WeWork’s Viability and the Future of Commercial Real Estate
WeWork, a company that aimed to revolutionize the way people work together, recently expressed “substantial doubt” about its future in a financial filing. This declaration raises concerns not only about WeWork’s viability but also about the commercial real estate industry.
Here’s an overview of WeWork’s past and prospects.
1. What is WeWork?
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey, tech entrepreneurs who used the funds from the sale of their previous co-working start-up, Green Desk.
WeWork’s vision was to create a “physical social network” targeting freelancers and remote workers.
The business model involved signing long-term leases for office buildings or individual floors, renovating these spaces, and renting them to freelancers and companies. To attract clients, WeWork offered incentives like beer, hard kombucha, and chic interior design, charging enough to make a profit after lease payments.
2. How did things go wrong?
However, WeWork’s success didn’t last long.
By 2019, when WeWork became the largest private tenant in Manhattan, investors began questioning the company’s shaky financial situation. WeWork had been reporting significant losses for years, including nearly $2 billion in 2018. Its initial public offering was withdrawn in October 2019 due to investor reluctance, and banks became more hesitant to lend money.
Ultimately, WeWork’s valuation plummeted from $47 billion to $7 billion by late 2019, leading to its acquisition by the Japanese company SoftBank. The company laid off thousands of employees, and its co-founder, Adam Neumann, resigned. Since then, Neumann has received over $700 million from selling stock to SoftBank and cash payments.
Under new leadership by Sandeep Mathrani, WeWork went public in October 2021 after a financial restructuring. However, Mathrani’s sudden departure three months ago raised concerns about WeWork’s financial stability.
Aswath Damodaran, a finance professor at New York University, had been skeptical of WeWork’s business model from the beginning.
“In the good times, you’re going to fill up your building,” Damodaran said. “In the bad times, they’re going to leave, and you’re going to be left with an empty building and a payment to make.”
3. What are WeWork’s next steps?
In its recent statement, WeWork expressed concerns about its ability to continue as a “going concern,” meaning its capacity to generate enough revenue to sustain its operations.
Typically, such a statement indicates potential bankruptcy within a year, and companies are legally required to disclose these doubts.
WeWork aims to reduce lease costs, increase revenue, and secure additional capital through debt or equity issuance or asset sales.
Interestingly, Damodaran suggests that WeWork’s critical condition declaration might give it more leverage with landlords and creditors, allowing it to continue operating despite the challenges.
“Nobody wants to push them over the edge,” Damodaran explained. “If you’re a lender to WeWork, the last thing you want to do is end up in bankruptcy court giving away half your assets to the lawyers.”
In a statement to investors, WeWork mentioned considering various operational plans to sustain itself as a going concern, including targeted investments to reduce member churn and increase occupancy.
4. What are the real estate implications?
As of the end of last year, WeWork possessed over 18 million square feet of rentable office space in the United States and Canada, according to financial filings. Therefore, its potential failure could significantly impact the commercial real estate industry.
The factors that contributed to the decline of WeWork, such as the shift to remote work during the Covid-19 pandemic, also influenced the downsizing of commercial real estate prices, according to Stijn Van Nieuwerburgh, a professor at Columbia Business School.
Van Nieuwerburgh’s research estimates a 45% decline in office space valuation from 2019 to 2029.
Vacancies in office space have been increasing across the country, reaching approximately 20% in the first quarter of 2023, as reported by the real estate services firm JLL.