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WeWork Continues Ruffling Feathers, Starts Investment Arm

A rendering of Dock 72, an office development from Boston Properties and Rudin Management in the Brooklyn Navy Yard

WeWork's relentless pursuit of world domination in the office real estate industry has bothered some big names, but it doesn't look to be slowing down anytime soon.

The coworking industry leader has launched an investment fund called ARK focused on acquiring properties, Bloomberg reports, citing anonymous sources. ARK has not been publicly announced, but WeWork has been ramping up its involvement in property ownership.

In 2017, the company partnered with Rhône Capital to raise $400M in funds to buy properties, the first being the flagship Lord & Taylor building on Manhattan's Fifth Avenue. That building is slated to become WeWork's headquarters next year (if it can finance the transaction). It has since bought properties as a part of partnerships in London and Washington, D.C.

WeWork has also entered into the development arena by partnering with Rudin Management and Boston Properties on the Dock72 project in the Brooklyn Navy Yard. It has also launched a venture called WeWork Space Services to assist startup members in finding space once they have outgrown coworking — long considered the province of brokers. The company's HQ by WeWork division occupies similar territory to both design and manage properties. Add them all up, and there are few areas of office real estate that WeWork doesn't touch.

“Don’t kid yourself, these are disrupters, they are seeking to disrupt the relationship of the landlord to the tenant. They are seeking to disrupt the relationship of the landlord to the broker,” Empire State Realty Trust CEO Tony Malkin said at Bisnow’s New York State of the Market event in late November.

Both landlords and brokerages have taken notice, and responded by launching their own coworking arms. CBRE has begun offering Hana to its clients, and Tishman Speyer has included Studio in its office building within Rockefeller Plaza, Bloomberg reports. 

Critics like Malkin believe WeWork's business of taking on long-term leases and using them for a month-to-month service increases exposure to possible downturns without allowing landlords to share in the profits generated by the coworking space. Companies like Convene and Industrious have been offering "partnership leases" to address the partnership question, as well as Knotel, perhaps WeWork's chief competitor in New York.

WeWork co-founder and CEO Adam Neumann

In an email conversation with Bisnow on Wednesday, Knotel founder and CEO Amol Sarva confirmed the use of partnership leases, saying that he considers those sorts of deals on the same spectrum as co-ownership of a building, like the ground-up development Knotel is pursuing in Brooklyn's Gowanus neighborhood.

"We partner with owners to help them do well," Sarva said. "Sometimes that means we are a co-owner. We are happy to have skin in the game alongside [landlords]."

WeWork Chief Development Officer Granit Gjonbalaj told Bisnow that the company plans to increase the number of partnership leases in its U.S. portfolio. But that does not get at the central question that seems to bug most of its critics in real estate: Just how successful is WeWork's model?

The company's valuation has skyrocketed in the past couple of years, largely driven by billions of dollars in investment by Japanese firm SoftBank and its venture arm, SoftBank Vision Fund. The most recent infusion took WeWork's valuation past the $40B mark, but apparently SoftBank's own backers are concerned about WeWork's trajectory.

The majority of capital in SoftBank Vision Fund is provided by state-run investors from Saudi Arabia and the United Arab Emirates, which have largely let SoftBank CEO Masayoshi Son have free rein over their investments. But the Saudi Public Investment Fund and Emirati Mubadala Investment Co. refused to sign off on a new $16B investment that would give SoftBank majority ownership of WeWork but leave co-founder and CEO Adam Neumann in control of the company, the Wall Street Journal reports.

The funds doubt the validity of WeWork's giant valuation, according to the WSJ, and expressed concern that the company continues to outspend its incoming revenue — it posted a $1.2B net loss through the first three quarters of this year. Neumann contended that each individual WeWork location is profitable, and the net loss is the natural result of the company's hyper-aggressive expansion. 

But WeWork is growing in so many directions and at such a fast pace that it is giving many in the industry a sense of unease, according to Bloomberg. Though Knotel boasts twice the number of locations in New York and is adding more seemingly every week, it has not diversified to nearly the extent WeWork has.

The biggest acquisition to date for Knotel was of blockchain startup 42Floors, but Sarva told Bisnow that its investment into blockchain technology is purely a way of speeding up the process of finding and acquiring space. When asked if Knotel had any plans to follow WeWork's diversification playbook, Sarva gave a one-word answer: "No."

SoftBank still hopes to convince its Middle Eastern backers to buy into WeWork further, but likely will be forced to find other capital if it wishes to complete its $16B buy-in (which would bring WeWork's valuation back down to $36B, according to the WSJ). Regardless, WeWork already has a significant-if-indirect connection to a Saudi sovereign wealth fund, which itself raises questions.

If WeWork is to continue its dizzying pace of expansion, it will need more cash infusions of the type that SoftBank has been supplying. Meanwhile, the rest of the real estate community will be watching closely.