WeWork Is Ratcheting Up Broker Commissions to Lure New Tenants

(Bloomberg) -- Last September, WeWork Cos. made a show of trying to poach customers from rival co-working companies during the slower months of late summer and early fall. Employees of the co-working giant cold-called competitors' tenants, set up games and couches outside of other shared-office spaces and offered up to a year's free rent if they switched over. 

This year, WeWork is enlisting another party in the battle: brokers. The company is offering commercial real estate brokers worldwide a 100 percent commission on the first year of rent paid by any tenant who switches to WeWork from a top competitor and signs a lease by October 1. Tenants also get half off the first year's rent if they sign for at least 12 months. That means, accounting for the discount, that WeWork's current bonus to brokers is five times the standard commission it typically offers of 10 percent on the first year's rent.

Competitors say that generous bonus is behind a new wave of brokers cold-calling their tenants and trying to tempt them away, offering them half off a year's rent if they switch to WeWork.

“A year ago WeWork had some of their staff coming to our locations unannounced, posing as prospective customers, taking a tour, walking around, taking pictures of logos of companies they saw, then emailing and calling them directly and offering them discounts,” said Amol Sarva, chief executive officer of Knotel Inc., a WeWork competitor that offers businesses flexible work spaces similar to co-working services. “Now they've hired an on-demand plausible-deniability army to do the dirty work.”

WeWork declined to specify which rivals a broker would have to lure a tenant from in order to receive the promotion, but in the U.S. the list includes Knotel, IWG Plc and Industrious, according to people familiar with the deal, who asked not to be identified because the details are not public. Late summer is a slower time for WeWork's co-working business, the company said, which is why it does seasonal promotions around now. 

Part of the reason WeWork can afford such large promotions is that it has raised billions in funding, including $4.4 billion from SoftBank Group Corp. last year. Using venture capital funds to kneecap competitors is a common strategy in Silicon Valley, and real estate providers often lure tenants and brokers with discounts and bonuses. But the new program suggests WeWork is strengthening its relationship with brokers and also raises questions about its ability to keep its buildings full as it continues to expand at eye-watering speed. 

At the end of last year, 82 percent of WeWork's office space was occupied, according to bond offering documents reviewed by Bloomberg. As it adds locations around the globe (it's on the brink of becoming the largest corporate tenant in Manhattan), the startup often offers discounts to “assist in driving initial occupancy levels,” which made its average revenue per member drop more than 6 percent last year, according to the document. Its overall sales and marketing costs, meanwhile, rose from $43 million to $143 in 2017.

As it's grown, WeWork has come to rely more on real estate brokerages. WeWork started an official broker commission program about two years ago, the company said, and in March started doubling commission rates for brokers from top firms CBRE Group Inc., Cushman & Wakefield Inc. and Jones Lang LaSalle Inc. WeWork said that a year and a half ago, brokers referred few tenants but now refer about 20 to 25 percent.

Despite its tightening ties with brokers, WeWork is also exploring competing with them. Last month it launched WeWork Space Services, a pilot program for medium-sized businesses in which WeWork acts as a broker for companies who want space but can't find it in a WeWork. “WeWork Space Services will allow us to retain our relationships with existing members who would otherwise have left a WeWork space by providing them with alternate real estate solutions while benefiting from continued access to our network and community,” WeWork's Chief Growth Officer Dave Fano wrote in a blog post.

“I don't know exactly what WeWork's intent is,” said Jamie Hodari, the chief executive officer of Industrious, another flexible office provider. “But I think if you look at the behavior and what their stated plans are, probably the most accurate description is they have a short-term plan with regard to brokers, which is to use them where possible to their advantage, and a long-term plan, which is probably to erase the entire industry.”

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