WeWork: Lease Liabilities

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—which didn’t happen that often—but where they were actually getting piece of equity in the building, which to me, 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.

What’s different, 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 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 returns—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—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, in other words, 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.

So if you’re signing a lease at the low end of the market—for example, coming out of the recession —a great time to scale this business was the year following a recession because the rates were so much lower than they are today. If you look a market like New York City or Miami, where the commercial rates were in 2010 versus 2019—dramatically different. So, if you’ve committed at that low end of the market and now you’re riding that wave up, the market’s rising, you’re getting higher rates from your clients, that’s where the margin comes in. That’s really, in the most basic sense, how the business works.