Roughly four years ago, WeWork was among those companies many considered rock stars. Just prior to its public IPO, it had been valued at over $35 billion. But as would-be investors examined the company’s portfolio, it became clear this assessment was over-inflated. And even more concerning was the company complex relationship with its founder and CEO, Adam Neumann. What was supposed to be a moment of celebration turned into one of company concern and panic. The potential collapse of WeWork was real, and the company needed a savior. As it turns out, SoftBank was that savior that prevented a WeWork downfall to the tune of $5 billion. Though the IPO didn’t go through, WeWork survived and hoped for better days to come.
Fast forward to today, and some things have changed but others have not. After the collapse of WeWork was avoided, the company did eventually achieve its IPO in 2021 by merging with a special purpose acquisitions company. Likewise, WeWork has continued to operate hundreds of thousands of office spaces in 39 different countries. But amidst the pandemic and other mounting pressures, the company hasn’t been able to turn the ship around. It continues to bleed massive amounts of money and is even struggling to find a CEO. While those predicting a WeWork downfall in 2019 may have been slightly premature, they were not necessarily wrong. They were probably just a few years off in their estimates.
“Our losses and negative cash flows from operating activities raise substantial doubt about our ability to continue as a going concern.” – WeWork Statement in recent SEC Filing
WeWork’s Business Model
WeWork was a unique concept when it was initially introduced in 2017. In essence, its business model involved securing commercial real estate properties in developed countries throughout the world. Once a lease was secured, WeWork would invest heavily in renovations and upgrades. This was done to create a sleek and modern co-working environment attractive to its potential clients. Assuming corporations would see WeWork as a better workspace option than leasing their own space, success was expected. And at least in its early years, this seemed to be the case. WeWork under the guidance of the charismatic Adam Neumann expanded rapidly, acquiring vast amounts of coworking spaces. It was this growth that initially supported its tremendous valuation.
The problem was that WeWork’s initial model leveraged too much of its revenues into expansion. Though not quite a Ponzi scheme, staff and executive expenditures were excessive. And profitability was far from what it should be to support such a valuation or rapid growth. Once this was revealed, investors shied away from the company, threatening the collapse of WeWork. But SoftBank rescued them preventing a WeWork downfall at the time. Since that rescue, WeWork has been unable to recover. Some degree of real estate contraction occurred, and expenses were cut. But this was far from enough to right the ship. This was especially true in light of the other unforeseen factors to come.
“[The WeWork business model] has never been a business model that worked.” – Vicki Bryan, CEO of Bond Angle
Dying a Slow Death
Since WeWork’s bailout by SoftBank, things failed to improve. Of course, this was due to a number of other factors in addition to its poor business model. Notably, the pandemic forced people to work from home rather than in co-working spaces. As a result, vacant offices contributes greatly to a WeWork downfall. Subsequently, with lightening of COVID restrictions, some workers began to return to office spaces. But this has been far from a full return with remote work remaining highly popular. As such, there’s a glut of vacant commercial real estate especially in vacant cities resulting in an excess supply. This too hasn’t done the company any favors and has contributed to the collapse of WeWork. Now with inflationary pressures and higher interest rates, the company faces new problems. Thus, despite trying to make positive changes, the deck has been stacked against them.
Since 2017, WeWork reports losing over $15 billion. At the same time, SoftBank states it has lost $10 billion in equity value, noting its investment in WeWork was a mistake. All of this has resulted in declining stock values as the collapse of WeWork continues. Currently, it is trading at 14 cents a share, having lost 33% of its value after losing its last CEO. In essence, the company still has sizable operational costs totaling $530 million this year to date. And despite a space occupancy rate of 72%, revenues fail to provide a profit for the company. These facts and figures are what led the company recently to suggest bankruptcy concerns are real for the company. Though the WeWork downfall has been gradual, it looks to nonetheless be inevitable.
“If we are not successful in improving our liquidity position and the profitability of our operations, we may need to consider all strategic alternatives…including obtaining relief under the U.S. Bankruptcy Code.” – WeWork Statement in SEC Filing
Putting WeWork to Bed
As it currently stands, WeWork continues to operate internationally as a global co-working space provider. It has 777 locations in 39 different countries, making its name easily recognizable among would-be clients. In these facilities, it has nearly a million workstations, and it still reports about 650,000 clients. But these figures are far from enough to cover expenses and impending lease renewals. In order to prevent the complete collapse of WeWork, several strategies will be pursued. This includes trying to reduce lease costs and expenses as well as increasing occupancy and capital assistance. But unless a miracle occurs, it’s not likely the WeWork downfall will be stopped. In all probability, bankruptcy is just around the corner.
To many, the final collapse of WeWork is not a surprise. Given recent barriers to recovery and a shaky start, the chances for survival have been slim since the pandemic. But there are bigger concerns linked to the WeWork downfall as well. Given the number of properties WeWork leases, defaulting on these leases could produce a tipping point in the commercial real estate crisis. For this reason, the recent news concerning WeWork is notable as well as highly concerning. For the sake of the real estate market and financial systems, let’s hope the WeWork downfall continues to be slow. Its collapse might be a given, but the longer it can survive, the better these markets will be.