Co-working giant WeWork (WE) has been accustomed to gloomy headlines since its nearly doomed public run in 2019, and this week was no exception. The aftermath of the past few days will not only decide the fate of the company’s stakeholders and thousands of employees, but also the near term of an already deteriorating office market where WeWork rents out millions of square feet. may also determine the health of
on tuesday, WeWork said it had ‘serious doubts’ As part of its second-quarter earnings report, it was revealed that it continued to lose money and member numbers, citing its ability to sustain operations. The company posted a net loss of $397 million, with membership down 1% year-on-year.
“As a result of the company’s losses and expected cash needs, combined with increased member churn and current levels of liquidity, there are significant doubts as to whether the company will be able to continue as a going concern,” WeWork said. said in its financial statements on Tuesday.
WeWork interim CEO David Torrey blamed the company’s declining membership on “oversupply of commercial real estate, increased competition for flexible spaces and macroeconomic volatility.” However, he added that he was “confident” that the company would survive “in the long term.”
“We are confident in our ability to meet the evolving workplace needs of companies of all sizes, across sectors and geographies, and our long-term vision remains unchanged,” Tory said in a statement.
After assessing its funding needs over the next 12 months, WeWork has raised questions about continuing as a going concern, an accounting term meaning that a company is stable and healthy enough to continue to meet its obligations. clarified. A company spokeswoman said the review did not take into account the company’s plans to improve its balance sheet.
These plans include a lease restructuring to reduce rent payments. Reduce member churn and generate new sales. Limit the amount of capital you spend. And they are looking for more money to come in through new debt and asset sales.
But WeWork downplayed the announcement, trying to project the image that the company was on the right track, but not everyone was convinced.
“I wouldn’t confess that I might fall off a cliff’s edge unless I’m lurking over it,” said Alexander Snyder, an analyst at CenterSquare Investment Management who keeps an eye on the flex-office market. It should be,” he said. “They needed to grow to get out of this problem, but that growth has stagnated.”
After the announcement WeWork reorganized its board of directors After several members resigned and were quickly replaced by three with experience working with companies in bankruptcy and default, wall street journal report.
WeWork’s stock price plummeted on the news, dropping nearly 40% in value since the announcement, to 13 cents a share by late Wednesday afternoon.
WeWork’s second-quarter results certainly showed hope, but net loss improved by $238 million for the year, while earnings of $884 million increased 4% over the period. The announcement left many concerned about the company’s continued existence. With stagnant growth, it will likely need a capital injection, which is hard to come by in the current market, Snyder said.
“I think the biggest change for them is probably the availability of credit,” he says. “We needed a runway to be profitable, and this year the runway is significantly shorter.”
Unless more capital comes in and WeWork fails, what will happen to the millions of square feet that WeWork leases?
“WeWork is far behind other companies,” said David Lipson, president of Savills North America. “other [coworking operators] Failed, but WeWork dwarfs them. ”
As of the end of 2022, WeWork operated about 43.9 million square feet around the world, of which 18.3 million were in the United States and Canada, according to Securities and Exchange Commission filings. And they account for more than half of Manhattan’s coworking market.
WeWork’s 6.9 million square feet in Manhattan accounted for 61.4 percent of all coworking spaces in the borough, according to a Savills report for the first quarter of this year. This is well ahead of second place IWG with 13.9% market share.
Tuesday’s warning may drive some tenants — Lipson said Savills’ phones keep ringing from WeWork members — but Manhattan’s 11.1 million-square-foot coworking market may not be able to absorb those tenants. Some may move to traditional office rentals instead.
For landlords, WeWork’s announced restructuring or plans to terminate more leases could affect the cash flow of those buildings, and things could get even worse if WeWork eventually files for bankruptcy. It can get worse. A Barclays report said the lease could be rejected during the process.
Barclays said it has ample exposure to WeWork in the commercial mortgage-backed securities (CMBS) market. WeWork is among the top five tenants in a $2.4 billion CMBS loan backed by office properties. The $3.5 billion doesn’t list his WeWork as a tenant, but the location is on his WeWork website. Additionally, the $1.6 billion CMBS lists WeWork as a tenant, but it’s not listed on WeWork’s site (meaning it may have closed already).
New York City, where WeWork is headquartered, bears the brunt, accounting for 38 percent of total CMBS exposure.
Barclays’ Lee Overby and Anuji Jain said in the report, “Given the current weak market fundamentals in the New York office market, these locations are at particular risk of closure due to excessive concentration. I think there may be,” he said.
New York City’s office market is already suffering from high vacancy rates and low office rents, and a sudden return of 6.9 million square feet of offices could be catastrophic. But Lipson said such an apocalyptic scenario is unlikely and Space’s outcome will be case-by-case. A landlord of a quality building with his WeWork base performing well should have no problem moving into the old WeWork.
“Getting a nice big lot in an exclusive and desirable location may not be the worst thing in the world,” he says. “This is a property-by-property, tenant-by-tenant issue.”
However, the market may be flooded with less desirable office districts due to the existence of coworking companies such as: WeWork has been supporting the city’s office market for years by filling those spaces.. Lipson said the owners of these properties shouldn’t be shocked by the news and should have considered WeWork’s potential based on future projections, as WeWork’s plight isn’t necessarily a secret. Ta.
WeWork was founded by Adam Neumann and Miguel McElvey in 2010 and has grown at a breakneck pace. A staggering $47 billion valuation In 2019, we had 485 locations in 28 countries.
But that growth was the result of a cash-consuming business model, and in 2019 it nearly ran out of cash midway through the initial public offering (IPO) process. A multibillion-dollar bailout and an acquisition from majority investor SoftBank Group Corp. helped the company survive, but at the cost of a canceled IPO and the ouster of Mr. Neumann.
The co-working firm eventually went public in 2021 through a merger with a special-purpose acquisition company, but things haven’t been smooth sailing since then. By the end of 2022, fears of shrinking cash flow and high debt have increased, WeWork default.
we work 2023 to start with 300 employees cut worldwide As part of a plan to shut down 40 underperforming U.S. outposts.
The co-working firm received notice from the New York Stock Exchange in April that it was in financial trouble. The company was delisted after its stock price fell below $1 per share for more than a month..
“This is a big red flag,” said Ashkan Zandier, a former WeWork employee and founder of the Real Estate Technology Innovation Center. “Now you are seeing the impact.”
WeWork’s possible delisting and move to restructure its heavy debt is what S&P Global Ratings sees: “equal to default” Authorities downgraded WeWork in May.
And although the company was able to strike a deal in March to cut its debt by $1.5 billion, it has since dealt with a change in leadership. Sandeep Matrani resigns as CEO I joined a private equity firm in May and within two weeks, Chief Financial Officer Andre Fernandez Resigns.
Matrani was seen by many as The perfect choice to keep WeWork on a stable track The sudden departure of the real estate legend who rescued mall owner GGP from one of the worst bankruptcies in history was a worrying sign for investors.
“Sandeep is very, very capable,” Snyder said. “He said a lot because he waved the white flag and didn’t want to go down with the ship.”
A WeWork spokesperson pointed to improvements already made during Masrani’s tenure as signs that current plans to bolster the balance sheet will succeed. Since the fourth quarter of 2019, coworking firms have saved more than $2.3 billion in costs and canceled or restructured 590 leases, saving about $12.7 billion in future payments, according to the company.
Lipson said WeWork is likely already reassessing all rentals, but with the threat of bankruptcy looming, some landlords are reluctant to actually work with WeWork. He pointed out that he may be feeling
“This is trying a tougher strategy against landlords: ‘Hey, we made this statement. We mean it,'” Lipson said. “Will anyone listen to me? Some may, some may not.”
But even if all goes wrong and WeWork fails, most people don’t expect to follow in the footsteps of the Dodo. Mr. Zandier predicted that WeWork would face a similar fate to its former arch-rival Knotel, being bought by commercial real estate brokers and landlords if its value fell a little further.
“The flex office industry should never have been created by third-party companies,” said Zandier. “Commercial real estate brokers and owners should have created it. They had operational experience. They had the infrastructure.”
Except for Knotel, which Neumark acquired during bankruptcy, Other companies are also entering the flex market. CBRE invested $330 million in Industrias to take a 40% stake, Cushman & Wakefield poured $150 million into WeWork, and landlords like JLL have their own coworking – Decided to launch a brand.
Lipson added that a flexible office model is a good idea and something tenants want, but no company has been able to do it yet.
“It’s taking long-term fixed debt and matching it with short-term commitments. That’s exactly what has broken banks,” he said. “Perhaps the model that works is a more landlord-based model.”
Snyder said that despite a TV show starring Jared Leto airing on WeWork’s issues, the brand and its reach are still incredibly valuable, so an acquisition from a CRE company could prove to be WeWork’s fate. I agree that it is likely that
“It’s famous and notorious at the same time, but it’s still a very recognizable brand and I think it will become the Kleenex of coworking spaces,” he said. “If you can buy it for a dollar, I think there is a lot of power in this brand…with the right capital structure, I think the business model works.”
To contact Nicholas Rizzi: nrizzi@commercialobserver.com.
