Today WeWork is going public in a transaction that values the company at $9 billion. This is a far cry from the earlier valuation of $47 billion when WeWork proposed its earlier public offering in 2019, but scandal intervened, and the company had to fight for survival. But there is no need to revisit the well-chronicled story of the company’s sordid past at this stage. What matters now are WeWork’s prospects for the future and its recent financial performance.
Below are some thoughts gleaned from my unique perspective as (1) a NYC office leasing agent who places clients in WeWork centers; (2) a WeWork tenant; and (3) an expert witness for a major NYC landlord in litigation adverse to WeWork that was recently resolved (more to come on Wharton’s new expert witness work in a future post).
The initial raison d’être for WeWork was to provide a place for individuals and small businesses to enjoy the benefits of a community setting as opposed to the isolation of working at home. In a paradoxical way, that personal connection is now more needed than ever. Further, for companies that are deferring entry into long-term office leases like the short-term commitment WeWork allows as a strategic pause while they figure out the best approach for their business and employees. As a corollary, businesses that are looking at the new concept of hotelling where they host meetings and gatherings of employees at relatively infrequent intervals may also be attracted to WeWork.
The company is also experimenting with a hodge-podge of collaborations with entities as far-flung as Cushman & Wakefield and Saks Fifth Avenue. It remains to be seen if these disparate projects will bear fruit. An additional concern is that WeWork has become quite bureaucratic and segmented; every tenant problem seems to require an inquiry with a different part of the business, frequently handled by unnamed individuals who deliberately have no phone number or e-mail which would allow for direct contact. Even the simplest issue requires submission of a “ticket” which can lead to a long runaround.
This ambiguity sums up my view of WeWork’s future. It was a brilliant idea which went sour due to overexpansion and management hubris (where have we seen that before?). Now that the excesses have been curbed, adults have been brought in to oversee proceedings and the supernova has crashed back to earth. That is a plus.
However, WeWork’s reputation has been irrevocably tarnished and many other coworking operators and traditional landlords are now offering a similar product. While there is definitely a place for WeWork in the office leasing ecosystem within its niche as the largest coworking company as the Great Experiment in hybrid work evolves, it is no longer a shining star bringing a finer and nobler way of living to the world. Rather, it’s just another business in a crowded space with deep-pocketed investors and lenders that may be too big to fail.
Significant challenges lie ahead. WeWork lost $3.2 billion in 2020 and another $2.1 billion in the first quarter of this year, including a $500 million settlement with infamous founder Adam Neumann. The red ink continued to flow in the second quarter of 2021, with a loss of $923 million in the quarter, which included $474 million of non-cash and non-recurring expenses. Further, the Financial Times just reported that WeWork’s revenue projections for 2021 which were initially $3.2 billion have now been cut to $2.7 billion.
On the positive side, preliminary total revenue for the third quarter of 2021 was $658 million, with $228 million in revenue in September, making it the fifth consecutive month of revenue growth and the highest monthly revenue recorded in 2021. Total occupancy continued to trend upwards at 60% as of the end of September 2021, up from 52% at the end of second quarter of this year. The company claims that total occupancy will increase to 64% when 30,000 net memberships that have new contacts to move in are added. This is consistent with the increase I have been seeing anecdotally in WeWork’s asking rents in NYC in recent months amid greater traffic at the company’s coworking centers as office attendance has picked up to 36.2% nationwide in the 10-city Kastle Systems back-to-work barometer.
In the past two years, WeWork has used its market power to achieve what was effectively an out of court workout outside of bankruptcy. From the beginning of 2020 to the second quarter of 2021, the company completed over 150 full lease exits and 350 lease amendments. This has resulted in an estimated $400 million in annualized rent savings. In addition, WeWork has reduced selling, general and administrative expenses by $1.1 billion compared to the fourth quarter of 2019 on an annualized, run-rate basis and has divested all non-core businesses.
I think of WeWork like a chain of retail stores that has been through a bankruptcy reorganization that reduced expenses, cut back its footprint to better-performing locations and jettisoned the leaders whose mistakes and greed cost the company dearly. On a related note, there are reports Neumann is throwing a party in New York’s meatpacking district this morning as he retains 11% of the WeWork stock; evidently he was not required to don sackcloth and ashes as part of his settlement.
But is there still a need for the WeWork product? The answer is yes, but that product is no longer fresh and WeWork has lost its competitive advantage to a considerable degree. Further, new patterns of hybrid work have emerged around the world with clear staying power which will impact the office landscape. Although the bloom is off the WeWork rose, it is still a serviceable flower when the need for short-term space is on the rise.
So that’s the way I see it. More importantly, what do our friends and clients think? Please let us know.