This was published 9 months ago
Opinion
Billions destroyed: How it all fell apart at WeWork
Stephen Bartholomeusz
Senior business columnistThe story of the rise and fall of flexible office space rental giant WeWork reflects the story of its times.
WeWork, the largest private tenant in cities like New York and London with leases totalling nearly 2 million square metres of office space, filed for bankruptcy in the US this week with assets of $US15 billion ($23.4 billion), but $US18.6 billion of liabilities.
Adam Neumann grew WeWork into one of the world’s most valuable start-ups before it all fell apart.Credit: AP
The company was cofounded by children’s clothing entrepreneur Adam Neumann in 2010, after the global financial crisis and during the early days of what became a prolonged period of near-zero interest rates and financial systems that were awash with central bank-generated liquidity.
That period also saw the emergence of a wave of “sharing economy” companies, like Uber, Airbnb, Lime and a host of other peer-to-peer business models.
Neumann took what was a quite conventional idea – shared office space – and juiced it up, taking out long-term leases on office space and then renting it out short-term to, initially, start-ups and other immature businesses.
The offices were spruced up and, emulating the kind of features common in Silicon Valley company properties, were stocked with hammocks, ping pong tables and free beer on tap to attract millennials.
Annual parties were held – WeWork’s “summer camp” has been likened to a mini Coachella festival– for both staff and customers, with canoes stocked with beer, performances by major music stars and lots of upbeat motivational talks from executives.
Neumann positioned WeWork as a technology company and a lifestyle brand, rather than a more prosaic and conventional property sector middleman.
The company expanded at a frenetic pace despite heavy losses, with backing from heavyweight investors like Japan’s Softbank (a venture capital heavyweight), T.Rowe Price and Fidelity. Ahead of a planned but ultimately aborted initial public offering in 2019, WeWork was valued at $US47 billion, making it momentarily, on paper at least, one of the most valuable – if not the most valuable – start-ups of the era.
The IPO was pulled after prospective investors looked at the $US15 billion of losses the business had accumulated, its messy governance (lots of related party dealings with Neumann) and a series of unrelated ventures that WeWork had invested in despite its own losses.
The bankruptcy has given WeWork a lot of leverage over all its creditors.Credit: Bloomberg
Neumann was ousted as chief executive, Softbank pumped in about $US3.7 billion of new debt and equity and, in 2021, WeWork was eventually listed via a deal with a special purpose acquisition company. Its initial market capitalisation was, at $US9 billion, a fraction of the 2019 valuation.
In 2020, of course, a seismic event occurred with the outbreak of the pandemic.
The Federal Reserve and other central banks again flooded their financial systems with cheap money, but COVID exposed the vulnerability of WeWork’s business model, a vulnerability that subsequently increased significantly as a result of the post-pandemic outbreak of inflation and the rapid rise in interest rates and withdrawal of liquidity as central banks responded to it.
WeWork had taken out 10 to 20-year leases on second- and third-tier properties but was sub-leasing them in short-term deals. Its own lease commitments were locked in but its revenues were exposed to fluctuations in market conditions.
Those conditions have shifted quite dramatically over the past 18 months.
The surge in interest costs from March last year in the US to 22-year highs has triggered a downturn in commercial property values, while the shift to working from home/hybrid working has seen demand for commercial space decline, vacancy rates rise (in New York they are about 20 per cent, the highest in decades) and rents fall.
WeWork’s own occupancy rate fell as low as 72 per cent but, despite a frenzy of attempts to renegotiate its leases, its lease costs fell only modestly.
The structural liquidity mismatch between its post-pandemic income and pre-pandemic costs created an equation impossible to resolve for a company that has never had a positive quarter of profitability.
SoftBank CEO Masayoshi Son’s big bet on WeWork went horribly wrong. Credit: Bloomberg
After a succession of temporary and permanent chief executives in the past few years, along with more infusions of cash from Japan’s SoftBank – which had committed the best part of $US16 billion to WeWork since its founding – it became obvious that the company couldn’t survive.
It was missing payments on its debt and, while it had renegotiated a large number of leases, the savings weren’t sufficient to stabilise its finances.
Bankruptcy, which offered the prospect of restructuring and reducing its debt and either walking away from its leases or using the leverage of the threat of walking away from them in a difficult and deteriorating market for landlords to obtain meaningful rent reductions, was the obvious option.
WeWork exercised that option on Monday with a Chapter 11 filing that covers its North American operations but excludes its international business.
With about 780 locations in 39 countries, including Australia, the business remains the biggest player in a sector that ought, thanks to the opportunity provided by the bankruptcy filing, to be favoured by both the conditions in commercial property markets and the shift to corporate downsizing of office space requirements in response to the more flexible working conditions sought by employees.
The model might have to be tweaked, with perhaps more risk-sharing with landlords to provide more flexible lease costs, but where WeWork was essentially launched at the top of a market for commercial space inflated by the actions of central banks, there might now be an opportunity to ditch its legacy liabilities and re-set the business towards the bottom of the cycle.
Stressed property owners are in a similar predicament to WeWork’s. The value of their assets has fallen significantly – some second- and third-tier properties in New York have seen their values halved – but their debt remains the same.
They might not like having to accept substantial reductions in rent but, in the US industry’s current circumstances, some rent is better than none. Therefore, the bankruptcy gives WeWork a lot of leverage over all its creditors.
Grand notions of WeWork as a “dot.com” business with its original fanciful and hubristic stated mission to “elevate the world’s consciousness” will presumably also be ditched, but a more conventional and mundane, but sustainable, property intermediary could emerge from the Chapter 11 process.
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