Every story must ultimately come to an end and this one finishes on Chapter 11. WeWork—the beleaguered co-working space company—filed for bankruptcy in early November after struggling to pay back its debt. This can happen when you own assets worth $15 billion but carry debt obligations of $19 billion. The fall was truly spectacular in economic terms as WeWork’s value fell from $47 billion at its peak to a mere $45 million just before filing for bankruptcy.
The Reasons for WeWork’s Downfall
What explains the mighty downfall? A few things it turns out: first, the company masqueraded as a tech startup but, once disrobed, was revealed to be little more than a “run-of-the-mill” office-space provider to short term renters. Its business model revolved around rental arbitrage whereby the company entered into long term leases with landlords at fixed rents, improved the space, and sub-let it to short term tenants at a premium above the fixed rate. Unfortunately, WeWork entered into long-term leases at the height of the market in the late 2010s only to see the market for office space decline soon thereafter and then fall off a cliff when the pandemic hit in March 2020. It turns out arbitrage only works if you can re-rent space for more than what you are paying.
IPO Attempt in 2019 Reveals Trouble
A failed IPO attempt in 2019 revealed all was not well at WeWork. The filings revealed larger-than-expected losses and potential conflicts of interest with the co-founder and then-CEO Adam Neumann. Neumann was booted the same year but only after negotiating a golden parachute in excess of $1 billion.
One brilliant concession Neumann negotiated as a condition of his departure was a $430 million loan from Softbank, an early and major backer of WeWork, that did not need to be paid back. Instead, Softbank reserved the right to seize Neumann’s WeWork shares held as collateral if he failed to pay back the loan (the shares, worth $500 million at the time of the concession, were worth $4 million at the time of the bankruptcy filing). Think Neumann will be paying back the loan? Me neither, but don’t hate the player, hate the game.
Even after going public at a much reduced valuation of $9 billion, WeWork never truly found its footing. Competitors entered the space as the model was easily replicated and the work-from-home phenomenon turned out to be more permanent than transitory. Add higher interest rates and macroeconomic uncertainty and WeWork’s failure was a foregone conclusion.
Bankruptcy Doesn’t Mean Game Over
The “automatic stay” is a fundamental feature of the bankruptcy process and it offers immediate and powerful protections to debtors like WeWork. For example, most collection efforts, lawsuits and foreclosure actions initiated by creditors are immediately halted giving WeWork time to reorganize its finances and live to see another day. This leaves many of the landlords who have long term leases with WeWork in an unfortunate predicament as WeWork can, subject to certain requirements, cherry pick those leases it wishes to hold onto (the well performing ones) and assign or cancel the underperforming leases. In fact, WeWork said it would begin to renegotiate many of its leases and with hundreds of locations in the US and Canada comprising nearly 20 million sq. ft. of office space, there is much work to be done.
Who Loses in the WeWork Bankruptcy
WeWork will likely emerge from bankruptcy a leaner, more efficient, and scaled down version of itself presumably with the best performing locations intact. Unfortunately, there will be many losers from the fallout, including equity investors, hundreds of landlords, and debtholders. Adam Neumann, however, won’t be one of them. Neumann recently commented that the WeWork bankruptcy filing was “disappointing” and “challenging” for him to watch blaming the company for “failing to take advantage” of its potential. In the end, Adam Neumann may have failed in his stated mission of “elevating the world’s consciousness,” but he managed to make a small fortune at WeWork mostly by starting with a large one.
Website Sources: Holman, J., & Moreno, J. E. (2023, November 7). WeWork files for bankruptcy amid glut of empty offices. The New York Times. https://www.nytimes.com/2023/11/06/business/wework-bankruptcy.html Brown, E. (2023, November 11). WSJ News Exclusive | A possible winner from WeWork’s troubles? Adam Neumann. The Wall Street Journal. https://www.wsj.com/real-estate/commercial/a-possible-winner-from-weworks-troubles-adam-neumann-0144d018 Gladstone, A., Saeedy, A., & Putzier, K. (2023, November 8). WeWork, once valued at $47 billion, files for bankruptcy. The Wall Street Journal. https://www.wsj.com/articles/wework-files-for-bankruptcy-5cd362b5 Plotko, G., & Higgins, M. (2023, September 17). WeWork’s potential bankruptcy raises issues for landlords and member-tenants. New York Law Journal. https://www.law.com/newyorklawjournal/2023/09/17/weworks-potential-bankruptcy-raises-issues-for-landlords-and-member-tenants/?slreturn=20231010192823