The Economist - USA (2019-09-28)

The EconomistSeptember 28th 2019 Business 59

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firms now account for about 5% of office

space in London and New York. Most of

their clients are small businesses. But

hsbc, a big bank, will occupy 1,100 desks in

WeWork’s new 6,300-desk London branch.

The landlords can still count on the co-

working companies themselves to sign

long-term leases. But they worry about the

prospects for these leaseholders. Trouble

at WeWork, which has lost over $2bn since

the start of 2018 and is struggling to show it

has a viable business model, is adding to

the uncertainty. Either way, observes Nick

Wright of cbre, a consultancy, the old

landlord-tenant model is being shaken up.

Life is changing for corporate tenants,

too. Typically, companies with tens of

thousands of employees will own their

headquarters and take out leases for

branch offices. Over time these obligations

are substantial. Among 75 big listed ser-

vice-sector companies in America and Brit-

ain, lease commitments over the next de-

cade or so amount to $146bn. Annual rental

costs amount to $5,000 per employee. Ab-

senteeism and the constant flow of people

mean that just 40-50% of desks are actively

used during working hours. This ineffi-

ciency constantly draws bosses to try to

save office costs, especially in a downturn,

although the reality is that office spending

makes up only a tenth of property and

headcount costs, with the rest going on

workers’ wages. Despina Katsikakis of

Cushman & Wakefield, a property consul-

tancy, warns that such stinting by firms can

have an adverse effect on the wellbeing of

their employees.

To optimise office use without killing

morale, Goldman is therefore giving staff at

its new London building options about

where they work—at unassigned desks,

private rooms and informal hangouts.

Even the bank’s 100 or so partners now oc-

cupy offices that transform into meeting

rooms when they are away. Such manoeu-

vres, the company says, have increased

desk occupancy by about 20%. Even in

places without 22 Bishopsgate’s anti-din

technology, open-plan offices are easier to

bear for distractible employees thanks to

noise-cancelling headphones. As a result,

companies need less space to accommo-

date the same number of workers.

According to the British Council for Of-

fices, an industry body, space per desk in

Britain has fallen by 10% over the past nine

years, to ten square metres. “We don’t like

the idea of animals in pens, but we’ve been

happy to have people in them”, says Sir Stu-

art Lipton, the developer of 22 Bishopsgate.

As companies reach the limits of densifica-

tion, they must compensate cramped

staff—the final group affected by the

changing workplace—in other ways. We-

Work, whose desks are a third smaller than

a typical office worker’s, provides renters

with ample space to drink nitro coffee, con-

ductimpromptumeetings orplayping-

pong.Officeshavetraditionallysetaside

just3-4%offloorspaceforsuchfripperies.

Occupiersnowexpectdeveloperstopro-

videatleastdoublethatamountofspace.

StaffinBishopsgatehaveaccesstoa climb-

ingwallonthe25thfloor(seepictureon

previouspage).Goldmanemploys“work-

placeambassadors”oneachfloor,whoare

responsibleforstaffwelfare.

Office improvementsare designedto

makewhite-collaremployees—andpros-

pectiverecruits,manyofwhomexpectto

becoddled—feelfitter,happierand,em-

ployershope,moreproductive.About10%

ofa firm’swagebillislosttosickpay.A Har-

vardUniversitystudydemonstratedthat

improvingthequalityofair,asGoldman

and 22 Bishopsgate do,can boost occu-

pants’cognitivefunction.Accesstonatural

lighthasalsobeenshowntoimprovepro-

ductivity.Whilea studybyAndrewOswald

oftheUniversityofWarwickfindsthatpro-

ductivityincreasesby12%whenpeopleare

happier.Unilever,a consumer-goodscom-

pany,estimatesthat$1 investedinits“well-

ness programmes” returns $2.50 to the

company.Goldmansaysthatmovingstaff

intonewofficesinothercountrieshasim-

proved their employees’ perception of

theirownproductivity(itdidnotmeasure

actualoutput).

There is work to be done. A recent

worldwidesurveyof600,000officestaffby

Leesman,a dataprovider,foundthat40%

thoughttheirofficepreventsthemfrom

workingproductively.Hotdeskscanbea

curse(seeBartleby).London’sthreenewof-

ficesarenotthelast wordinworkplace

managementandarchitecture.Buttheyof-

fera glimpseoftheforeseeablefuture. 7

E

arlier thismonth WeWork delayed its

initial public offering (ipo) after it be-

came clear that the co-working firm would

fetch as little as one-fifth of its latest priv-

ate valuation of $47bn. Prospective inves-

tors began to question its poor governance,

lack of transparency, reckless expansion

and lack of economies of scale. The com-

pany, which has lost $1.4bn in the first half

of this year, desperately needs cash. Public

markets, creditors and venture capitalists,

whom WeWork’s dreamy co-founder,

Adam Neumann, has infatuated for years,

appeared unwilling to hand over any more

unless something changed. This week

somethingdid: MrNeumann agreed to

step down as chief executive. Will this be

enough to avert WeWork’s slide towards

possible bankruptcy? And would its implo-

sion have consequences, other than to

leave its backers out of pocket?

Start with WeWork’s prospects. The

company has around $2.5bn in cash—

about as much as its combined loss in

2017-18. If it continued to burn through this

pile at the current, even faster rate, it would

run out of money in under a year. The resig-

nation of Mr Neumann, whose name ap-

pears 169 times in the company’s ipo pros-

pectus, may be intended to signal a shift

away from his quest for growth at all costs

towards more responsible stewardship of

capital. If that results in smaller losses, in-

vestors may loosen their purse strings. But

this outcome is far from assured. Mr Neu-

mann remains on the board as non-execu-

tive chairman. And a new, humbler version

of WeWork may seem a less appealing pro-

position than his grandiose vision.

A collapse, then, is not out of the ques-

tion. It would be felt beyond the firm and

its investors. First, WeWork’s troubles dim

the prospects for other overvalued startups

and their venture-capital backers, notably

SoftBank (see Schumpeter).

Second, holders of its $669m in junk

bonds might take a hit. Big known ones in-

clude Lord Abbett, an investment firm,

which lent WeWork $44m, and Allianz, a

German insurer, with some $21m in expo-

sure, according to Bloomberg, a data pro-

vider. But $669m is a drop in the $9trn

bucket of America’s stock of corporate

bonds. Any spillover into broader financial

markets would thus be limited.

More troubling, some financiers and

regulators fret that WeWork and fellow co-

working companies may threaten finan-

cial stability. Eric Rosengren, president of

NEW YORK

Would an overvalued office startup’s

implosion pose a systemic risk?

Future of the workplace (2)

WeWorry

Would you buy stocks from this man?