WeWork expands in London amid Brexit uncertainty

US startup set to become the biggest private tenant in the city

LONDON: A seven-year-old US startup is set to become the biggest private tenant in London just as the UK.’s economic outlook worsens.

Three years after entering the British capital, WeWork Cos has signed leases that will make it the city’s No. 1 private-sector user of office space, according to data compiled by CoStar Group Inc for Bloomberg.

The rapid growth makes WeWork, valued at US$20bil, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.

“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015.

“In the present uncertain market many people are hoping that the WeWork model works –- but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalised business, but if the cycle turns down, then the model looks vulnerable.”

WeWork’s success in London depends on demand for flexible office space growing fast enough to keep rental income above the historically high rates the company pays to lease its properties. While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments.

WeWork, through a spokeswoman, declined to be interviewed for this story. The firm currently operates 17 London locations, with two more opening soon and a further 10 announced.

It has also begun buying some buildings and is in talks to purchase a 12-building campus close to Liverpool Street station from Blackstone Group LP for about £600mil (US$807mil).

WeWork’s rapid growth in London means that at a minimum it has committed to paying about £815mil of rent in the future. Of that, £231mil must be paid over the next five years, according to its British unit’s accounts filed in late October. Membership income for WeWork UK Ltd was £61mil in 2016 and the division posted a loss of £11.1mil.

Growing demand for flexible leases has drawn increasing competition. Blackstone bought The Office Group for about £500mil earlier this year and plans to expand the business while British Land Co, the UK’s second-largest real estate investment trust, has started Storey, a new flexible workspace brand.

There were almost 1,140 serviced office and co-working facilities in London in April 2017, up from around 490 in 2012, according to data collated by broker Instant Offices.

Founded in 2010 in New York, WeWork started life offering short-term offices and has expanded into a diverse range of areas, from co-living to kindergartens, all of which centre on the idea of creating a community. Created by Israeli Adam Neumann and American Michael McKelvey, the company has also begun branching out from purely leasing office space and has now begun purchasing properties in London and New York.

WeWork has average occupancy of 90% across its London portfolio, according to a spokeswoman. Part of WeWork’s appeal is that tenants are sold memberships, rather than leases, which offer access to an app designed to facilitate collaboration with other occupants, together with regular events, discounts on a range of services from gym membership to health insurance, as well as free beer and prosecco, all designed to foster a sense of belonging.

In recent years, big companies as well as startups have chosen to use co-working spaces for some employees. WeWork has secured deals with firms including International Business Machines Corp and Amazon.com Inc in its US business and is seeking similar deals with blue-chip tenants in London.

Some companies have as many as 600 people in WeWork sites, McKelvey, the chief creative officer, told Bloomberg in an interview in July.

While WeWork has helped stoke demand for London’s office space, some say the risk is simply being passed down the chain. Rather than a landlord needing to rent out its offices, it’s now WeWork, the renter, that needs to find a steady supply of businesses to fill its spaces.