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WeWork used discounts to convince tenants to relocate to new locations

  • WeWork's huge expansion in recent years left it with more than 30 million square feet of new office space to fill.
  • In at least some cases, it tried to fill new or under-occupied spaces in the US by offering discounts to existing members at higher-occupancy locations to convince them to relocate, according to sources familiar with the arrangements.
  • The discounts could be as steep as half off the going rate, one source familiar with the deals told Business Insider, or months' worth of free rent, a second source said.
  • In its paperwork for its initial public offering, which it has since shelved in part over concerns about its business model, WeWork disclosed occupancy levels on buildings that have been open for two years or less – but not for older ones.
  • Read all of Business Insider's WeWork coverage here.

WeWork's massive expansion in recent years put pressure on the company to fill vast amounts of new office space.

One way sales representatives did so was by convincing US-based tenants at some of its older locations to relocate, using deep discounts as a lure, four people familiar with the arrangements told Business Insider. The deals in some cases helped to fill its newer office spaces, as the company went on a growth binge that added more than 400 new locations over three years.

Incentives to fill new buildings are relatively common in the real-estate industry. Fuller, thriving buildings are often seen as more attractive to would-be tenants, which don't want to be left isolated in a large, relatively empty space. That's especially true for WeWork, which made a sense of community and an opportunity to network a part of its pitch to potential new arrivals.

WeWork's ability to quickly attract tenants to its new buildings was a core part of its pitch to Wall Street investors too. Though its spaces incur losses in the first year or so after it signs a lease, they quickly become moneymakers because they quickly reach high occupancy levels and stay that way, it said in its initial-public-offering paperwork.

However, little has been revealed about how exactly WeWork filled these buildings so quickly. WeWork said in its S-1 filing that it had, in some cases, used discounts as it opened new locations at a faster rate and to encourage longer contract terms.

That filing came as WeWork was still publicly committed to aggressive growth under cofounder and former CEO Adam Neumann.

At least one commercial-real-estate-industry executive familiar with the arrangements said these kinds of deals were possibly creating losses for WeWork. "There's not enough [profit] margin to give a 50% discount and you're not underwater, "the executive said.

As the company new management team shifts its focus to shoring up WeWork's financials after the ousting of Neumann, it's possible these kinds of deals could be reassessed. WeWork has now shelved its IPO indefinitely, and it told The Wall Street Journal last week that it expected the pace of entering new lease agreements to slow as it pursues "more strategic growth."

A WeWork representative declined to comment.

WeWork resorted to particularly generous promotions to land tenants in new locations

In trying to fill up its new spaces, WeWork sales reps in some cases resorted to particularly generous promotions, offering discounts to both new clients and existing customers, those familiar with the deals said.

The starting point for the discounts for existing tenants was one free month off a yearlong contract, but account executives or salespeople could offer even more generous terms or different kinds of incentives, such as reducing the monthly rent or offering additional credits for things like supplies and services, a former New York-based WeWork sales representative said.

In other cases, WeWork sales reps reached out to companies in existing locations that were on discounted deals set to expire, the commercial-real-estate-industry executive said. It agreed to extend those deals if the companies agreed to relocate to new locations with low occupancy levels, the executive said.

Under the deals, the tenants could pay half the going rate for their spaces – or less, the executive said. By moving, the companies were "able to perpetuate those discounts," the executive said.

Alternatively, tenants could get a bigger office at the lower-demand location than they had at the higher-demand one at the same or lower cost, the former sales representative said.

"Anything to get the deal done," the sales representative said.

WeWork offered such promotions to convince existing tenants to relocate "a bunch of times," a former employee who worked in the company New York headquarters said.

Traditional landlords sometimes take similar steps when they open new buildings or locations, Jeff Langbaum, a real-estate analyst with Bloomberg Intelligence, said.

But in the traditional-office-space market, leases cover multiple years – at least three and often much longer. Generally, landlords balance initial discounts with higher rents later on that pay for them. By contrast, WeWork's customers typically sign only short-term leases, giving the company little time to make back discounts.

The average lease commitment of WeWork's customers is for only 15 months, and many customers can break their deals with only a month's notice, the company said in its IPO paperwork.

Because of that, there's no real economic advantage for WeWork to shift tenants from older to newer facilities, Langbaum said. The only benefit it would seem to get is to show higher occupancy levels at its newer sites, he said.

Within 18 months of being open to occupants, the average WeWork space is 89% full, the company said in its IPO filing. The space is generally still at that occupancy level after two years, it said in the filing.

WeWork didn't disclose any specific details about the occupancy levels of locations that have been open for longer than two years. The company considers such spaces "mature," with "generally stable" occupancy levels, it said in its IPO paperwork.

What WeWork offers is "a short-term lease that may very well wind up with nothing left at the end of it," Langbaum said, making it seem like the company is "basically just playing a numbers game."

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