Microsoft’s Lease with WeWork: A Positive Sign?

In the Seattle area, WeWork at Capitol Hill has a new client—Microsoft (MSFT). The total cost of Microsoft’s lease with WeWork is $3 million, and the tech giant plans to occupy a complete floor in the building.

On September 16, the Seattle Daily Journal of Commerce reported that Microsoft would lease an entire level. The lease area would cover 14,700 square feet of the five-story Capitol Hill building, which WeWork leased in December 2018. The building would be primarily used for flexible and shared offices.

The development aligns with WeWork’s long-term strategy of depending on large companies. WeWork offers flexible spaces for businesses or teams within large organizations. WeWork would lease space to the companies who would like to own premises in prime office buildings, but do not want long-term lease commitments.

In 2017, IBM (IBM) leased a large WeWork space in New York’s Greenwich Village. In 2016, Microsoft shifted 30% of its sales force to the shared space in New York.

Amazon (AMZN) has a WeWork office in Boston, while its Berlin property houses Airbnb. Some of WeWork’s other enterprise clients include Slack and KPMG.

It’s become evident that shared working spaces aren’t just for startups. The 2017 Americas Occupier Survey by CBRE revealed that 65% of enterprise companies would include co-working in their operations by 2020.

The primary reason for this shift could be more contractual workers being recruited in giant corporations’ teams. Sometimes these large corporations hire small groups for a time-bound project or are testing new business alliances. In this case, committing to a 10-year lease doesn’t sound feasible, as flexible working spaces are more practical.

WeWork classifies companies with more than 500 employees as enterprises, noting that enterprise memberships are its fastest-growing segment. Enterprise clients formed 40% of WeWork members in 2018. WeWork seems to prefer enterprise clients, which offer significant revenue streams from a single location. Plus, enterprise clients are relatively more stable than freelancers and startups.

In 2017, WeWork launched Powered by We, through which it offered design, construction, and management services to enterprise clients. At this time, the company started increasing its focus on enterprise memberships.

In our view, it’s encouraging that WeWork has a steady stream of enterprise clients, and we believe it could benefit from bringing more large corporations on board. The company has weak financials, and a steady flow of revenue would be a much-needed financial shot in the arm.

There are also inherent risks of depending too much on a single large client. If the client cancels the membership, it would cause a significant strain on WeWork’s cash flow while impacting its occupancy rate. In my opinion, a diversified client portfolio should be the target.

The WeWork IPO has been postponed until the end of the year due to the company’s inflated valuation and soft financial standing. Before it gears up for the next IPO, the company must work toward minimizing its risks and creating a sustainable revenue model.

Today, Microsoft stock climbed 2.35% and traded at $141.77 at 10:44 AM EDT. The stock is past its 52-week high. Investor sentiment turned buoyant after the tech giant announced a share buyback and dividend hike. Microsoft’s tech peer IBM gained 1.5% on the day, while Amazon stock is also trading in positive territory.