Could WeWork take Coworking down with it?
I initially wrote this piece back in November 2018. I should probably re-title it now as Could WeWork Take Stock and Property Markets Down With It?. Having spent 6 years operating a Coworking Space I was writing from the perspective of the damage a WeWork collapse might have on the industry. As I wrote and researched I was staggered at the lunacy of the figures involved, figures that no one else with even the scantest knowledge of the Coworking Business could fathom(I am reminded of the saying “How do you make a small fortune in ……..? -Start with a large one).
Developments and Plans forged in the past 9 months now make WeWork a systemic risk well beyond Coworking. More on this below.
Note the figures in brackets are the figures as of July 2019 the preceding ones are from November 2018. They provide a very tangible context.
The hamster on the wheel that is WeWork’s model, now requires such feeding that it is now beginning the process of cannibalizing the industry it helped found.
Any semblance of the WeWork that started in New York in 2010 with the mission of enabling start-ups and being at the centre of that eco-system is now well and truly gone.
The model that made WeWork so successful in its early days(as a real estate venture that is) as the property markets collapsed, involved securing terms from desperate landlords and liquidators that involved expensive landlord fit-outs and long, -several years long, rent free periods. Business was good, landlords were lining up to do deals and whilst mistakes were made, cash poured in.
As the first of rent-free periods started to terminate and “fit-out laden” rents began to kick in WeWork fed the beast through new leases, and new members. They sought out locations that were still in the early stages of recovery and so the wheel was kept turning. WeWork continued to lose money and so covering that loss required building and maintain a stellar valuation and so selling the story of WeWork became more crucial than the selling the benefits of membership.
So, when WeWork take most of the revamped former Central Bank building in Dublin you have to know they are no longer even dreaming of the day when they will be profitable. And when you see stories of purposefully target members of other Coworking Spaces you know their early lofty ambitions of creating community and enabling start-ups is dead too. When the walls start closing in values and principals wont pay the bills.
WeWork’s customer acquisition methods have included setting up pop-up stalls outside existing Coworking spaces. Chat rooms are full of stories of Staff joining competitors and earning commission for each member changing space with inducements of up to 6 months free membership.
WeWork is not a listed company so it’s difficult to assess how the market views WeWork.
The only insight we have is the value the market puts on its debt (Bonds).
Currently two of the top three ratings agencies rate their most recent bond (for which WeWork is paying a very high 7.8% interest) at 1 and 2 levels above “Junk” respectively. Moody’s stopped rating it completely.
In its recent set of accounts WeWork lost something in the region of $1bn in 2017 ($1.9 in 2018) using standard definitions. As WeWork were tapping the bond markets again some creative accounting was needed.
Now those bondholders are effectively offering them for resale at 95 cent (91.25 cents) in the Dollar, which, for comparison purposes is lower than even Tesla’s bonds trade.
Regus which is a direct competitor has been in business since 1989. It turns over $2.4bn, has a healthy balance sheet and actually makes a profit. It failed to find a buyer for its business last year at $2.8bn.
Based on the same matrix WeWork is worth in the region of $0.8bn. A far cry from the $18bn ($47bn) fantasy valuation it spins itself as. It values itself as a tech start-up. It’s not. It is an over leveraged Real Estate business that thinks and would like its investors to believe that it is a tech company. It’s a valuation it must retain and grow just to keep pedaling to keep up with its $18 in Leasing debt. This fantasy valuation attributes $100,000 in value to every member hence the need(and value of) to poach members and offer rewards or bounties.
Coworking grew out of the needs of a new generation of location independent workers for low cost, flexible, socially connected work place. In this case, the adage, if you are not paying for the product you are the product is taken a step further. In Dublin today if you join WeWork and pay them €470 a month you can have the pleasure of being leveraged, commoditized and bundled.
When WeWork hits the buffers -as that is the only trajectory it is on- it will have enormous consequences for Coworking. It will make borrowing for well run Coworking Businesses almost impossible. It will call into question the remote working concept. I’d like to think that existing small independent operators will survive. Only time will tell
Updated July 2019
Since I wrote this in November WeWork has grown but it is not a great Start-up growth story. It has grown into a cross sectoral risk.
Why? -WeWork is launching an IPO.
Why is that such a problem?
What Could go wrong?
Now, what might happen lets say if skeptical investors choose not to believe WeWork is a Tech company, and follow the CEO’s lead and invest their money in bricks and mortar instead of his company and the IPO subsequently failed or flopped?(Companies whose IPO’S fail or launch but flop, are walking dead and death is only a matter of time)
Then there is the effect on the property market. If (when) WeWork fails there is going to be an inevitable collapse in Commercial property values. How many billions of Commercial property loans are predicated on a WeWork Covenant?
But hey this is all worst case scenario of course as Bankers are so much more responsible now than they were say 10 years ago!