WeWork? We Don’t Work...
In just a few short months, the buzz surrounding WeWork has seemingly transitioned from big dreams to bankruptcy. The rentier firm’s rapid fall from grace has shocked real estate markets as WeWork, the former venture capital darling and current largest Tennant in both London and New York, botched its recent attempt at an IPO last month. Despite the company’s enormous growth in physical presence in recent years, its glossy S-1 filing this autumn revealed its precarious financial position and soured investor confidence. The firm had previously masked its questionable business model which over-prioritised social spaces at the expense of revenue generating space, enormous debts, and excessive expenses including parties and corporate jets via flaunting its credentials as a technology unicorn claiming to revolutionise co-working. Much like other technology IPO’s Uber and Peloton, WeWork proved weak under scrutiny.
WeWork now faces bankruptcy by mid-2020, haemorrhaging cash at a rate of $700m per quarter despite recently projected valuations of $47Bn. It looks unlikely that the business will become profitable as quickly as recently ousted CEO and founder Adam Neumann once claimed, which led WeWork’s valuation fell to as little as $8Bn. SoftBank’s Vision Fund has since agreed to a $9.5Bn ‘rescue’ investment for 80% equity, lifting WeWork’s post-money valuation by a small degree, but most notably the fund will include an offer for up to $3Bn of stock held by other shareholders including Neumann. Even under this deal the fund will not gain majority control, with Neumann’s voting rights passing to WeWork’s board members, although it can be expected that the firm will undergo enormous change as it prioritises free cash flow and profitability, facing massive downscaling and layoffs of up to 2,000 jobs.
More significant than the impending problems faced at WeWork are the impacts of the fallout on wider property markets and local economies. It can be expected that competitors will seeks to fill the void as WeWork downsizes, although WeWorks presence will be missed. The company claims that WeWork’s clients contribute £75m yearly in economic activity around its London sites alone, supporting over 50,000 jobs. Moreover, the short-lease office market in London is already undersupplied with vacancy rates presently at 4.5%, meaning it is unlikely that WeWork’s flexibility demanding clients will not be effectively absorbed in the short term, posing strain on the capitals rental market and output. Much uncertainty remains over the firms near future, but with a recession likely due, it is unlikely that the firms financial woes will be quelled soon, casting further doubt over its implications for property markets going forward. Perhaps even more alarming are the potential effects of WeWork’s misfortune on London’s property market, as WeWork utilised no small amount of debt to make most of its acquisitions, with effects further afield in New York and elsewhere likely.
Lastly, it will certainly be interesting to observe the crises at WeWork in contrast to the fortunes of the broader capital markets landscape, in which increasing numbers of rapidly expanding private companies are waiting longer than ever to list publicly, while equally receiving enormous investments from private equity and venture capital backers without due scrutiny. Further analysis of the potential risks of these developments will feature in the coming months.