Back in 2015, Adam Neumann and WeWork had characteristically big dreams for its co-living division, WeLive. According to an investor presentation published by Buzzfeed, WeWork estimated that WeLive would grow from the two locations opening that year to a business that could cater for more than 34,000 residents across a 10.4M SF portfolio with 91% occupancy by 2018. This business would produce revenue of $606M, WeWork told potential investors.
As recently as 2018, Neumann told Wired in an interview that “WeLive is going to be a bigger business than” the coworking division of WeWork. “You can write that,” he added.
The number of WeLive locations today? Still just those first two.
Courtesy of WeWork
WeLive in Crystal City
A third is expecting to open in Seattle next year, adding to the existing facilities in New York City and outside Washington, D.C.
WeWork tore up the world of office real estate, and has grown faster than anyone in real estate predicted. But by its own lofty ambition, WeLive, so far, has been a disappointment.
In the initial public offering prospectus WeWork’s parent, The We Company, filed last month, WeLive’s revenue was not mentioned, presumably because it was such a small proportion of the $1.5B revenue figure the company revealed for the first half of 2019. WeWork acknowledged in the prospectus that WeLive “may not generate meaningful revenue or cash flow.”
That isn’t down to the co-living sector generally, which, after a slow start, is now seeing an explosion, with brands like The Collective, Common, Ollie and Medici securing equity and debt funding and securing sites to build up pipelines of tens of thousands of units in the U.S. and UK. Rather, it is an old story applied to a new company and a new sector.
Co-living might on the surface resembling coworking, but in fact, one of the only things in common between the two sectors is the first two letters. Co-living is harder, slower and the profits are made in a different way. WeWork was right to identify that the living sector would be bigger than the working sector. But it was wrong to think it could make as big an impact as quickly.
“Google searches for the term ‘co-living’ look eerily similar to both the number and the exponential trajectory of ‘coworking’ searches six years earlier, implying a long runway of demand lies ahead for co-living,” Ollie CEO and co-founder Chris Bledsoe said.
Small, private bedrooms around shared common areas can bring the price of apartment living in big cities down, and therefore meet one of the defining consumer needs of our time. But meeting that need in practice is not easy, as WeWork has found.
WeWork expanded rapidly in the office market in large part by taking older, often quite boring office buildings and refurbishing them, giving them the lively and modern feel of a Silicon Valley tech office.
In co-living, WeWork’s original strategy also was to convert these kind of office buildings to rental apartments. Its first two projects, at 110 Wall St. in New York and 2221 South Clark St. in Crystal City, were retrofitted offices. When it began looking for schemes in London, this was its focus as well. The problem with this strategy is that it is much simpler to build cool offices out of an old office building than cool apartments
“It is a lot easier to build when you are doing it from scratch, and the majority of our portfolio is ground-up development,” Common CEO Brad Hargreaves said. “You can get in a lot of trouble when you try to cram co-living space into an arrangement where it might not be straightforward.”
Google Maps
110 Wall St., the building that houses the first WeLive
Inserting the right plumbing and electricity is a challenge compared to ground-up development, Hargreaves adds. Bledsoe pointed out that existing office buildings tend to have deep floorplates, which, for a co-living operator, tend to translate into a lot of wasted, non-rentable interior space; most markets require bedrooms to have a certain amount of light and air.
“By comparison, these deep floorplates, the interiors of which can be legally densified with desks not bedrooms, tend to have a higher and better use for coworking operators,” Bledsoe said.
The thing about converting offices is that even if it is hard and not ideal, it is a lot quicker than building from the ground up, and WeWork has always seemed like a company in a rush. In New York and D.C., WeWork announced that it would be turning offices to apartments at two of its buildings in spring 2015, and both were open by May 2016. Its development in Seattle, if it opens in 2020 as planned, will have taken about three years.
Then there is the business model of co-living versus that of coworking, which lends itself to a different time horizon and return criteria.
“Co-living is a challenging space in which to make money,” said Zafar Bhunnoo, former director of UK co-living operator Spaces and an independent co-living expert. “In co-living, you can only lease space on a one-for-one basis: You can only rent a room to one person at a time. In coworking, you can sell things at 120% and rely on a certain amount of people being absent at any given time.”
Bhunnoo also pointed out that compared to offices, rented residential real estate is a highly regulated sector in most markets around the world, and the cost of fitting out apartment space can be 40% to 60% higher than fitting out workspace.
“If you look at The We Company, what they’ve done is build a solid and simple playbook where they can deliver desks to companies in a matter of months, and those companies keep coming back for more,” Bhunnoo said. “WeLive pales in comparison.”
Bledsoe pointed out that for WeWork’s biggest backer, technology investor SoftBank’s Vision Fund, it made more sense to allocate capital to WeWork rather than WeLive, especially given the strategy of “blitz-scaling”: growing a company as quickly as possible to build up a big market share.
“I can’t say I speak for the We team, but in many ways, I suspect they may be a victim of their own success,” he said. “In coworking, they’ve created one of the most impressive arbitrage-unlocking machines the world has ever seen, densifying desks onto an office floorplate and quickly converting the world’s latent office inventory into cash, save all the corporate overheads.”
In contrast, the economics for a co-living operator are muted by the institutional landlord’s tendency to favor less profitable, easier-to-break management contracts over higher-octane master leases, he said.
“That is a function of wanting to maintain the tenant diversification benefit that is a central aspect of a multifamily asset’s profile, and therefore its tight cap rate,” Bledsoe said. When you factor in longer time frames and higher construction costs, it just doesn’t work as well for VC backers that want to grow fast.
“All of which add up to an altogether longer gestation period for capital, something that VCs functioning on a five- to seven-year fund life don’t have the patience for,” Bledsoe said.
The type of business WeWork has become might also have played a part, Hargreaves said. The move away from individual entrepreneurs and smaller companies toward larger, enterprise clients, which now make up 40% of WeWork’s rent roll, means there are fewer synergies between WeWork and WeLive. Whereas once the company might have planned to cross-sell members desks and beds, that is not as important, given the focus on big corporates.
“We’re not seeing big companies putting their employees in shared-suite co-living spaces, the companies that do need to house employees are still doing it through the traditional serviced apartment companies,” Hargreaves said. “As the focus has moved from entrepreneurs to enterprises, I think it has just become less of a strategic priority.”
WeWork declined to be interviewed for this article, but public appearances by James Woods, who the company hired to run WeLive in 2017, show the company is not unaware of the growing pains its co-living division has encountered.
“I would just say that we as a company want to take the time to refine this product and get it right,” Woods told Bisnow in spring 2017.
Does it matter for WeWork that WeLive has had such a slow start? Maybe, if it genuinely wants to be a player in the space, and fulfill its promise to be more than just an office company. In 2015 when it first announced plans for WeLive, co-living was a much less crowded field. It has likely lost its first-mover advantage.
“It’s also more protectable [than coworking] for early movers like Ollie who develop the intellectual property — the brand, technology and know-how — to successfully manage multiple layers of operational complexity and build trust among risk-averse institutional investors who are less likely to bet on an unproven operator,” Bledsoe said.
Can co-living do without WeLive? You bet. Bledsoe points to a 30% premium for co-living schemes compared to conventional apartments. Hargreaves points to Common’s development pipeline of more than 10,000 units across 100 buildings. Medici Living Group, based in Europe, has already taken to the nickname “The WeWork of co-living” after raising $300M to fund a U.S. expansion. For once, WeWork is the company being left behind.
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