Real estate newcomer Adam Neumann shocked industry observers last year when he acquired the rights to buy the top 25 floors of the famed Woolworth Building for $68 million.
Neumann, 33, had launched the trendy shared office space provider, WeWork, only three years earlier, and his audacious play for the iconic skyscraper raised some eyebrows.
“I don’t know what possessed him to think he could do it, but he did it,” said Kenneth Horn of Alchemy Properties, which Neumann has since brought in to spearhead the tower’s conversion into a residential condominium. (While Neumann was ultimately not part of the investment team, he will get a cut of the profits for finding the deal.)
The Woolworth deal put Neumann on the map in New York real estate circles, but the pony-tailed Kabbalah devotee has little in common with his colleagues in the world of commercial office leasing. His WeWork spaces, better known in the tech world than the real estate world, come complete with free beer, fully stocked refrigerators, Foosball and Connect Four.
WeWork’s mission, Neumann told The Real Deal, is to change workplace dynamics by bringing a diversity of creative professionals into one space, where they can interact and collaborate. Making smart real estate plays, of course, is crucial to advancing that cause. To that end, WeWork has been busy expanding its portfolio: The company has long-term leases on some 218,000 square feet of New York office space, and in November, it teamed up with Boston-based investment firm AEW Capital Management to purchase the leasehold on a 103,000-square-foot office building at 175 Varick Street in Tribeca for $33.5 million.
“We are changing the way people work,” Neumann said. “It just happens to be that we need space to do it in.”
Hatching an idea
The Tel Aviv–born Neumann, the son of two doctors, moved stateside in 2001, following a stint as a navy officer in the Israeli military.
After arriving in New York, Neumann enrolled at Baruch College to study towards an undergraduate degree in business. Joking around with friends during a night out spawned his first big business idea: Krawlers, a brand of baby clothing with padded knees to protect crawling infants. Despite being childless and unmarried, Neumann thought the idea had potential. When he woke up the next morning, he set about registering a trademark for Krawlers.
With the help of a professor at Baruch, Neumann secured a deal with a Chinese manufacturer to produce the product. Then, in 2006, he partnered with children’s clothing designer Suzan Lazar to create the brand Egg Baby, which is now carried by retailers such as Neiman Marcus, Nordstrom, Bloomingdale’s and Saks. (Neumann has largely taken a backseat to Lazar in recent years as WeWork has taken off.)
Neumann displayed similar persistence with his first real estate foray in 2008, when he and two friends, Miguel McKelvey and Gil Haklay, struck a deal with infamous Brooklyn landlord Joshua Guttman. (Guttman’s Greenpoint Terminal Market burned down under mysterious circumstances in 2006.)
At that time, Egg Baby and McKelvey’s architecture firm were both tenants at Guttman’s office building at 68 Jay Street in Dumbo.
Neumann and McKelvey noticed that the building was partially vacant, which sparked an idea for a shared space concept. Thanks to badgering from Neumann, an initially reluctant Guttman agreed to let them try it out in one of his buildings, 147 Water Street.
“Adam has an endless faith in his ability to convince people to do things he wants them to do,” McKelvey said of his longtime friend.
With Guttman’s help, Neumann and McKelvey launched a new business, which they dubbed Green Desk, investing just $5,000 each. They rented the space from Guttman with flexible terms, then sublet individual cubicles, and groups of cubicles, to tenants. Neumann and his business partners managed the day-to-day operations, while the profits were split down the middle with Guttman.
The concept took off.
“We had most of the first floor pre-leased before we even finished construction” on the space, McKelvey recalled.
The space was soon fully occupied, and Neumann and McKelvey decided to strike out on their own. Guttman did not respond to a request for comment, but McKelvey said Guttman bought them out of Green Desk in 2009 and has since expanded the business into more of his Brooklyn buildings.
With a proven concept and “a few million” in their pockets from the sale of Green Desk, the duo went on to launch WeWork.
On a Tuesday last month, TRD toured WeWork’s 103,000-square-foot location at 175 Varick Street with Neumann, who stopped periodically to greet tenants and make sure the keg had not run dry. (Beer is available for free to WeWork tenants at all times.)
One floor of 175 Varick houses tech professionals from companies like
Reddit.com, as well as a Foosball table and a vintage arcade game. A few floors down, architects and design professionals occupy a sleek, contemporary all-white space. And on yet another floor, Neumann is in the process of launching a new program for filmmakers in collaboration with his wife, Rebekah Paltrow, an actress and cousin of Gwyneth Paltrow. (The pair, who married four years ago, met in college and have a 16-month old daughter.)
Companies who take space at a WeWork location are not technically tenants. They pay a monthly membership fee, ranging from less than $100 a month for a virtual office to around $2,600 a month for a private, six-person space.
WeWork now has more than 3,000 members, and current tenants include TED, the not-for-profit conference company, Lego and a division of American Express. In addition to 175 Varick, WeWork has locations at 154 Grand Street, 349 Fifth Avenue, One Little West 12th Street and 261 Madison Avenue, as well as in San Francisco and Los Angeles, one of which the company owns.
Kegs and arcade games are not WeWork’s only non-traditional office amenities. WeWork is well-known for its parties and events. Last summer, the company organized a trip for tenants to the Adirondack Mountains, where it took over a children’s summer camp at Raquette Lake for a three-day party and professional conference.
While the events are pricey — the summer camp cost the company around $200,000 — Neumann says they’re worth it in order to attract the best and the brightest to WeWork spaces.
WeWork also encourages connection-making between its members. For instance, if a fashion company requires a new website, a freelance computer programmer or website designer can be called in from across the hall.
Neumann said he got the idea for WeWork from his involvement in the celebrity-friendly Kabbalah Centre.
“I noticed that in the Kabbalah community, people were really helping each other,” he said. “I wanted to translate that into business.”
WeWork has accepted upwards of $20 million in investment from wealthy individuals since it launched, Neumann said, though its owners and staff still hold more than 70 percent of the equity in the enterprise. Investors include Joel Schreiber, owner of Manhattan real estate investment firm Waterbridge Capital; Sam Ben-Avraham, owner of the New York–based Atrium clothing boutique; and Neumann’s longtime business partner, Marc Schimmel — a real estate scion, the reported former boyfriend of Madonna and a well-known Kabbalah devotee.
Neumann said WeWork so far has plowed most of its earnings back into the company, investing in rapid growth and capital expenditures. That’s made the company an aggressive player on the real estate scene.
“While we sacrifice profitability on a daily basis, we’re actually seeding real profitability that will come in the future,” Neumann said.
WeWork is now leasing space from well-known landlords such as Neil Bender, head of the $1 billion Manhattan real estate portfolio amassed by the late William Gottlieb, and the Sapir Organization. And this summer, WeWork signed on to rent the entire 56,000-square-foot building at 54 West 40th Street. The location, which is adjacent to Bryant Park, is currently under construction; it’s being built out before tenants can move in.
The firm, which now has 80 employees, is showing no signs of slowing its property-acquisition binge. Neumann said WeWork plans to rent an additional 1 million square feet nationally in 2013, including 600,000 to 700,000 square feet in New York. Two deals — one in Midtown for 90,000 square feet and one near the Woolworth Building for 103,000 square feet — are already underway, he said, though he declined to provide exact locations until the deals close.
WeWork’s involvement in real estate extends beyond office leasing. Whenever possible, the company partners with investors to purchase its locations, Neumann said, adding that it’s also getting into development. Indeed, WeWork is in talks with the city to build a 250,000-square-foot WeWork location at the Brooklyn Navy Yards. That project could get underway as early as this spring, though Neumann declined to provide further details.
By far his highest-profile deal, however, involved the Woolworth Building at 233 Broadway.
Neumann first became interested in the building in early 2012, when Waterbridge’s Schreiber invited him to check it out as a potential WeWork location. Despite his lack of development experience, Neumann immediately saw the building’s potential as a residential conversion and approached owners Steven Witkoff and Ruby Schron with an offer to buy it.
Neumann was “brazen in how he came in,” Horn said.
His boldness paid off. The trio shook hands on a deal valued at $68 million. Once Schimmel came on board to provide some initial capital, a contract was signed.
As a development newbie, Neumann knew he wouldn’t be able to convert the building to residential condos alone. So four months later, he and Schimmel reached a deal with Alchemy: Horn’s company would provide debt and equity for the project in exchange for the majority interest in the deal. While Schimmel is part of the investment group that eventually bought the property, Neumann is not. Instead, he will be compensated with a significant percentage of the project’s eventual profits.
What made the real estate industry sit up and take notice, Horn said, was Neumann’s knack for deal-making. It’s a credit to those deal-making skills that Neumann will receive a large share of the profits, Horn said. And according to Neumann, Witkoff and Schron have since received offers for more than $10 million higher than the $68 million closing price it settled on with Alchemy.
Indeed, at a panel event last month, Witkoff (who did not respond to a request for comment) admitted he may have sold too low, and stuck to the agreed-upon price only because he’d shaken Neumann’s hand in good faith.
Neumann is “a bulldog,” Horn said.
“He’s the kind of guy who sets his mind on something and moves forward on it.”