WeWork used discounts to convince tenants to move to new locations
- WeWork's massive expansion in recent years left more than 30 million square feet of new office space to fill.
- In at least some instances, it sought to fill new or under-occupied locations in the United States by offering discounts to existing members at higher occupancy locations to convince them to relocate, according to sources familiar with the schemes.
- The discounts can be as steep as half the ongoing price, a source familiar with the deals told Business Insider, or months of free rent, another source said.
- In its paperwork for the first public offering, which has since been partially scrapped for concern with its business model, WeWork revealed coatings on buildings that have been open for two years or less ̵[ads1]1; but not for older ones.
- Read full Business Insiders WeWork coverage here. [19659006] WeWork's huge expansion in recent years put pressure on the company to fill large volumes of new office space.
One way sales reps did it was to convince US-based tenants at some of their older locations to relocate, using deep discounts as a lure, four people familiar with the event told Business Insider. The agreements in some cases helped fill the newer office space, as the company took on a growth style that provided more than 400 new locations in three years.
Incentives for filling new buildings are relatively common in the real estate industry. Fuller, thriving buildings are often seen as more attractive to future tenants, who do not want to be isolated in a large, relatively empty place. This is especially true for WeWork, which provided a sense of community and an opportunity to network part of its path to potential newcomers.
WeWork's ability to quickly attract tenants to its new buildings was also a core part of the path for Wall Street investors. Although the areas have losses in the first year or so after entering into a lease, they quickly become money makers because they quickly reach a high occupancy rate and stay that way, the original paperwork states.
However, little has been revealed about how WeWork accurately filled these buildings so quickly. WeWork said in its S-1 filing that it had in some cases used discounts when it opened new locations at a faster rate and to encourage longer contract terms.
This submission came when WeWork was still publicly committed to aggressive growth under co-founder and former CEO Adam Neumann.
At least one manager of commercial real estate who was familiar with the schemes said that these agreements would potentially result in losses to WeWork. "There is not enough margin on [profit] to give a 50% discount and you are not underwater," said the management.
As the company's new management team shifts its focus to providing the WeWork economy after Neumann expires, it is possible that these types of agreements can be reassessed. WeWork has now delisted its IPO indefinitely, and it told The Wall Street Journal last week that it anticipated that the pace of signing new leases would slow down as it pursues "more strategic growth."
A representative of WeWork declined to comment. [19659015] WeWork took advantage of particularly generous promotions for landlords in new locations
In trying to fill up the new areas, the sellers in some cases resorted to particularly generous promotions, offering discounts to both new and existing customers, those familiar with the agreements were told.
The starting point for discounts for existing tenants was a free month of a year-long contract, but account holders or sellers could offer even more generous terms or different types of incentives, such as reducing the monthly rent or offering additional credit for things like supplies and services , said a former New York-based WeWork sales rep.
In other cases, WeWork reached sales representatives to companies in existing locations that had discounted agreements that were about to expire, says the commercial real estate industry. It agreed to extend these agreements if the companies agreed to relocate to new low-occupancy locations, the executive says.
Under the offers, tenants could pay half the price for their seats – or less, management said. By moving, the companies were able to perpetuate these discounts, management said.
Alternatively, tenants could get a larger office at lower demand than they had at one with greater demand at the same or lower price, said the former sales representative.
"Everything to get the deal done," said the sales representative.
WeWork offered such campaigns to convince existing tenants to relocate "a number of times," a former employee who worked in said the company's New York headquarters.
Traditional landlords sometimes take similar steps when opening new buildings or locations, said Jeff Langbaum, a Bloomberg Intelligence real estate analyst.
But in the traditional office market, leases cover several years – at least three and often much longer. Generally, landlords balance initial discounts with higher rents later that pay for them. However, WeWork customers usually only sign short-term leases, giving the company little time to repay discounts.
The average lease for WeWork's customers is only for 15 months, and many customers can break their agreements with just one month's notice, the company said in its IPO papers.
Because of that, there is no real financial benefit to WeWork moving tenants from older to newer facilities, Langbaum said. The only advantage there seems to be is to show higher occupancy in the newer locations, he said.
Within 18 months of being open to residents, the average WeWork space is 89% full, the company said in its IPO. The space is generally still on that coating after two years, the filing states.
WeWork did not disclose specific details of coatings in places that have been open for more than two years. The company considers such spaces to be "mature" with "generally stable" coatings, it says in its IPO papers.
What WeWork offers is "a short-term lease that can easily run without anything left at the end of it," Langbaum said, making it seem like the company is "really just playing a numbers game."
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