WeWork used massive discounts - in some cases, essentially giving away space for free for 2 years - to try to poach customers from rivals
- WeWork used steep discounts and other price-related promotions to try to poach customers from rival coworking companies, multiple sources in the coworking and commercial real estate industry told Business Insider.
- The company would frequently offer customers a year's worth of free rent on a two-year deal to relocate; although it reportedly discontinued such deals in 2017, it actually offered them through at least last year, the sources said.
- In some cases, according to the sources, WeWork would also pay a commission to the customers' brokers that was equivalent to a year's worth of rent; in other words, WeWork made no money over the course of the two-year contract.
- The legacy of such discounts could hamper the efforts by WeWork's new co-CEOs to shore up its business and staunch its losses in the wake of its failed initial public offering.
- Read all of Business Insider's WeWork coverage here.
A few years ago, Jamie Hodari had a disconcerting conversation with Adam Neumann, WeWork's CEO at the time.
Neumann told Hodari, the CEO and cofounder of Industrious, another player in the coworking industry, that WeWork was going to be coming after his company's customers, Hodari said. And it would be using extraordinarily deep discounts to lure them away.
"I didn't believe him ... I thought he was bluffing," Hodari told Business Insider. "And it turned out he wasn't. That's exactly what they did."
WeWork specifically targeted Industrious' clients, offering them deals that included significant periods' worth of free rent, Hodari said. WeWork's assault, which started around 2017 and continued into last year, led to a stressful time for Hodari and his team.
"It was very scary for the first couple weeks," he said. "We were worried, like, OK, I think we have a great product. I think our customers love us. But it's hard to compete with free."
Neumann, through a representative, declined to comment. WeWork representatives also declined to comment.
Industrious wasn't the only coworking rival whose clients WeWork tried to poach with such discounts. Representatives of three other companies in the space said WeWork targeted their clients too, also by offering generous terms. All three - Premier Workspaces CEO Jeff Reinstein, Novel Coworking CEO Bill Bennett, and a sales representative at another WeWork competitor who asked to remain anonymous for fear of job loss - said WeWork offered their customers a year's worth of free rent on a two-year deal if they'd relocate to one of its spaces.
"WeWork was very aggressive about trying to steal our clients," Premier's Reinstein said in an email to Business Insider.
Although using discounts to poach tenants is a common practice in commercial real estate, WeWork appears to have taken the tactic to a new extreme. Backed by billions in funding from private investors who effectively subsidized WeWork's money-losing operations, the company sought to turn the screws on its rivals by wooing tenants with deals that seemed economically irrational.
WeWork paid brokers big commissions
In some cases, WeWork would offer outsized commissions to brokers who convinced their clients to move from another coworking company's space, Bennett, Reinstein, the sales representative, and a commercial-real-estate executive familiar with the arrangements told Business Insider.
The typical broker commission is about 10% of the size of the deal, Bennett said. But WeWork would often pay double or triple that - i.e., 20% to 30% of the rent.
And in some cases, WeWork would pay a commission to brokers that was as large as the amount of rent the customers were due to pay in the second year of their deals, after the free-rent period was over, Bennett, the sales representative and the real-estate executive said. Hodari recalled WeWork offering similar commissions to his customers' brokers.
In other words, WeWork, in those deals, essentially saw zero revenue on the leases over their two-year terms.
"Crazy, right?" Bennett said. "You're giving away 100% of your revenue."
WeWork offered deals "we couldn't possibly compete with," said the sales representative. "That's not competing. That's giving your product away for free."
Last month, Business Insider reported that WeWork used deep discounts to convince existing clients to move from spaces that were highly occupied to new or less occupied locations. Business Insider also reported in 2017 that WeWork was using half-off promotions to convince potential customers to relocate from coworking spaces run by rivals. But a "source with knowledge of the matter" told Business Insider at the time that WeWork had discontinued the practice.
The promotions continued until recently
To the contrary, coworking and other commercial real-estate sources told Business Insider in recent weeks that WeWork continued offering such deals through last year. And the sales representative continued to see such discounts being offered up until August, when WeWork filed for its initial public offering. Additionally, Business Insider did not previously report the outsized commissions.
What's more, WeWork used the deep discounts not only to poach rivals' clients but to prevent its own customers from being lured to rivals, said the sales representative and the commercial real-estate executive. If a WeWork tenant informed the company that the customer was considering moving to a rival coworking space, WeWork would quickly respond by offering them a discount of as much as half off, said the sales representative.
"The client just had to mention they were looking at another coworking provider," the sales representative said. "Ten [out of] ten times they'd come back and say, 'WeWork dropped the price substantially.'"
WeWork offered the discounts as it was undergoing a massive expansion. Between 2016 and the end of June, the company opened up more than 400 new locations, more than quintupling its total number.
It's not unusual in the commercial real-estate industry to target the customers of rivals or to offer discounts - including periods of free rent - to lure in new tenants. What makes WeWork's discounts unusual was their size, and the fact that it was offering them on relatively short-term contracts, easy-to-break contracts.
Many of the company's customers can end their agreements with as little as one calendar month's notice, WeWork said in its IPO paperwork. Even if customers stay for the entire length of their term, there's no guarantee they'll sign another contract that would allow WeWork to make up for discount it offered on the first one, said Jeff Langbaum, a real-estate analyst with Bloomberg Intelligence.
"The tenant could decide to just up and leave," Langbaum said. "The fact that there's no long-term lease to rely on makes it very risky for WeWork," he continued.
WeWork's new co-CEO are trying to shore up its business
The coworking giant's new co-CEOs will have to wrestle with the legacy of such discounts as they work to shore up its business and try to keep it afloat. The Financial Times and Bloomberg both reported last week that WeWork could run out of cash as soon as next month.
One way WeWork may try to cut its losses is by reducing or eliminating its generous discounts. But that might not be so easy if the promotions were the primary reason why particular customers signed up for space.
Some of the deep discounts WeWork offered last fall are starting to expire, and the company is trying to push those customers into market-rate deals, said the commercial real-estate executive. Few tenants are accepting such a price hike, choosing instead to either move to other office spaces not operated by WeWork or to negotiate new discounted deals from WeWork itself, the real-estate executive said.
The other problem for WeWork is that the discounts left the impression that its service is a discount product that's not worth market rates, said Hodari. That downside might have been worth it if it had had great success in poaching customers. But Hodari, Bennett, and the sales representative each said their companies saw few defectors.
After Hodari and his team went through some nervous initial moments, it turned out that only about 5% of Industrious' customers defected to WeWork, and the company was able to replace them quickly, he said.
"From what I observed, [the poaching-related discounts] backfired," Hodari said. Those deep discounts "can really erode your market position over time," he continued, "and should be handled with care."
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- Even after ousting Adam Neumann as CEO, WeWork could still go public this year - if it prices its IPO low enough
- Firing Adam Neumann doesn't solve WeWork's biggest problem: The underlying business stinks
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