The postponement of shared workspace real estate company WeWork's Wall Street IPO is generating considerable uncertainty about its continued expansion, including in Israel. Concern is being expressed about a possible (still theoretical, at this stage) cash flow crunch that the growing company is liable to encounter due to the absence of the capital it planned to raise on Wall Street.
If such a shortage materializes, it is liable to hamper WeWork's rapid expansion, following the very rapid increase in the space that it rents (and sublets to others) in recent years, when it began activity in dozens of cities around the world, and its holding of hundreds of properties. This expansion included Israel.
A warning about the risks incurred in WeWork's operations was sounded last June by Shlomo Eisenberg, chairman and controlling shareholder of income-producing real estate company Isras. At a local conference attended by senior figures in the sector, Eisenberg said, "I still don't understand the WeWork phenomenon. When I rent out substantial space in my properties, the first thing that I do is check the tenant's balance sheet, because I believe that a company that isn't making a profit can't pay rent - that's my point of departure. There's no doubt that the model that WeWork offers is exciting and innovative, and that's why so many imitators followed in its footsteps, but I don't understand it very much. I haven't seen WeWork's reports, and I read about them only in the press, but when they show a profit model, I'll rush to rent space to them."
"The company will be unable to continue pouring in cash"
A capital market source said today, "Despite the postponement of the IPO, it does not appear at this stage that WeWork will reduce its activity space. We will first see a slowing in the rate of expansion, with less new offices space being opened than up until now. It appears that the company will be unable to continue pouring in cash at the same rate as it has until now without having financial backing. Later, if the situation does not change, it is likely to have to take additional measures." Investment house Value Base senior research analyst Shay Lipman is more optimistic. He told "Globes," "I assume that WeWork's IPO will eventually take place. Meanwhile, the company can continue raising money privately, as it has up until now."
Lipman says, "Halting the IPO at this time is not likely to affect the company's expansion, certainly not in Israel, and does not constitute a risk to the companies that hold properties. Even if WeWork falls, there will be those who will take its workspaces in its place, whether competing companies or the property owners."
As part of its rapid deployment, WeWork offers many shared workspaces in Israel, and as far as is known, it currently holds and operates office space in 10 properties in Israel, most of them in Tel Aviv. Its biggest deal in Israel to date was renting space in the new ToHa office tower built on Yigal Alon Street in Tel Aviv, where it signed a NIS 300 million long-term lease with the owners, income producing real estate companies Amot Investments and Bayside Land Corporation (Gav Yam). The 15-year lease, which was for four floors, was later expanded by WeWork to six floors, making the company the biggest tenant in the property.
Another headline-grabbing property rented by WeWork in Israel is a building on Dubnov Street in central Tel Aviv, the company's first property in Israel, which it last year rented out in toto to technology giant Microsoft. This is WeWork's only deal in Israel on this format, which it has used for others of its properties around the world.
WeWork also has space in other places in Tel Aviv, where its local headquarters are also located - on Begin Street. It also has space in Bayside Land's project in Beer Sheva and space in Haifa, Herzliya, and in downtown Jerusalem in the landmark former Hamashbir building in King George Street.
Operations in 100 cities in 30 countries
WeWork began its operations in Israel in 2014, and the local market was the company's second business location outside the US, where it began operating in 2010. Looking ahead, WeWork has already announced that it plans to open another property on Shocken Street in Tel Aviv in late 2019, and it intends to expand next year to the Sapir Tower in Ramat Gan and to a building in Petah Tikvah, which will give WeWork 13 local properties.
WeWork, founded by Israeli CEO Adam Neumann, his wife Chief Brand and Impact Officer Rebekah Neumann and Chief Culture Officer Miguel McKelvey, set up and manages shared workspaces all over the world. The company splits office space, which it rents, into rooms and spaces, and then rents them out by the room or the desk, usually for short periods. According to figures reported by WeWork in recent months, it has activity in 500 buildings worldwide spread among 100 cities in 30 countries.
WeWork's model is based on usually renting space from property owners for long periods and subletting it to third parties, whether private individuals or business concerns. This model incurs heavy costs: renting a property, renovating it, marketing it to new community members, and absorbing the expenses until the building is fully occupied by tenants. In this framework, WeWork operates the properties and provides all of the tenants' needs, including providing a wide range of services to its customers. As far as is known, some of the money that WeWork planned to raise in its IPO on Nasdaq was earmarked for buying properties that would make the company not only a operator of a property, but also its owner.
According to the figures on WeWork's website, it offers several models for renting space. Among the main models are renting a private work table, a shared work table, and a private office. In most cases, the price range in WeWork's properties in Israel begins at under NIS 1,000 a month, and reaches as high as NIS 3,000 a month, depending on the renting model and the location of the property. These prices are relevant for a private tenant, while in cases in which it closes a contract with a company, the rental periods are for the long term, and the rents change according to the company's needs and the supply of space.
"Shaking up the offices market"
As a result of its high-speed growth, WeWork has attracted quite a bit of interest among income-producing real estate operators in Israel. Some industry leaders recently referred to its influence on the sector at the June real estate conference. WeWork VP real estate Uzi Levy responded to Eisenberg, saying, "Keep in mind that the company is opening commercial centers on the scale of Azrieli Tower every month, and there's no doubt that development expenses are affecting its balance sheet and its size… WeWork is not just making a change; it's giving the offices market a real shakeup, because it's bringing something new into a conservative market and the point here is a community, not shared workspaces - a workspace that provides a completely different user experience; it's part of the community… About 40% of WeWork's space today is of the world's largest corporations. It's not just space that provides a substitute for a startup founder who previously worked in a café."
Mivne Group CEO David Zvida said at the conference, "We already have dozens of shared workspaces prototypes, whether the same company is present as an anchor tenant of the whole building or only part of it. If a company like WeWork is in a veteran property of ours, this is an advantage, because it can generate an upgrade, both for me and for itself. I'm not sure, though, that it's worthwhile for such a company to be in a new building, because it sometimes detracts from its value." Aviram Wertheim, chairman of real estate investment company Alony Hetz (the controlling shareholder in Amot, which holds the ToHa Tower), also referred to WeWork at the conferences, saying, "Shared areas are here to stay."
WeWork, it was reported last week, has postponed as of now its plan to raise $3 billion in an IPO in the US. The IPO was designed to fund the company's continued rapid growth. Investors were unenthusiastic about the IPO, even after the drop in the sought-for valuation. The reports about the valuation for WeWork in the IPO first mentioned the enormous sum of $47 billion, but this later fell to $15 billion, and even that did not help the company complete what it had planned.
Published by Globes, Israel business news - en.globes.co.il - on September 22, 2019
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