The companies represent different approaches to the future of real estate, and their success or failure will offer important lessons to landlords.
The collapse of WeWork’s $47 billion valuation was the most exciting real estate story of 2019. Landlords, lenders, customers and competitors watched in awe as the company crashed into a wall of scrutiny and ridicule. In 2020, Airbnb might offer a similar spectacle, with a $35 billion valuation and a growing number of questions about the company’s long-term prospects.
What propels both companies? The changing needs of end users and the growing appetite of venture capital investors to disrupt the way real estate assets are operated and transacted. Both trends will keep transforming the industry, regardless of the struggles of WeWork or Airbnb.
A Time of Transformation
The global economy is awash in capital. According to data from PitchBook and the National Venture Capital Association, venture capital investments reached an all-time high of $131 billion in 2018, exceeding the heyday of the dot-com bubble. Elsewhere in the financial world, the amount of capital available to institutional money managers is also at an all-time high, according to data from Preqin and Ernst & Young.
In theory, investors only want to fund “real” tech companies that have high margins, can scale quickly and operate in industries that are easy to disrupt. In practice, the industries that could be easily transformed by technology — media, business processes, financial brokerages — have already been transformed. As a result, investors are venturing further up the risk curve, seeking out companies that want to disrupt other, more challenging industries such as real estate, health care and mobility.
Beyond its direct focus on real estate, venture investment also fuels other trends that affect how buildings are used and valued. Remote work, drones, ridesharing apps, electric scooters and autonomous vehicles are redefining location and accessibility. Social media and digital marketing are changing the perception, selection and design of physical spaces.
More generally, the technology boom has resulted in a war for talent. That, in turn, makes tenants more demanding. At the same time, the abundance of capital allows companies to stay private for longer — away from the scrutiny of public markets. That makes it difficult for landlords and lenders to assess the creditworthiness of some of the largest tenants.
Real Estate Disruptors
WeWork and Airbnb represent two ways to disrupt real estate — one focused on supply and the other on demand. As Lisa Picard, CEO of Blackstone’s EQ Office, pointed out in a March 2019 Medium article, WeWork is essentially a value-added reseller (VAR). It adds a physical and service layer on top of a physical product made by others. (See The Rise of Real Estate as a Service.) WeWork signed leases at a rapid pace to secure prime locations in dozens of cities. The future liabilities represented by these leases were a key factor in the backlash against the company by public investors and the media.
WeWork’s model is indeed risky, but signing leases is not, in itself, a bad idea. Thousands of successful hotels, retailers and other businesses commit to long-term leases while relying on revenue from customers who barely commit to stay for a single night (or pay for a single cup of coffee). And demand for office space in good locations is not likely to disappear overnight, particularly space that appeals to the sensibilities of the fastest-growing tenants and employees. This does not mean that WeWork will succeed, but it would be unwise to dismiss it as a passing fad.
Still, Airbnb’s approach appears more sensible. The company is not signing any leases or investing in build-outs; instead, it aims to become the prime online destination for those seeking accommodations. Because of that, Airbnb is not trying to monopolize supply but to aggregate existing demand. Unlike WeWork, Airbnb still has a lot of cash in its coffers, and it has turned a profit for several quarters.
However, several travel giants are moving into Airbnb’s turf. Booking Holdings, Expedia and Marriott International are all investing heavily in their own home-sharing platforms. These companies are not typical “incumbents.” They are well-versed in digital marketing and customer service.
Airbnb also faces a growing backlash from cities that want to limit the company’s ability to use residential buildings for short-term stays. Existing residents are uncomfortable with transient visitors in their buildings. Aspiring residents blame Airbnb for taking residential inventory off the market. And local officials are unhappy about the undermining of their zoning ordinances. In theory, Airbnb’s suppliers could disappear overnight, either by government decree or by switching to a competitor. Not signing leases to secure its inventory might turn out to be an even more unstable business model than WeWork’s.
The good news for landlords is that controlling actual buildings is still valuable. The bad news is that customers expect these buildings to be marketed and delivered in a whole new way — more serviced, flexible and focused on the needs and aspirations of individual people (as opposed to nondescript “tenants”). In addition, technology is redefining the meaning of location, visibility and accessibility, as well as the power of zoning laws. An industry that was once governed by personal relationships is now facing new competitors backed by unprecedented amounts of capital.
Learning from History
In 1999, Napster was the hottest tech company on the planet. It was a precursor to what we now call the sharing economy, allowing users to share a vast catalog of music files. At the height of the dot-com bubble, Napster was growing faster than any company in history, reaching nearly 20% of all web users within a year of its launch. But Napster was a terrible company. It had no business model, it generated no revenue, and it was illegal. It did not go public and fell into obscurity.
But music labels were wrong to conclude that Napster was a fad or that copyright laws would protect their monopoly. Napster failed, but the industry was forever changed. The annual revenue of the record labels fell from more than $20 billion in 2000 to less than $8 billion by 2015. It took years for revenue to start growing again. People didn’t stop listening to music, they didn’t even stop paying for it — but they paid new providers such as Apple and Spotify, which ate into the labels’ margins.
Real estate executives would do well to learn from history. Even if both WeWork and Airbnb go bankrupt, customers expect new digital and physical experiences.