Leading versus WeWork | In Practise

Leading versus WeWork

Founder and CEO of Quest Workspaces

Learning outcomes

  • Why did WeWork have such a large impact on the commercial real estate market?
  • What are the challenges WeWork is yet to face and how could they deal with this?
  • What strategic options were available against a competitor like WeWork at its peak?
  • What are the key psychological challenges of leading against irrational competitors and how can leaders overcome these pressures?
  • How does the ownership structure of a company impact the founder or CEO’s decision making?
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Executive Bio

Laura Kozelouzek

Founder and CEO of Quest Workspaces

Laura has over 28 years experience in commercial real estate. She started running a single location and worked her way up to manage over 500 locations for HQ, the world’s largest operator of shared space at the time, before it was acquired by Regus. In 2004, Laura founded Synergy Workspaces, a provider of flexible workspaces, which quickly grew to 25 locations and over 1,600 offices to become the largest US operator of executive office space. During the financial crisis, Laura sold Synergy Workspace and then founded Quest Workspaces, another flexible workspace business, in 2010 with solely her own capital. Quest has organically grown to 12 locations today and Laura has grown $50k seed capital to a $20m revenue business today. Read more

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It’s a pleasure to have you with us today. Could you run us through your background?

Sure. I’ve been in the coworking flex-space market, maybe before it was even called that, from about 33 years ago. At the time it was called executive office suites; it was called business centers. It was basically the same concept, but set up differently, based on how people worked 30 years ago. So I’ve been working in serviced real estate for a little over 30 years.

Prior to that, my background was in hospitality and in hotel management, and over the course of those three decades, I’ve managed through three separate recessions and have the advantage of seeing how our industry has adapted to that change and provided a need to the clients based on where they were in that generation. I entered into the industry when there wasn’t even voicemail, fax machines, or the internet so you can imagine how things have changed since then.

I started off in the industry as what we call a general manager, running a single location. So I learned from the ground up and then the company that I was working for at the time was in the process of scaling quickly, so I took on a regional position and then eventually ran about 500 locations for the world’s largest operator of shared space at the time. I worked through mergers, through acquisitions, through rollups, through consolidations. We’ve acquired centers, we’ve disposed of centers. I’ve really experienced every single aspect of the industry, and after all that knowledge, I decided to start my own company.

The first one was called Synergy Workspaces back in 2003, and then that company was sold in 2008, 2009, and then I started the company I currently have in 2010, which is called Quest Workspaces, and currently we have 12 locations; 2 in Manhattan and 10 in South Florida. What’s unique about this company that I currently have is that rather than raise private equity and grow through partners and that scenario, which I have done in the past, this time around I’ve decided to not have any partners, not have any debt, not have any investors, and I started the company with $50,000 and I just grew it organically over the last 10 years. We’re up to a run rate of about $20 million in sales, so it’s sort of an old-fashioned way to grow a business, but one that I believe very strongly in.

I think even that is a topic, in itself, we can explore another time.

Exactly.

But it’s funny how you say that, because I think there was a perception in the press that WeWork actually created this concept, but clearly, it’s been around for decades.

Don’t get me started. I was on my soapbox for 10 years, pounding my chest saying WeWork repackaged it. Actually, I give them credit for really putting the industry on the map, in the sense of getting your everyday consumer to actually even understand what the business is all about, based on the marketing that they did and how quickly they grew, but it has evolved. The industry has constantly been evolving like most industries. So, it’s different today than it was 10 years ago. But you’re right, the actual concept of flexible space and serviced space has been around before I even entered it. Probably 60 years ago is when it started. And it was just different, based on what the needs were at the time. Technology enables a lot of the processes in how we work, so we’ve had to adapt our business to satisfy other needs and other desires and other requirements that people have in the workspace. You’re absolutely right, it’s a little sexier today with evaluations and the buzz that WeWork has got, but it’s fundamentally the same business.

What exactly did WeWork do differently?

{audio:0:04:27.7} Adam Neumann hit the nail on the head in terms of creating a brand and creating an approach that didn’t currently exist. When you think about it, the largest operator at the time was Regus and I actually worked for the company that merged with Regus for many, many years. So I was very familiar with the culture and the products and the services and what they were doing well and what they weren’t doing well. The problem with Regus is that they were so big and getting them to see things differently or to change was really difficult. They lost that very innovative, entrepreneurial culture and they become really, really stale. I’m not too sure that they didn’t see the opportunity to repackage what we did and create a different way to do it, and what I mean by that, the Regus locations, they look the same. Instead of resembling a cool hotel or a restaurant, which is sort of the WeWork design, it was very dull, corporate, boring, and then on top of it, they’re kind of lifeless.

So, I think what WeWork did, and they did it really effectively, is they took something that was working and they just made it more interesting. Everything from the design element, to the parties, and the events, and the beer. They repackaged it in a really effective way. Their brand started off as more of geared toward start-ups. It was all about start-ups and “do what you love” and I think it really tapped into this psyche of what people wanted. And then they started shifting to more like an enterprise offering, because they realized that was actually more profitable than going after the start-up community. So I feel like Regus was kind of resting back and these guys kind of blew by them. Is it because they didn’t see it or they weren’t able to execute on it because, it’s like anything, you have a hotel chain, and if you have a lot of old products, it’s very difficult to take that old product and make it new and fresh. You try to do these renovations. WeWork had the benefit of coming out of the gate and just creating a whole new design, approach, look, versus Regus having been around for over 30 years.

WeWork made it cooler, they made it sexy, they made it more interesting, and they spent a lot of resources and money in terms of establishing that brand, and they did it through social media. They knew how to tap into that user and it almost became like a lifestyle brand, where people wanted to be associated with it because it was a cool, fresh, new way to work. And what was happening was that, with a lot of big companies, even when they went after enterprise clients, these enterprise clients are already trying to attract younger, millennial workforce talent, and they would prefer to work in that environment versus a sort of a stodgy, old, corporate kind of look. I think that’s really where they did a really amazing job. Now, Regus’ answer to that was to create a new brand, which is their Spaces brand. It will be interesting to see how successful that is. Sometimes the culture is so pervasive within a company that you can’t just simply acquire new brand or slap a new name on it and create the same effect. It will be interesting to see how that works.

Was WeWork doing anything significantly different on the lease side of things, with landlords?

No, not really, except for when they were actually taking a piece of the equity in the building, which to me, which didn’t happen that often and that always seemed like a conflict. It caused them problems with the S-1 filing, when they actually got into the details of it. But the way they structured their leases were very similar to the way we all did, in terms of direct structuring or direct lease.

If you look at my company versus WeWork, they didn’t really care how much money they had to spend in the space to build it out, and that became a big, important part of their brand. For example, if a tenant improvement package was $80 per square foot, often they would spend way more than that, in terms of building it out. They made a significant investment in all their spaces.

One of the things that Quest does very differently, and takes a different approach, is that we’re super opportunistic. So for us, we try to find second-generation space that has great infrastructure and great bones, and then we work within the parameters of the tenant improvement dollars that we get. We’re not making a huge investment in our locations, yet we’re delivering a great-looking product. For me, it’s always been, I’m going for a quick return on my investment, and by doing that, we’re getting all our investment back within the first year.

Another thing that WeWork has done differently is they haven’t been very mindful and it’s like a land grab. They don’t care. It’s about scaling quickly, getting the buildings they want, and they’re not so concerned about the rates they’re paying. A lot of the conversations I’m having with journalists now is that this is just the start, because all we need is a slight bump in our economy or a slight downturn and I don’t believe there is any way these guys are going to be able to sustain this and to produce enough revenue in a different market, in a market that’s challenged in any way, to be able to sustain the rents that they’re having to pay. And I think that’s going to be their real problem. They’ve committed to too many leases at too high rental rates.

Especially when these free rent periods drop off, and they actually have to start paying?

Don’t get me started on that. The more they grow and the more they expand, the more they’re actually helping their cash flow because of that scenario. Once they stop growing, it’s almost like a house of cards as well. To summarize the basics of our business in the simplest way, think about it like real estate arbitrage the way most of the leases are structured when you go and you sign a direct lease. I think it’s going to change, and it needs to change to be more sustainable over time. But for the most part, we sign a lease, we commit long; we commit 10 years, 15 years, sometimes 8 years. But we sign a lease at a base rate and then it escalates a few percentage points each year. And then we go to market and we rent the offices first, whatever you can get based on the market rate.

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Leading versus WeWork

October 31, 2019

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