LONDON • A seven-year-old United States start-up is set to become the biggest private tenant in London just as Britain's economic outlook worsens.
Three years after entering the British capital, WeWork Cos has signed leases that will make it the city's No. 1 private-sector user of office space, according to data compiled by CoStar Group for Bloomberg.
The rapid growth makes WeWork, valued at US$20 billion (S$27 billion), increasingly important to the health of the city's property market as well as more vulnerable to any future decline in rents.
"A downturn of some description has to happen at some point, and when it does, the serviced office business will suffer very quickly," said Mr Michael Marx, the veteran developer who ran Development Securities for 21 years to 2015.
"In the present uncertain market, many people are hoping the WeWork model works - but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalised business, but if the cycle turns down, then the model looks vulnerable."
WeWork's success in London depends on demand for flexible office space growing fast enough to keep rental income above the historically high rates the company pays to lease its properties.
While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments.
WeWork, through a spokesman, declined to be interviewed for this report.
The firm currently operates 17 London locations, with two more opening soon and a further 10 announced. It has also begun buying some buildings and is in talks to purchase a 12-building campus close to Liverpool Street station from Blackstone Group for about £600 million (S$1.1 billion).
WeWork's most basic membership plan, which allows access to the company's offices two days a month and use of the firm's app, starts at US$45 a month, according to its website.
The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers' fees of as much as 20 per cent for bringing in tenants, double the industry norm, people with knowledge of the matter said.
WeWork's standard broker payment is 10 per cent, another person said.
WeWork's rapid growth in London means that at a minimum, it has committed to paying about £815 million of rent in the future. Of that, £231 million must be paid over the next five years, according to its British unit's accounts filed in late October.
Membership income for WeWork UK was £61 million last year, and the division posted a loss of £11.1 million.
Growing demand for flexible leases has drawn increasing competition.
Blackstone bought The Office Group for about £500 million earlier this year and plans to expand the business, while British Land, Britain's second-largest real estate investment trust, started Storey, a new flexible workspace brand.
There were almost 1,140 serviced office and co-working facilities in London in April this year, up from around 490 in 2012, according to data collated by broker Instant Offices.