March 8th, 2019
On this episode of QuestCast, I chat with Maciej Markowski the founder and CEO of SpaceOS, an office space management software solution for “creating digitally native workplaces that connect and communicate with their tenants.” Here, we assess WeWork’s astronomical valuation, talk about the differences between WeWork and Regus, and look to the future of flexible real estate particularly with respect to technology and the implications for hospitality.
Edited for clarity and brevity
There are analysts and journalists out there that are skeptical about WeWork’s valuation. For you as somebody that works within real estate tech, how impressed are you with the work that they're doing in terms of the technology?
It is a scarily complex question to address so I'll try to go through in an organized way. On one level, absolutely that valuation is a bit wild when you compare it to Regus for instance or IWG. Their per-desk valuation is outrageous. Someone calculated it and it was like $100,000 per desk. It doesn’t make any sense when you look at it from the hard-nosed real estate perspective. If you believe that they [WeWork} are the ones that will really revolutionize real estate, and that they will create this workspace as a service thing for corporates, like the way that most corporates outsource part of their accounting, HR or or legal.
If WeWork is able to convince the corporates that it is the real estate expert; if they are able to do something like Marriott International which is a management company for hotels, where they just have a great system and list of rooms and trainings to create a Marriott franchise, if WeWork is able to pull that off then the valuation starts to make more sense. Then you add the thinking - and I think I read this somewhere in one of the Softbank interviews - that they were looking at WeWork as a company that can advertise to their members all day long.
If you're able to monetize those users and they're at your space, then all of the sudden you're like Facebook on steroids and you can control what people are seeing and buying and to a degree that's the play that we have with SpaceOS. To enable people to buy things to interact with things. That door is open up for us too, so I understand what they're trying to do.
And if you combine those three things then I believe that the evaluation starts to make some sense. I still think that it's a little bit crazy, but it's not as crazy as a regular real estate people person might think.
Difference between WeWork and Regus
Luke: How different is what WeWork is doing compared to what Regus is doing?
Maciej: A few years ago, Regus was way behind compared to WeWork - but they have an impressive tech team nowadays. I had the pleasure of speaking with their innovation director a couple of weeks ago and I see they are smarter about how they design offices and with the tech experience that they're creating.
I don't think that they have this raging ambition that WeWork has in terms of revolutionizing everything from A-Z but speaking about the member experience, I think they're closing the gap. It's also important to remember that WeWork’s spaces are newer. Regus has been around for over 20 years, so they have a truckload of legacy spaces.
My colleague was in Newcastle and he visited a Regus space. I should read you his comments you would sell all your Regus stock that you have. But then there are other [Regus] spaces that are very good so that the experience that you may have at Regus varies from location to location. The newer ones are smarter locations compared to the ones that they acquired ages ago.
WeWork in a Downturn
One more thing… I think that everyone is thinking that WeWork will have massive trouble when the next recession hits. I don't think it will be easy for them, but I also don't think it will be as bad as people think. Regus imploded when the recession hit - I think twice even, that's why they're called IWG nowadays. But they also had a different strategy.
WeWork raised an immense amount of funding so they have a big surplus that they can survive on. And also - from what I know - they structured their deals so that it's no longer that they're just signing five-year leases and then signing on companies for six months etc. and then charging a premium. I think that's what they were doing initially - almost like a description of the last financial crisis, but now I think more and more they have deals with landlords where they share the risk. I think they also have some of their agreements forces them to buy some of the spaces.
When the next recession hits, what it will accomplish is that it will wipe out a lot of the smaller [coworking] ones. I remember reading a study that over half of the coworking spaces are not profitable. But those that are 100 and 200 people, 80% of those are profitable. I think the people that will struggle are the smaller coworking spaces.
Additional room for growth in flexible commercial real estate
That's an interesting thing you said about WeWork and the space in general in terms of what the impact is going to be once the downturn hits – or maybe it will never hit - who knows but obviously there's some cyclicality that the sector needs to deal with. How much bigger can they [WeWork} really get? Do you think that the space is getting saturated, or do you think there's still plenty of opportunity to grow?
It's nowhere near the peak. It's probably the early majority. I remember reading a JLL report saying that that 30% of office workers will be coworking by 2023 or something. Some reports have suggested 50%, but I don't think so for various reasons. Things like companies wanting to own their brand and to control the space deeper than what WeWork allows. I think that 30% is a reasonable point and there's a long way to reach that.
I remember doing some estimations - and this is very much back of the napkin calculation - I remember counting have something like 300,000,000 people in modern global office buildings, so if you think about one-third of that is roughly 100 million being in flex offices, then we still have a long, long way to go.
If you're in New York or in London and you're thinking there's a WeWork everywhere, that is not the case almost everywhere else. After New York and London there's Dublin with five spaces Berlin and Paris have quite a few, and there are some cities in the U.S. of course. But then you have Barcelona, Madrid, Frankfurt, Prague - you name it.
The entry of corporates into WeWork
Do you think that the entry of the corporates into WeWork will negatively or positively impact the corporate culture of the company?
I cannot see why WeWork couldn't do what almost any other hotel has done. Like Hilton or and DoubleTree by Hilton or Marriott and Marriott Courtyard, or any of that almost anyone that has a brand that splits into two different target segments of the market. So, I think or imagine that they will go down that path somehow. I think there's a lot of benefit for startups to be near corporates and corporates to be near startups. Yes, the needs of startups and corporates are different. Things like security and privacy requirements.
That is why there are companies out there that think they can do better than WeWork. Hey, we can do better branding, we can do better security, better privacy. I'm actually sitting in a WeWork today and most of the windows are [inaudible]. So I can imagine a corporate security officer going crazy about that.
There are also benefits for startups working near corporates. If you're a fintech startup and you're not working with a big bank, then then you're in trouble. Kind of like us being a property tech startup. It's great being next to the big developers.
That kind of goes back to the skill-sharing element of the technology, right?
Exactly. There is a massive WeWork in Farrington. On one floor it’s very much coworking and start-up focused. Everything above is corporate. With bigger companies it somehow works. It's not that hard to divide it up. If you think about any corporate there's a finance Department, there's a marketing department, you switch from floor to floor and it's different.
I think they're quite smart. They're pretty data-driven and pretty good at offering various options: fixed desking, hot desking, or a private office, or of a corporate part of the space they kind of recognize the different needs.
The convergence of coworking and coliving
You mentioned aparthotels so let's switch the conversation a little bit and talk about the intersections between hospitality and coworking. We’re seeing more and more hotels incorporating co-working into their business model, and we're seeing with The We Company re-brand, a clear focus on the co-live product, which is not typical hospitality, but nevertheless they are offering per diem rates on rooms. Is WeWork a potential contender within the hospitality space?
I would say that a lot of the hotel groups are amazingly positioned to create coworking spaces. Firstly, many of the hotels survive on business travelers. I think most of the revenue for a lot of the big hotels come from business travel. If you ever tried to work in a hotel then you know what it's like. So for them, to have a coworking-like space makes total sense.
Secondly, they are best prepared for providing great user experience. They are all about the guest. If you just look at the read the business books about the spirit to serve by Marriott or any of these they're really, really focused on keeping people happy, and they're used to this high-touch approach.
The typical [coworking] facility or office manager isn’t used to that. If anything, they often want to be left alone and not bothered with requests, and so there actually have a lot of strong points if some of the hotel chains say OK, let's do coworking. I think that they can do some amazing things.
We have a client in Israel that is actually launching in May, so I have to be cautious what I say, but it’s a hotel chain in Israel and they are also opening their own chain of coworking that would be locating in the same building or within a 5-minute walk from the hotel. I think it makes so much sense. I think it's perfect.
I'm a big fan of the Ace Hotel they turned that lobby into an amazing space where guests love to come. Hotel lobbies can be much better, and hotels are starting to understand that. They’re also starting to understand they need to provide a better experience for business travelers.
Thinking about Wework and co-living. I think they have a very decent understanding of young folk. I'm only 30 so I'm right on the cusp. In the expensive cities like New York, London, Tokyo, Oslo, Zurich - that makes total sense for young people.
We have quite a few clients in the coworking area that have created their own small co-living areas adjacent to their coworking areas. Because there are people visiting that start-up, they live and work out a project and then all of the sudden there is a space for you to stay.