WeWork is 'grossly' overstating its market opportunity, experts say

WeWork, in its initial-public-offering paperwork, says it's operating in an enormous market, and it's only barely started to crack the surface of it.

The company says its potential market is the $3 trillion it estimates businesses are spending on office space for some 255 million desk workers around the world; only 0.2% of those workers are in WeWork spaces today.

But real-estate analysts told Business Insider those numbers vastly overstate the company's market opportunity.

WeWork's service isn't a good fit for many types of businesses and office work, and it has yet to prove that its business model works outside city centers, the analysts said.

Read all of Business Insider's WeWork coverage here.

WeWork is reportedly having trouble convincing investors that it's worth anything close to the $47 billion valuation it fetched in its last private-funding round.

Here's another reason why they should be skeptical: The company has likely vastly overstated its potential market.

In its recently released initial-public-offering paperwork, WeWork said its current members account for only 0.2% of what it sees as its potential customer base and that its potential market is worth around $3 trillion a year.

“We believe that our leadership position in this market, which we expect will benefit from trends enabling the re-invention of work, provides us a strong runway to continue growing,” the coworking giant said in its IPO filing.

WeWork may well continue to post strong growth as it moves into new cities and opens up new locations, real estate experts told Business Insider. But the company seems to be implying that its potential market includes just about every desk job in the cities it either operates in already or in which it plans to open space eventually. And the market, as it defines it, seems to include not just those cities' dense urban cores, where WeWork's space to date is almost entirely located, but also their surrounding suburbs as well.

Jeff Langbaum, a real estate analyst with Bloomberg Intelligence, said he took WeWork's market size estimates with a grain of salt, because they were “so far out there.”

“I don't disagree with the premise that there is opportunity for them to continue to expand,” Langbaum said. “I don't think it's anywhere close to that $3 trillion.”

WeWork says it has huge potential

Reports this week in The Wall Street Journal and Bloomberg indicate that WeWork's planned initial public offering is facing significant skepticism from potential investors. The company is reportedly considering going public with a market capitalization of as little as $20 billion — less than half its last private valuation — or possibly shelving its IPO entirely.

The company faces numerous questions about its business and governance, including how it might survive a recession and how much investors should trust its CEO, Adam Neumann, after a series of eyebrow-raising moves and transactions.

Read this: Here's how WeWork answered the 5 biggest questions about its business — and why analysts are still worried about its upcoming IPO

Central to WeWork's pitch to investors is the notion that it has only brushed the surface of an enormous market. It mentions its 0.2% market penetration estimate on page four of its IPO paperwork and its $3 trillion total addressable market on page six.

“We are just getting started,” the company said in its document. The italicized text for emphasis is in the original filing.

WeWork operates its coworking spaces in 111 cities today, according to the document. But it plans to eventually offer office space in 280 cities around the world.

The company appears to define its addressable market in the US to include everyone who works at a desk job in one of the cities in which it either offers space already or plans to do so. Outside the US, it counts as potential WeWork members anyone in its current or target cities who works in a wide range of white collar professions, including managers, professionals, technicians and associate professionals and clerical support workers.

“We assume that these individuals need workspace in which they have access to a desk and other services,” the company said in its filing. “We view this as our addressable market because of the broad variety of professions and industries among our members, the breadth of our solutions available to individuals and organizations of different types and our track record of developing new solutions in response to our members' needs.”

WeWork estimates that there are 149 million workers in such professions in the cities in which it currently operates. It figures there are 255 million in the 280 cities it eventually wants to be in. About 527,000 people — or about 0.2% of that 255 million — work in a WeWork space today, the company said. Even in its most mature markets — New York and London — only about 1.2% of workers with desk jobs work in a WeWork space.

The company figures that businesses in the cities in which it plans to operate spend about $11,700 per year per worker on office space. By multiplying that figure by the 255 million office workers it thinks it could eventually serve, WeWork gets to the $3 trillion market opportunity it sees.

“We believe these total opportunities reflect the amount employers are willing to spend and present an opportunity for us to capture greater wallet share,” the company said in the filing.

Not every desk job is likely to move to a WeWork space

But real estate analysts think WeWork is greatly inflating its potential opportunity.

The company doesn't specifically list which industries or types of workers are included in its 255 million potential member estimate, so it's hard to know how accurate that number is in terms of the number of desk workers in the areas it plans to operate. WeWork spokesman Erin Clark declined to comment for this story or to provide more details on how the company defines its potential customers.

But even if WeWork's number is a fair estimate, it's highly unlikely that all those desk workers really represent potential customers, analysts said.

A receptionist in a medical office is a desk job, but it's not at all clear that a doctor would want to set up shop in a WeWork coworking space. Likewise, lawyers are typically desk-bound, but it's not clear that a law firm would want to set up shop in a coworking environment, given the confidential and sensitive information they handle.

Even with specialized offerings, in which WeWork customizes entire floors of building for individual companies and handles the facilities management, its sub-leasing model isn't right for everyone.

A corporation likely isn't going to want to put its research and development department, responsible for developing proprietary technologies, in a WeWork space, said Walter Johnston, who focuses on the real-estate market as a vice president of credit ratings at the research firm Morningstar.

Part of WeWork's business model is to concentrate a greater number of workers in a particular amount of space than is typically the case in commercial real estate. That's how it can advertise to potential customers that its spaces cost them less money — at least on a per-employee basis.

But many companies may not want to cram their workers in such tight spaces, Johnston said. WeWork claiming that every desk worker could potentially work in one of its offices is kind of like a pickup truck manufacturer saying that every single car driver is a potential customer, he said.

“Not every desk job is suited to a WeWork-type environment,” Johnston said. “There are certain office types that just aren't, at least at the moment, being served by WeWork,” he continued, “and it's [unclear] if they ever could be.”

Apple is unlikely to turn its Spaceship over to WeWork

Another problem with WeWork's market size estimate: However many desk workers there may be in its markets, its ability to provide office space for them is likely limited. The company owns few properties. It instead leases them from other building owners. And it's in competition for those spaces not only with traditional tenants, but with other coworking companies, such as Regus and Industrious.

At least some industry figures, such as real-estate tycoon Sam Zell, are starting to talk about the need for the business to limit the amount of space it leases out to coworking companies, worrying that such businesses are ultimately unsustainable.

Additionally, many companies with office workers already own their own buildings or properties. It's highly unlikely that they would want to somehow turn over management of those offices to WeWork or have WeWork remake them in its own image.

Take Apple, which recently spent $5 billion on a new headquarters in Silicon Valley. Most of the employees at its new Spaceship campus likely work desk jobs. But Apple would seem to have no incentive to turn the Spaceship into a WeWork space, Johnston said.

“Apple just spent all this money to own their own building,” Johnston said. “Right now, they're the owner, they're the landlord, and the tenant. There's no reason for them to insert somebody in the middle.”

It's unclear if WeWork works in the 'burbs

WeWork doesn't give a precise definition of what it means by “cities,” when it talks about the areas in which it currently operates or plans to open space. Clark, the company spokeswoman, declined to offer an explanation.

However, the company appears to be looking not just at urban areas, but their surrounding suburbs.

For example, it notes in the filing that when it discusses its market penetration in San Francisco, it's including spaces it operates everywhere from the financial district of that city to Oakland, to suburbs such as Mill Valley and Mountain View. Likewise the Los Angeles market for WeWork includes the spaces it operates in El Segundo, Costa Mesa in Orange County, and Pasadena.

While WeWork may operate some buildings in such far-flung places, it's not clear that its model really works there or for most suburban office spaces, analysts said. To date, most of its success has been in dense urban areas, said Tom Smith, a cofounder of Truss, an online commercial real-estate marketplace. In New York, for example, nearly all of WeWork's space is in Manhattan, he said.

Regus, which pioneered the coworking industry and is WeWork's top rival, has had success in the suburbs, Smith said. But it doesn't try to pack as many people into its spaces as WeWork does. And WeWork hasn't show that its own model will work outside of city centers, Smith said.

“I don't know, necessarily, that WeWork's [model] plays as well everywhere, and that would severely limit their ability to expand into ... this addressable market they're referring to,” he said.

And then there's the $3 trillion market size number — a staggering number by any measure (as a point of reference, there is only $1.7 trillion of physical US currency in circulation, according to the Federal Reserve). The $3 trillion figure obviously would be smaller if it turns out that there really aren't 255 million potential WeWork members.

But there's another problem with that number, the analysts said. WeWork makes clear that the $3 trillion figure represents what businesses are spending on office space for those 255 million workers today. Part of the company's appeal is that what it charges for space on a per worker basis is significantly less than the average amount businesses are paying today. While there's probably room for WeWork to raise its rates, it's not at all clear that it could boost its rates up to the average amount that businesses are paying elsewhere, analysts said.

WeWork seems to be talking out of both sides of its mouth, Johnston said.

The company seems to be saying, “the product we offer is cost saving and then our market opportunity is eliminating those cost savings,” he said.

If you add up all of those factors, the market opportunity ahead for WeWork is much smaller than it states in its IPO paperwork, analysts said.

WeWork estimate of its market penetration — 0.2% — “could be grossly understated,” Smith said.

WeWork has reportedly been bleeding HR managers in the last year, and some are pointing fingers at CEO Adam Neumann

WeWork gave out 58 stock awards worth at least $1 million each in February, and 94% of them went to men, according to a lawsuit

Why WeWork's $47 billion private valuation could be a key stumbling block for its IPO — and might even derail it completely

2 big numbers — $4 billion and $47 billion — sum up WeWork's business model and the risky reason it could collapse in a recession