November 17, 2016
WeWork’s rise to a $17 million valuation is supported by its arbitrage pricing model. In this model, the company owns zero real estate, but instead has high fixed-income costs for rent that it passes on to its users for a high mark-up in profit. This model places all of the risk on WeWork, but so far, has been extremely beneficial as the economy has been strong. However, what could happen in a downturn?
Competitors to WeWork, like RocketSpace and Serendipity Labs, are using alternative pricing methods akin to hoteliers and franchising, respectively. RocketSpace, a five-year old startup in San Francisco geared towards co-working for tech companies, is following in hotels’ footsteps, where landlords pay operators and pocket the majority of the profits. This model puts the risk onto the landlord, but also allows for them to benefit from the upside of increases in rent over time.
On the other hand, Serendipity Labs believes in franchising its business, like a fast-food chain. Franchisees can choose to lease space under the brand’s name or lease out space they own, while also covering the cost of construction so that Serendipity Labs doesn’t have to raise capital for such endeavors.
Co-working spaces continue to increase, but only time and economic variables will show what pricing models prove to be the most beneficial.
For comments, questions or concerns, please contact Daniella Soloway