These are boom times for WeWork.
The co-working giant has been scooping up Boston office space at a torrid clip, some 1.5 million square feet in 16 buildings, from downtown towers to Fort Point warehouses. That’s nearly a Hancock Tower of desks that it rents from landlords and then sublets on flexible terms to everyone from freelancers to Fortune 500 companies.
At this pace, WeWork should soon surpass Fidelity as the largest user of office space in Boston, a swift ascent for a firm that in 2016 had two outposts renting desks for a few hundred dollars.
But its meteoric rise in the notoriously cyclical commercial real estate industry also raises a troubling question, with broader implications beyond the fate of one company: What happens when a recession hits, or if WeWork falls?
The dynamic tech and creative companies that have flocked to WeWork for its flexible terms have helped power Boston’s explosive growth, and serve as a bellwether for the broader economy. Likewise, any decline in their fortunes may show up in empty desks at WeWork long before it hits the city’s towers of more traditional office space, making the co-working operator a newfangled canary in the economic coal mine.
WeWork’s fortunes are being closely watched by real estate executives and Wall Street types alike as the company readies for a public stock offering, likely this fall, while gobbling up ever-larger chunks of buildings in cities worldwide.
There are reasons to fret. Just nine years old, WeWork has known only boom times. It’s never reckoned with a recession. The company’s bread-and-butter clients are startups and other companies too small or too fast-growing to commit to traditional long-term real estate, and they are susceptible to vanishing just as quickly as they come.
Oh, and there’s this: WeWork lost nearly $2 billion last year.
“I’m highly skeptical,” said Mark Hickey, director of market analytics at real estate data firm CoStar. “They really could get hit on all fronts. The whole well could dry up.”
WeWork’s basic business model is relatively simple.
It rents floors of office buildings on 10- or 15-year deals, just like any other corporate tenant, decorates them in hip high style, and then re-rents spaces for a premium: basic access for a desk at its Boston locations costs around $500 a month. Its terms vary, from month-to-month for a small operation, to a year or more if a larger company wants a whole floor, but they’re far shorter than a traditional office lease.
“Essentially, they lease space at wholesale, and find companies to rent it from them at retail,” said Aaron Jodka, managing director of client services in the Boston office of real estate firm Colliers.
That works great when the economy is strong, as it has been for years now in Boston. Rents on high-end office space downtown have jumped nearly 14 percent in the last year, according to real estate firm Newmark Knight Frank, and vacancy rates remain low. But at some point, the economy will turn, and indeed there are enough suggestions of looming trouble that in late July the Federal Reserve cut interest rates for the first time in a decade.
In a downturn, it wouldn’t take much for WeWork to get hit. Freelancers and solo entrepreneurs might decide to save on their $500 a month WeWork membership by working from a coffee shop instead. The venture capital firms that float midsize startups could get cold feet and pull their funding, forcing the companies to lay off employees or close outright. Corporate tenants to whom WeWork increasingly leases satellite office space may find they have room to spare again at headquarters.
And because WeWork’s business model isn’t based on the traditional 10-year office lease, with many tenants renting month-to-month, those bustling, hip work spaces could empty out fast.
That’s what happened to Regus, a co-working pioneer that prospered during the tech bubble of the late 1990s but filed for bankruptcy protection in 2003 after the bubble popped and many of its tenants folded.
Regus has long since recovered, and today its parent company, IWG, runs more than 3,000 co-working locations worldwide. But WeWork’s footprint in Boston, New York, London, and other big markets is far larger than that of Regus, and the ripples from any recession could be felt more deeply.
“It’s really hard to say what happens to them in a downturn,” said Danny Ismail, an office market analyst at research firm Green Street Advisors. “Regus in the 2000s didn’t work out very well.”
Executives at WeWork declined to comment for this story, citing their upcoming initial public offering. But they have previously expressed confidence that WeWork can weather whatever tough times may come.
Indeed, they argue that their flexible-lease model would prove even more attractive to tenants who don’t want to be locked in to a long-term lease on space they can’t fill.
For some big landlords, WeWork’s particular business model is a little too chancy, and they have opted to keep their offerings to just traditional tenants. Others have limited how much space they devote to co-working leases. Some of the bigger property owners, such as Boston Properties and Tishman Speyer, are even experimenting with renting their own flexible office spaces.
No matter what happens, a slowdown in WeWork’s growth spurt is likely inevitable, real estate analysts say.
At some point, Jodka said, the company will have to turn around its huge losses.
“They haven’t been focusing on profits, they’ve been focusing on growth,” he said. “Time will tell if they can make money at this.”
Still, WeWork has ridden a wave of young, fast-moving companies of the sort pouring into downtown Boston. Many don’t know how big they’ll be in five years, said Wil Catlin, managing principal at Boston Realty Advisors, and don’t want to tie themselves down for 10 years in space they may outgrow — or never need. Nor do they want the hassle of building and managing their own offices.
“It’s not overly complicated,” Catlin said of WeWork’s appeal. “That flexibility is what people are buying. They’re not going there for the free beer.”
Karin Brandt would agree. She’s cofounder of coUrbanize, an online real estate startup that first moved into a WeWork 18 months ago and has switched offices several times since it has grown. Before her latest move, Brandt thought about subleasing a more traditional office, but ultimately secured her current spot with just a few e-mails.
“I did the whole thing in 20 minutes. I didn’t have to go to lunch with anyone. I didn’t have to hire a dedicated office manager to manage furniture and a buildout,” she said. “As a startup, time is the most important thing, and we want to spend time on things that drive growth. An office move is not driving growth.”
Increasingly, WeWork is making that pitch to larger companies.
Already, the company counts one-third of the global Fortune 500 among its clients. Amazon, Liberty Mutual, and General Electric have based some of their Boston employees in WeWork spaces, and the company is designing many of its newer locations to lure tenants that might rent a whole floor, as shoemaker Puma did at a WeWork office on Arch Street while it builds a new headquarters in Somerville.
In its biggest Boston deal yet, WeWork recently leased four stories at 40 Water St. — 97,000 square feet — to catering services firm ezCater.
About 500 ezCater employees moved in during July, and there’s room for another 250. WeWork custom-built the space for ezCater, swapping its glassy and black color scheme for ezCater’s trademark green and white.
It also paid for all the furniture, the pricey cabling, and its food-themed conference and huddle rooms.
Bobby Mirabello, ezCater facilities manager, acknowledged it probably would have been cheaper to lease raw space, but all those extras that WeWork handled made this a less-expensive option overall. The clincher, Mirabello said, was a five-year deal.
“We really liked the flexibility that offers,” he said. “We want to be able to pivot if we need to, and keep our options open.”
That flexibility won WeWork its biggest client yet in Boston. But it also means that in just five years, WeWork could be in the market for another big tenant, with potentially another custom buildout, to fill the space — no time at all in traditional real estate terms.
It’s a substantial risk, for WeWork and — potentially — for its landlord at 40 Water St., real estate firm Related Beal, which declined to comment. For now, it’s a chance WeWork, and a growing number of landlords, are willing to take.