale to meet the demands of big companies.

Fortune 500 companies want to minimize the number of vendors they interact with, according to multiple experts who spoke to Business Insider. They may be enticed by the shorter leases and dialed-up hospitality of flexible offices, but most providers will only stand a chance if they have spaces across the US or the globe.

For smaller flex office providers, mergers can be the fastest way to attain the scale needed to do business with big-ticket clients. Right now, companies in hot markets like New York are competing on price, but any price war is unsustainable, according to a senior executive at a large coworking firm who declined to be quoted by name when discussing competition.

“We're not selling cornflakes here,” the executive said. “You've got to pay your rent in the end, so we have to pay our rent.”

There's precedent for consolidation. OmniOffices, founded in 1962, offered some of the first flexible offices for executives. CarrAmerica, one of the first US real estate investment trusts, purchased OmniOffices in 1997 for $50 million. That combined company bought HQ Business Center the next year for $235.5 million. And Regus (now IWG) bought that company in 2004, paying $302.5 million for more than 300 offices.

Brookfield Asset Management and private equity firm Onex put together a bid to purchase IWG, but the deal fell apart in 2018 when IWG's shareholders indicated they would reject it.

In previous flexible office consolidations, smaller operators were acquired by larger ones That dynamic that could be in play now, as operators look for exits by acquisitions, rather than by going public. One brokerage executive at a large commercial real estate firm said that in the past, smaller providers have “happily” been gobbled up, and now, they're readying for similar talks.

Much of the market is already concentrated with the largest players. WeWork, Regus, Spaces, Knotel, and Industrious make up 60% of flexible office inventory, according to a 2019 CBRE report. WeWork and IWG, which owns Regus and Spaces, own 50% of the inventory alone.

“This is a very capital-intensive business, so growing through M&A is an advantage,” said Scott Homa, director of US office research at real estate giant JLL.

One business's failure could lead to another's success. Homa said one office provider in California is finding its niche by taking over “mom-and-pop” coworking places that go out of business, though declined to name the company.

SHUTTER

WeWork has raised more than $10 billion from SoftBank's Vision Fund alone, bringing its valuation to $47 billion. It's now the highest-valued American startup. By comparison, publicly traded IWG has a market cap of roughly $3.4 billion, though it has around 10 times the number of offices as WeWork.

WeWork has spent more than $10 billion – and lost $219,000 an hour every hour of every day last year, per the Financial Times' calculations.

But chasing WeWork's success could sink more than a few small coworking startups. JLL's Homa said that even in a healthy market, he's seeing such businesses fail because they're not run efficiently. Last month, a five-year-old Orlando-based coworking startup, Catalyst, announced it was closing after the company was crowded out of the local market by out-of-town firms.

It's a model that's at great risk during a recession, experts say. As companies shrink and demand for office space declines, rentals can quickly turn from a revenue source to a liability for office providers. Most companies could be stuck with a web of contracts to sort out.

“A recession will provide a great clearing-out time, so we're left with those that have good sound operating models and are the strongest of the bunch,” said Julie Whelan, head of occupier research for the Americas at CBRE.

READ MORE: Lots of extremely successful founders in Silicon Valley cash out early. But WeWork's CEO pocketing $700 million is still far from normal.

Fifth Wall's Wallace said it's difficult to forecast how many flexible office providers will survive in the medium term, because there are a wide range of expectations for just how much the market will grow.

IWG has had a mixed record with earlier downturns. After the dot-com bubble burst, Regus had to sell off 58% of its UK business and its US business filed for Chapter 11 bankruptcy in 2003. In response, the company lowered costs and diversified the locations of its offices.

Ccoming out of the financial crisis, the company's 2010's £64.6 million profit was a dip of more than £100 million from 2008's profits. By 2011, it profits began to rise again.

SPECIALIZE

Newer companies might find more success by serving a particular clientele than anyone who needs an office.

“I think the world's going to look like the hotel world, where you'll have a bunch of big brands and a bunch of smaller boutique brands,” said Jonathan Wasserstrum, CEO and co-founder of SquareFoot, a commercial real-estate listing service.

These niche brands won't have WeWork's broad appeal, focusing instead on being the office of choice for certain groups. Examples include The Wing, which focuses on women, and The Assemblage, which caters to entrepreneurs with an interest in spiritual wellness.

“I think you'll see more creative, artistic models,” said Fifth Wall's Wallace. “You might see more life sciences and biotech focus models that will emerge. I think you'll see a natural fragmentation.”

To be sure, while some coworking providers might look to work with a single well-defined client base, others want to go where the big money is: Fortune 500 companies. That's already a major focus for WeWork, and it's expected to be a selling point as the company prepares to go public.

READ MORE: WeWork rival Convene is betting a healthcare startup can help it win new customers by bringing office clinics to the masses