WeWork Israel to Drop Shared-residence Plan Amid Global Cutbacks

But sources say its basic business is expected to continue thanks to its partnership with property company Ampa

A man walks into a WeWork space in the Manhattan borough of New York City, New York, U.S., October 4, 2019.
\ CARLO ALLEGRI/ REUTERS

WeWork Israel is expected to delay its entry into new markets after its U.S. parent’s initial public offering collapsed last month and its Israeli founder stepped down as CEO, real estate sources told TheMarker.

The biggest casualty of the upheaval is likely to be WeLive, the company’s plans for a residential equivalent to its shared-office-space business. In addition, WeWork Israel will delay plans to roll out new shared-office-space centers in outlying towns that were aimed at small businesses not in the high-tech industry.

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WeWork Israel, which today employs about 500 people, is expected to announce layoffs shortly. It did not respond to TheMarker’s queries for this article.

Over the last two years, the Israel unit had been developing plans for shared housing, including one being planned with the Tel Aviv municipality and the Azrieli property development group to be located on Menachem Begin Boulevard. It would have followed a model developed in the United States – rental units comprising a bedroom with a shared kitchen, bathroom and other facilities.

The We Company, WeWork’s U.S. parent, hasn’t crafted a plan for WeWork’s global operations, nor has it given any express instructions to its Israeli unit. But media reports have said WeWork will slow its global expansion and cut its total head count by about 2,000.

WeWork is also expected to try to renegotiate its leases with landlords and strengthen its balance sheet. Until now, the company had been taking on major debt on the assumption that its IPO, based on a preliminary valuation of $47 billion for the global company, would inject huge sums.

The layoffs are expected to come mainly in management as well as research and development. WeWork employs 500 people in its global R&D, 200 in Israel. The Israeli R&D staff, however, is not part of the Israeli operating company; rather, they report directly to WeWork’s U.S. headquarters.

The R&D staff perform two functions; one is the development of new products and services, which is expected to bear the brunt of the layoffs. The other is to develop software and run the company’s information systems, jobs more likely to survive.

Cost cutting will affect WeWork Israel’s expansion plan but isn’t expected to affect its current operations. That’s because WeWork uses a different business model in Israel than it does elsewhere, which is expected to insulate the Israel unit from the worst of the cutbacks.

In Israel, WeWork has a partnership with the property company Ampa, which leases space for WeWork facilities from landlords and then sublets it to WeWork or owns the buildings itself in exchange for a share of the profits. Ampa is responsible for financing and renovating office centers to WeWork standards and is guaranteed certain revenues to cover its costs before profits are distributed.

By comparison, in the United States, WeWork pays rent to landlords rather than shares profits. The Israeli model lets the company avoid capital costs developing new office facilities and reduces its risk. As a result, WeWork Israel isn’t carrying part of the parent company’s enormous debt.

Sources in the real estate industry say that without the Ampa partnership, WeWork would not have been able to operate in Israel at all because its finances would have deterred landlords from signing contracts with it.

The two sides signed a five-year contract when WeWork first entered Israel in 2014 and are negotiating a five-year renewal. Industry sources say Ampa is satisfied with how the partnership has worked, and the renewal is expected to be completed without any special problems. But the division of profits may be revised.

“We believe in WeWork’s business model, which acts as the basis for our agreements with the company,” Ampa said in a statement. “The business results of the partnership prove that.”

WeWork does not break out its Israel business’ finances, but sources in the real estate industry believe that its nine centers – with three more in development – are profitable on an operating basis.

WeWork takes long-term leases on office space and, in effect, sublets it to large numbers of tenants in units as small as a desk. In exchange for a package of related services and its “cool” ambience, the company can charge premium rents.

But its model met resistance from the stock market during its abortive IPO because a recession could leave it holding massive lease commitments without any guarantee that it will have tenants to fill its facilities.

The WeWork Israel model theoretically leaves Ampa exposed to the same kind of risk. However, real estate sources say that as a large and experienced property company it would be able to operate the facilities as shared-office facilities on its own or rent them out as traditional office space.