How Recession-Proof Is the Business Model?

The economic crisis of 2007-2008 might seem like a distant past for many people. The US, for example, has since seen one of the longest eras of economic growth in its history. Nonetheless, it’s important to ask the inevitable question: what are the potential downsides the company will have to face in the wake of a recession? Starting in 2010, The We Company was able to establish itself thanks to investing significant capital during an extremely bear real estate market. Even with the current bull market in real estate, The We Company is still running at major losses. The bad news is that real estate was the most affected economic sector in 2008 and will likely be towards the top of the list once again during the next recession. The good news is that real estate prices have historically bounced back fairly well in the world’s major cities. The biggest factor in determining the resiliency of the business model is just how much debt The We Company can take on in order to make it out of a recession?

It took six years for housing prices in Manhattan to rise above pre-housing bubble levels. However, the market skyrocketed after this recovery. Could The We Company make it past an economic slump?

Is Powerful Tech The Dominant Value Driver?

While real estate holdings are an important part of The We Company business model, its leaders are increasingly focused on bolstering tech through major acquisitions. In November 2017, it acquired Meetup (service used to organize online groups that host in-person events). In April 2019, it acquired Managed by Q (a software platform for hiring services for offices). Most recently, in July 2019, The We Company decided to acquire SpaceIQ (software that helps companies efficiently use office space). Perhaps, these moves can help The We Company justify its current IPO valuation. Even though the acquisition strategy seems to be mostly focused on software companies focused on the office building vertical, it’s clear that The We Company is also interested in researching how people utilize space in general. In February 2019, it acquired Euclid, a spatial analytics platform that uses WiFi signals to understand how people relate to spaces and how spaces relate to each other. It’s possible that this technology could be used to not only optimize office spaces but also other specific-use buildings that are part of the We brand.

Can acquisitions help The We Company optimize revenues?

How Will Future Societies Utilize Real Estate?

Owning real estate appears to be a good business strategy; however, The We Company is also focused on building a brand around the community aspect of co-working, co-living, etc. Does this really mean anything if the business could just make money easily by holding on to real estate for 10 or 15 years? It seems that simply owning these buildings would be enough to generate a significant amount of profits over time. Deciding to invest capital in the office space vertical is essentially betting on how the future of work will look like. Since WeWork provides a location that can support larger teams and actively works to eliminate the monotony of cubicle culture, it is betting that the future of work will still be location-based.

Yes, it’s possible that remote workers will choose to pay for a hot desk in one of the WeWork locations. It’s also possible that teams decide to work individually at home and communicate virtually. In that sense, the biggest competition that The We Company faces isn’t real estate giants. It is more likely to be challenged by technologies which have the ability to enhance the capabilities of workplace communication. Two current examples that come to mind are Zoom for teleconference meetings and Slack for internal communications.

Even if the way companies collaborate does become virtual, it’s possible that The We Company could re-purpose office spaces to expand to other business verticals. This ties back into the idea of experimenting with various purpose-specific buildings in order to see which types of business verticals produce revenue and which don’t. If the demand for office space trends downwards in the coming years, The We Company might be able to avoid the negative impact by making a data-driven decision to pivot towards a more profitable vertical.

Predicting how cities of the future will function can be difficult. Take this image from Disney’s Epcot Center booklet in 1982 for example.

Winning Or Losing In Real Estate and Tech?

As of 2019, it’s undetermined whether The We Company seems to be winning in either. The company is taking on massive losses. This seems to be an increasingly common strategy as demonstrated by ridesharing industry giants Uber and Lyft. While companies in the ridesharing industry can reduce costs by not owning their vehicle fleets that depreciate in value over time, companies in real estate are at the mercy of boom and bust cycles. There are other potential red flags to consider. For example, Adam Neumann, founder and CEO of The We Company, cashed out $700 million in company stock ahead of the expected IPO.

Even with hurdles to profitability, the long-term play of redefining how real estate is used on a global scale is fascinating. It’s one thing for The We Company to have the power of a large, global customer base (which it has). It’s another thing to also own (or long-term lease) the real estate that people use on a daily basis and have access to the data that shows how real estate can be used more efficiently in specific nations, cities, and neighborhoods. Simply put, the technology behind The We Company might allow its growth model to be far more adaptable than traditional real estate companies are. It will be interesting to see how it uses data to test new business models and how its core focus evolves with market changes and societal trends over time.