In August 2017, a New York co-working startup named WeWork was squeezed into a unicorn outfit and hurled on to the world stage by a $4.4 billion investment from Japanese conglomerate Softbank. By August 2018, as WeWork’s astronomical growth continued, we started to question our assumptions of this as a fad, contemplating WeWork as the start of a new era in commercial real estate and office design. While also warning that overfunding could lead to unrealistic expectations, thereby encouraging wastefulness, indiscipline and sloppiness.
“Considering the money spent on somewhat-risky acquisitions, outstanding rent payments and net-loses, there are also fears that bringing in debt investors at this stage would put the firm in a financially precarious position. If, say, the tech bubble were to burst, WeWork might find themselves in free fall,” we said in a May 2018 article entitled WeWork, WeLive, WeGrow but Will We Succeed in the Long Term?
In February 2019, we saw a glimmer of diversification through SaaS acquisitions and predicted more funding from Softbank as the company sored to a crazy valuation that the now-removed CEO Adam Neumann claimed was based on their “energy and spirituality”. In May 2019, we reported on WeWork’s IPO intentions and highlighting that any significant dip in the co-working trend could be catastrophic. For anyone who doesn’t know the rest of the story, an excerpt from our October 2019 article sums it up well.
“The WeWork carnival is settling down and the dismantling is about to begin as the company searches for a more sustainable future. It has been quite a ride from zero to a $47 billion valuation and back down to whatever lies ahead. The circus master lost control, the cracks began to show, now customers consider their memberships, and staff fear for their futures. The main investor has seized control to save the company from complete collapse leaving uncertainty as the only certainty for the key stakeholders in this unprecedented mess.”
The article went on to discuss the extreme measures that would have to be taken in order to save the company from collapse — not from downturns or bubbles bursting as had been predicted by many business commentators, but from the “wastefulness, indiscipline, and sloppiness” typical over overfunded startups.
The hype surrounding WeWork got to all of us, but no one more than Adam Neumann, whose failures left his already fragile company in taters, for his former staff to pick up the pieces. And soon, as the Coronavirus dust settles, we will dive straight into a deep recession.
- Goldman Sachs: US GDP -24% in 2Q, a record drop.
- JPMorgan: "Recession will rock the US and Europe by July"
- Bank of America: "The US economy has fallen into recession"
- Morgan Stanley: “Base case is a global recession”
- UBS: “Deep recession by July”
- Pacific Investment Management Co: "Inevitable recession"
- Deutsche Bank: "The worst global recession since World War II"
So, WeWork is screwed. Just before their IPO was officially aborted, they announced Q3 2019 net loss of $1.25 billion. The majority of WeWork’s short-term tenants are expected to downsize or break contract at the first opportunity as the world moves into survival mode, but WeWork is still locked into a multitude of leases that average 15-years. In 2020 alone, the company has almost $2.2 billion in non-cancelable operating lease commitments. Then, on March 17th, the NY Times reported that Softbank is threatening to withdraw an offer they made to acquire a much larger stake in WeWork.
Remembering the story, as it happened through the links above, is more than just a nice way to pass your time in lockdown. It raises serious points for all companies moving into the uncertain times ahead, civilization is at a standstill, and the longer it takes to return to normality the deeper this recession will be. While the trigger is unexpected, the recession is not. Pragmatic companies would have planned for this overdue downturn, which will end our longest unbroken period of economic growth. A deep recession will challenge all companies, but not all companies are in the same predicament as WeWork.
“While there aren’t many ‘winners’ in a situation like this, those involved in offering flexible working services are seeing hundreds of millions of people thrust into an involuntary remote working trial,” we wrote in Thursday’s article: COVID-19, the Worlds Biggest Remote Working Experiment is Underway. “When the dust settles on this global work-from-home experiment, flexible working may be seen as necessary for the future survival of companies,” it continues.
On March 13th, short-term office rental firm, Convene, made the decision to close 17 of its locations after a member at the company’s 5th Avenue site was tested positive for coronavirus. On March 20th, IWG - the world’s largest flexible office provider with 3,338 locations in more than 100 countries, began asking its UK landlords for a 3-month rent freeze in exchange for a 3-month contract extension.
“This is test No. 2. Test No. 1 happened last year with the failure of the WeWork IPO. We’re going to find out how durable this business model is,” Braddock Commercial Real Estate Solutions President and CEO Christopher Campagna said. “The pandemic is going to put even more pressure on WeWork,” Campagna added, highlighting Convene and others are much better placed, because of the strong relationship they have formed with their landlords. “Flexible providers like that will survive because their landlords won’t allow them to fail.”
So, the future is not looking good for WeWork but, in general, the co-working industry is staying optimistic. They depend on the idea that once the lockdown measures are lifted, that those who have been forced to work-from-home (for what may turn out to be months) will be desperate to get back to the office or co-working space. However, they seem to ignore that fact that lockdowns will last longer than expected, that people will likely be encouraged to work-from-home beyond the end of the lockdown, and that office space will be a key target for cost-saving measures of all companies striving to survive what looks like a deep recession.
“Companies will get more comfortable with people working remotely once they find out that employees can be productive even if they are not right under your roof at corporate headquarters,” said Global Workspace Association Executive Director Jamie Russo, who believes remote workers won’t want to stay remote for long. “My instinct is that they will want to be part of a community. The industry has discovered over the past five or six years that a lot of our new membership is driven by work-from-home people. All the folks at home are going to come rushing into coworking spaces where they won’t have to deal with their kids anymore.”
The uncertainty in the world today means that we cannot be sure of anything. However, the best-case scenario of most of the leading financial institutions is a severe recession. The coming months and years will be difficult for every company, in every industry and, as we have all been saying for some time now, the short-term rental model will struggle in a downturn. The robust companies in the space should be able to survive and adapt to this new reality, but for others, such as WeWork, it looks like it may be the end of the road.