WeWork and the Challenge of Labeling CRE Companies as Tech

There’s often been temptations among those running companies to position them as high tech, especially if they aspired to go public. The reason is easy to see, as many in finance have noted in discussions over the years: multiples.

Investors tend to see tech company valuations worth higher numbers of multiples of cash flow, earnings, enterprise value, or whatever metric they use in considering a business. And some companies, like WeWork when it was starting and then initially getting ready for a desired IPO, definitely pushed the tech vibe.

“What does it even mean to be a tech company in 2019/?” Recode at Vox asked. “’If you’re going to raise capital, it’s an easier way to get your foot in the door by saying you’re some new kind of disruptive tech company,’” Paul Condra, lead emerging technology analyst at research firm PitchBook, told Recode.

“That’s why WeWork went to great lengths in its filings to point out all the things that make it a tech company and, by extension, validate its price tag,” they added.

Again, this has hardly been uncommon. There are some businesses normally thought of as tech that you could argue were something else. Alphabet, for example, which makes 78% of its revenue from advertising, making it sound like a publisher. Yes, they do a lot of tech, but the fundamental business is publishing information and selling ads against it. Facebook is similar in that sense. Big user of tech, much of which it creates, but still publishing, ads, and selling information.

But these are companies dealing with intangible services and products. WeWork is in the business of leasing real estate, some of which it owns and some that it leases. The money comes from property marketing and managing office space. Nothing intangible about that, and real assets tend to cost money, whether they’re your property by ownership or by contractual arrangement.

WeWork has recently warned of bankruptcy risk after a nearly $700 million net loss in the first half of 2023 and $10.7 billion in net losses over the previous three years.

But coworking, hybrid, and collaborative working space provider IWG saw a big jump in January through June performance for 2023. With more than 4,000 work locations in more than 120 countries, revenue was up 14% year over year and operating profit increased by 154%. CEO Mark Dixon pointed to hybrid work as the driving force.

It’s not that the businesses are fundamentally different. Both get space, often leasing rather than owning, and looking to expand. One difference is the legacy of positioning and attitude.

“Analysts said WeWork’s past had spooked potential tenants and left it with massive debts, a hangover from its early decision to act like a big tech company and pursue an aggressive global expansion on the bet that profits would follow,” wrote the BBC last Friday. “The firm had scooped up long-term leases in prime office space around the world, expecting to make money by sub-letting the space on a short-term basis to firms and individuals looking for flexibility and trendy digs.”

Framing and positioning a company a given way has consequences. It can start down a road, act in ways markets expect, and hit an operational dead end where investors, business partners, and customers no longer give it slack.

There are other companies in the CRE space that are trying to be tech first, real estate second. The younger they are, the better chance they have to ask themselves the hard question of what they really are rather than what they play on TV. Forget the visionary positioning and figure out how to make your CRE business work.