The co-working business model — which propelled co-working giant WeWork to a $16.9 billion valuation last month — may be changing tack.
WeWork has carved out a niche for itself by signing long term-term leases for office space that it then refurbishes, divides and rents out at higher rates. Now investment dollars are flowing to a different kind of co-working business model, according to the Wall Street Journal. Increasingly, WeWork rivals are operating like hotel chains, where landlords pay them a fee and keep most of profits.
The traditional approach, used by WeWork, “is just a fundamentally high-risk model,” Duncan Logan, chief executive of RocketSpace, told the Journal.
San Francisco based-RocketSpace focuses on co-working space for tech firms and has been operating for five years. In August it announced a $336 million investment from Chinese conglomerate HNA Group. The funding will allow the company to expand to 12 new locations in the next two years, according to the paper.
Unlike WeWork, RocketSpace takes a fee from the landlord for running operations. Usually the landlords pay for the build outs, but also collects profits as the rents go up. It’s less risky than WeWorks approach, but does not generate as much return in the short term.
“If you’re doing the math over two cycles,” Logan told the Journal, “it’s a far better return, because you don’t go bust.”
In the past week WeWork has expanded its reach even further in New York City. Last week the company signed a deal for roughly 64,000 square feet at Billy Macklowe’s Hell’s Kitchen office building at 311 West 43rd Street. Sources also told The Real Deal the company is close to signing a 122,000-square-foot lease at Sitt Asset Management’s 2 Herald Square. The company is also looking to launch an investment vehicle to buy its own real estate properties. [WSJ] — Miriam Hall