The collapse of its planned initial public offering and growing doubts about its financial model are forcing the office-sharing giant to make sharp cutbacks, but for now the company’s large presence in Israel is expected to remain unaffected,
Adam Neumann, WeWork’s cofounder and CEO until last week, is a kibbutz-born Israeli who started the company in New York nearly a decade ago. Today WeWork operates nine co-working centers in Israel, most of them in Tel Aviv, and has three more in development.
It’s the central player in the emerging market for shared office space, making it a popular option for the country’s many startups. In addition, around one-third of WeWork’s 600-person research and development staff are based in Israel.
On Monday, WeWork’s parent, The We Company, filed to withdraw its IPO, a week after Neumann was ousted. Scrapping the IPO marks the conclusion of a tumultuous few weeks for the office-sharing firm, during which concerns were raised about its burgeoning losses and a business model that involves taking long-term leases and renting out spaces for a short term.
By keeping the company private, Neumann’s successors will be able to proceed with the company’s financial turnaround without disclosing as much information publicly.
Two sources familiar with the matter told Reuters that the company is currently looking to trim its workforce and slow down its expansion in order to burn through less cash and be less dependent on fresh funding.
Among other things, it is halting all new lease agreements with property owners, the Financial Times reported Thursday. Bloomberg News said the company was selling the $60 million Gulfstream G650 it bought last year for Neumann to use for travel and meetings.
In Israel, many property owners opted not to work with the company even before the crisis exploded. Shlomo Eisenberg, who controls the Israel real estate company, said as much publicly last June, vowing not to sign a lease with it until WeWork was profitable.
WeWork doesn’t disclose its Israeli financial performance, but real estate sources who spoke with TheMarker said the local operation was profitable on an operating basis.
What worries Eisenberg and other property owners is the WeWork model: The company takes on long-term leases for office space and then rents it out on a short-term basis to a mix of freelancers, young startups and more established firms. It charges premium rents because it offers services and a cool ambience. But investors worry that the model could leave WeWork holding lots of office space it can’t rent during an economic downturn.
By contrast, IWG, a WeWork competitor that also operates in Israel, signs shorter-term leases and recently began franchising, which at the end of June accounted for about 10% of its locations. Eventually it is targeting 90%, CEO Mark Dixon told Reuters in an interview Tuesday.
Dixon said that there was clearly going to be “a flight to quality” that would benefit London-listed IWG. The company has about 27 centers in Israel, according to its website.
However, We Work has been able to expand in Israel thanks to a unique partnership with the property company Ampa. A financially strong and respected property company, Ampa signs leases for properties it then sublets to WeWork, thereby taking on the risks that investors are so concerned about.
“WeWork’s operating model in Israel is different from its model abroad,” said Yair Levy, CEO of Salaryo, which specializes in lending to members of co-working spaces.
Ampa’s risk is minimized because it could operate the centers itself or replace WeWork with its own tenants. We Work is (or was) a brand name that attracted tenants, but it has no specialized knowledge that prevents someone from taking over its business.
Even before the IPO crisis, WeWork Israel had adjusted its strategy and avoiding signing new leases until it signed up tenants for most of the space it was renting in advance.
The three centers now in development — in Petach Tikva’s Kiryat Aryeh, Sapir Tower in Ramat Gan and Schocken Street in Tel Aviv, near the Haaretz building — presumably have tenants signed up.
WeWork Israel declined Wednesday to comment on the impact of the company’s global cutbacks locally. “The company continues to do business with clients as usual. There’s been no change in operations,” it said.
As part of WeWork’s branding strategy Neumann marketed the company as a high-tech startup, pointing to proprietary technology it had for managing clients and rental agreements. It bought a handful of startups and launched an R&D operation.
A source close to the company said it was likely that the 600-person R&D operation would be cut back considerably, including its 200 Israeli staff.