Could WeWork bring down Manhattan’s commercial real estate market?

Everyone loves WeWork, right? They have well-designed spaces in the best neighborhoods in cities. They’re a sort of physical manifestation of our entrepreneurial desires. Seriously, a bunch of good looking, plaid-shirted people drinking artisanal coffee and building wireframes of apps and whiteboarding video marketing spots? That’s just… cool.

So cool, that the Wall Street Journal just reported this week that WeWork now occupies more office space than anybody in Manhattan, just passing JPMorgan Chase. You know, the biggest bank in the country, with $2.5 trillion with a T in assets.

It’s really a testament to how much people love WeWork.

But its also sort of a problem. Or at least could easily become a problem.

The article noted,

WeWork is one of the biggest and fastest-growing of the “flex space” office providers, a group that also includes Knotel Inc., Industrious Office and IWG PLC. These companies rent office space from building owners, then sublease it for as short as a month or up to three years. They offer tenants greater flexibility than do traditional landlords, which typically lock in renters for a decade or longer.

In finance, this would be called a duration mismatch. If you’re managing a pension portfolio, and the average person in your plan is 20 years from retirement, you’d want all the assets in your plan to have a duration of 20 years – that is, to make sure any changes in the value of the liability (how much you must pay pensioners) are offset by changes in the value of that pile of assets (how much you’re investing now to pay them in the future). And note, it isn’t exactly linked to “years” in practice, but for simplification sake, we’ll run with it. This gets mathy because the change in the value of a 1-year Treasury note acts differently than the change for a 30-year Treasury bond when interest rates move.

All this is to say that this duration mismatch makes WeWork’s strategy incredibly risky. If they enter into a 30-year lease on some commercial real estate space, and sub-lease it for 6-months, 1-year, or 3-years to companies, they are banking that they’ll be able to replace those tenants with other tenants who can pay the same amount in a few years.

But what happens in an economic downturn? There will be less demand for that real estate space, so WeWork will either have trouble filling its space, or will cut prices to draw in customers. But at the same time, they have the same lease payment to make for their own lease on the space.

Anyone who has lost a job or has taken a pay cut when they have a mortgage knows how stressful this is. And when there’s a much bigger recession things can get ugly. Just think back to 2008 and 2009, when the entire US housing market fell into tatters because of an economic downturn.

That’s sort of the kind risk WeWork poses to the New York commercial real estate market. What if an economic slowdown puts pressure on smaller companies and entrepreneurs to cut costs? What then happens to all that commercial real estate space WeWork is leasing in New York? What kind of effect could that have on the bigger real estate market in the US?

JPMorgan is able to withstand a recession. They have a ton of money, and can raise capital quite easily. WeWork, on the other hand, is a private company that relies on private equity funding, but has also tapped into the bond markets for financing.

The results have been less than stellar. The WSJ wrote a story right after the first bond issue in April titled, WeWork Bonds Fall As Debt Investors Question Startup Stories. The bonds have recovered since then, but are still trading below par.

And oh yeah, the economy is humming along right now. WeWork’s story might get a lot more interesting when things get choppy.

Adobe is killing it; Thank you, creators

Adobe’s quarterly earnings yesterday showed a continuation of a longer-running trend: the Creative Cloud is an unstoppable force.

A few quick highlights from the report and some analyst reactions:

  • The transition to the Creative Suite was a huge question mark, but that story is over – now the company has been adding users like gangbusters. Stock analysts talked up Creative Cloud’s growth, which was up 28% over the past year. That’s a lot more people taking up photography, videography, and web design. Hell yeah.
  • The subscription model really works! That was a huge question over the past few years, but Adobe gets it. It’s also why Apple is pushing app developers to sell on a subscription basis – that works well for consumers who want to test products, and works great for the companies, who have to continuously update their software and make it better for the consumer.

This is all fantastic stuff. Hopefully it’s a good signal that there are just more people out there creating fantastic art.

Product review-less review of the Apple September 2018 launch

I watched the entire Apple product event yesterday (big hat tip to Sam Sheffer and his live stream on Twitch. Well done.), and while of course I’d like to upgrade right away to the XS Max and the new Apple Watch, I… might not. They’re just expensive, and I think I might be able to hold out with my 6+ for one more cycle.

And while I won’t get into a review of each of the products – there are already plenty of good ones out there – here are my thoughts on the event, from a bit of a different perspective. Where does the product and timing of the iPhone Xr, iPhone XS, and iPhone XS Max stand in the upgrade cycle? Will all those iPhone 6 and 7 holdouts finally make the leap with this new line of iPhones?

Demand: I think Apple is clearly trying to position itself across a massive swath of the market. Just look at this chart, tweeted by Horace Deidu this morning

Apple is making a serious move to cut across a lot of price points here – from entry-level users who just (probably) want to be on iMessage, all the way up to the price insensitive buyers who are using the XS Max with 512 GB of storage for basically anything under the sun you can imagine a phone doing.

However, I think that if we were to compare this with the past upgrade cycles, this would be huge step up. But I just don’t think that is going to happen this time. First, it’s just a S-level upgrade, so all those iPhone X buyers are probably fine waiting for the next upgrade cycle. Second, those of us with iPhone 7s or 6s are just waiting longer to upgrade.  As I wrote a few weeks ago in Samsung Note 9 vs Apple iPhone X vs You’re probably not going to upgrade anyway

These kids, who are doing summer internships at Morgan Stanley and are thus likely well-remunerated (I’ll hold off from any family wealth assumptions), are using their current devices for longer and longer. The most popular phones were the iPhone 7/7+, then the 6, then the 8, then the X.

On a device payment plans? See fewer promotions? Just opting to replace your battery? Or just riding a phone until the wheel completely fall off? You’re not the only one, and that is weighing on upgrade rates.

And while the XS Max has the biggest display ever, I can’t see it generating the same kind of buzz we saw with the iPhone 6+. It’s bigger and better, but is if fundamentally different?

The “cheap” iPhone Xr: I think the Xr is going to be the biggest hit of the cycle. Apple’s in-house estimates (in-house, so take with a boulder of salt) show 50% of iPhone users, which is around 700M to 825M customers, could look to upgrade to the Xr in the next year and a half to two years. Even if just a fraction of those users do that, that’s big for Apple – at least in units moved. That lower price is a big selling point for consumers – at least relative to the high-end iPhone models. That $750 price tag is more than the highest end models just a few cycles ago. For all the talk about ASPs, Apple has done a great job making people think $749 is cheap for a phone.

Usage: The biggest step forward seemed to be with the new Watch, with the focus on health and fitness. Fall detection and ECG? How many people are going to be getting these for their aging parents? I can see these being a bigger hit than past models, and a lot of people who had been on the fence about the Watch might finally see some real-world uses that might finally push them over the edge. 

The new iPhones though? They are fantastic – just look at the chip upgrades, the camera and camera software. But I just don’t think there’s that much new with them. Some of the biggest improvements that people might use day-to-day – the portrait mode with adjustable bokeh comes first to mind – are software upgrades, not hardware upgrades. You can buy an iPhone 8 that is going to do 99% of what the Xr will do for $150 less (though I don’t doubt people would pay that kind of premium to have a salmon-colored iPhone).

If anything, this fact hammers home the fact that services – and not devices – are the future of Apple’s future revenue growth.

So that’s my quick product review-less review of the Apple launch.

9/11, the 10th anniversary of the Financial Crisis, and Downtown Manhattan: A lesson in resiliency

With this week including both September 11th and the 10th anniversary of the Financial Crisis, it has been a great week to reflect on Lower Manhattan.

I have been reading a lot about the history of New York lately, and that little bit of land at the very southern tip of the island of course has a long and interesting history. It was where New York was founded, was as much a part of the founding of the United States as anywhere, and grew to become the center of the financial – and later cultural – universe.

But that all didn’t happen seamlessly. I’ll list just a few things that has happened that centered on the (rough back-of-the-envelope calculation…) four square miles below Canal.

And every single time, it has shifted its form, becoming something else entirely.

We’ll start when the Dutch took Manhattan from the Lenape. The Dutch weren’t great neighbors. But they wanted money and power, they filled the shallows in (go look how the pavement slopes on Pearl Street), and startedto build up its commercial port.

Then the British took over, reclaimed more land from the sea, and started building up the wharves and seawall.

A statue of King George III went up in Bowling Green, but that was pulled to the ground by American revolutionaries, then, as the New York Times noted,

“His statue here has been pulled down to make musket ball of, so that his troops will probably have melted Majesty fired at them,” Ebenezer Hazard, the New York postmaster, wrote to Gen. Horatio Gates.

The population boomed in the 1800s, as the American’s created even more land. As Adam Davidson noted in his fantastic book Magnetic City,

Huge loads of ash, offal, manure, dead horses, and household garbage were carted to the water’s edge and loaded onto floating “dumping boards” and into the shallows and slips, where they gradually alchemized into real estate. The slow process haloed the city in stink, but in the long run it proved to be the most profitable form of recycling.

A 1835 fire burned down almost everything in Lower Manhattan, including the Merchants’ Exchange and the Tontine Coffee House, the birthplace of the American-style market economy.

From the ashes, though came the Woolworth Building, opened in 1913 as the tallest building in the world Its architect, Cass Gilbert, said it had “a measure of beauty, and that architectural beauty, judged even from an economic standpoint, has an income-bearing value.” It was a physical symbol of technology (the skyscraper), beauty (just look at its turrets and green copper top), and America’s capitalist might (Gilbert said it was just a machine that makes land pay).

Not everyone was so enthused, including a terrorist who bombed JP Morgan and Co. in 1920. You can go there (23 Wall Street) and still see the marks on the building from the blast.

New York’s shipping industry collapsed in the mid-20th century. But out of that, a group of artists moved into the Coenties Slip, into the industrial lofts abandoned by shippers. Some of those artists? Robert Rauschenberg, Jasper Johns, Ellsworth Kelly, Agnes Martin, Robert Indiana.

Then New York almost went bankrupt in the 1970s. Some fantastic books were written about how New York at that time (most notably Ken Auletta’s The Streets Were Paved With Gold).

But the city recovered in the 1980s and became the “Master of the Universe” global center of wealth and culture, and all the good and bad that came with it.

Then 9/11 happened. A total aside: I was a senior in high school at the time. That entire day still sticks out vividly in my mind. I was watching MTV, who was playing music videos from New York banks through the night after. I recall watching Malcolm McLaren’s Buffalo Girls:

But guess what? New York recovered. 

The disasters that followed in the 2000s and 2010s – the Finacial Crisis and Hurricane Sandy – were also devistating to Lower Manhattan – though certainly in different ways than 9/11.

Yes, Wall Street is there, but in an increasingly decentralized financial universe, there is less of a need for a footprint around the exchange. But the neighborhood itself is far different than it was in the mid-2000s. People actually want live there.

Now, some of those monuments to the past are being converted to totally new, different uses. Look at 70 Pine Street, which was the headquarters of AIG, the insurer that blew up and almost brought down the entire US economy in 2008. Now, it was converted to residential. Here’s your typical 1BR apratment, for just $4,550 a month.

Or the top of the Woolworth Building, which was gutted of its elevator and mechanical equipment and converted into a $110M home.


Photo via Curbed/Williams New York

Or the JP Morgan & Co. building on Wall Street. Davidson wrote,

“In its new incarnation, the roof of Morgan’s folly has become a poolside arbor in which to lounge with a cocktail and admire the muscular marble figures laboring in the pediment of the Stock Exchange across the street. The roof garden, Starck enthused, is “like an Italian villa on a lake. You’re in the middle of a sculpture, in a garden in the middle of the world. It’s an ecstasy trip.”

Affordable housing is without a doubt the biggest problem in New York. These transformations are all creations for the absolute wealthiest, and do nothing to address the most pressing need of the city. So some of the most recent changes in Lower Manhattan are indeed an evolution, but an evolution to what end?

But the point still stands that Lower Manhattan will adjust, shift, iterate, mold itself into something new. You can throw whatever you want at it, but it’s about the most dynamic place on the face of the earth.
Lower Manhattan has lived a hundred lives. It still has a couple thousand more to go.

THE WEEK’S BEST: Design, architecture, and technology – August 24, 2018

What I wrote last week:

Nothing, I’m worthless.

What I shot last week:

Design, architecture, and technology digest:

Architecture and Design: Cities

Watching a real urban planner play SimCity is incredibly satisfying — FastCompany

He’s able to put his background to use. Little did I know that by arranging roads on a 4 x 4 grid versus a 6 x 6 grid–in other words, allowing four buildings on each block rather than six–you can radically change the taxable density of a city. As he explains, this slight shift in the grid changes the land-to-road ratio from 36% to 27%.

“It’s not an enormous difference, but in SimCity as in real life, roads require maintenance,” Amos explains. “You want to minimize roads and maximize land value.” This logic is exactly why pedestrian-first communities make so much sense, beyond obvious quality-of-life benefits for citizens.

The Bipartisan Cry of ‘Not in My Backyard’ — New York Times/The Upshot

Mr. Carson framed the idea in traditionally conservative terms: the logic of rolling back regulation. But conservative communities and Republican voters are among those who’ve pushed to tightly regulate development. Democrats have done the same. Nimbyism knows no party limits.

Architecture and Design: Style x Technology

Posting Instagram Sponsored Content Is the New Summer Job — The Atlantic

Others say that their work with brands has taught them a range of new skills, including photo editing, sales, marketing, budgeting, navigating workflows, and juggling inbound and outbound requests. The Instagram hustle prompted Leigh, a 14-year-old in Virginia who just finished eighth grade, to download Gmail onto her phone for the first time and spend hours cold-approaching businesses for brand deals.

“Some teens don’t know they have this potential, and they don’t know they could be making a profit off this,” she says, adding that she finally understands why her parents, who are both entrepreneurs, are “always going over emails.”

NYC Library Takes Novel Approach, Posting Books to Instagram — Wall Street Journal

The technology works in such a way that when readers are on the Instagram app, they hold the page of a book by resting their thumb on the screen, library officials said. They turn the page by lifting their thumb.

The experience is “unmistakably like reading a paperback novel,” Corinna Falusi, Mother in New York’s partner and chief creative officer, said in a statement.

All the ways in Which Instagram has changed our lives — Quartz

It was changing how we perceive the world, and even started shaping it. Today, you can find reams of articles that describe how it has transformed just about everything—from the obvious (like photography), to the very specific (eating rhubarb).

Is the Art Market Ready to Embrace Work Made by Artificial Intelligence? Christie’s Will Test the Waters This Fall — Artnet

The resulting work, titled Portrait of Edmond de Belamy, depicts a man in a dark coat and white collar with indecipherable facial features that reside somewhere in the uncanny valley. The unique piece, a gold-framed canvas print that is currently on view in Christie’s London showroom, is estimated at $7,000-10,000. The collective says it will use the proceeds from the sale to further train its algorithm, finance the computational power needed to make such works, and experiment with 3D modeling.