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WeWork Was Hardly a “Self-Sustaining Business” Before Coronavirus Hit. Its Prospects Now Are “Incredibly Gloomy”

The company was already facing financial issues when it encountered a worst-case downturn scenario.

It’s as if co-working giant WeWork absorbed the initial jolt of a 7.0-magnitude earthquake and continues to be rocked by aftershocks.

In August, WeWork’s New York City-based parent company filed for an IPO. But only a month later, co-founder Adam Neumann stepped down as CEO and the company yanked the stock offering after the IPO paperwork exposed significant financial and structural problems. Then, in November, the company laid off 2,400 employees.

Nothing could prepare WeWork for what came next—the coronavirus pandemic, along with the subsequent withdrawal of a $3 billion share buyout from Tokyo-based conglomerate SoftBank Group Corp. Now, experts say WeWork’s corporate earthquake could crater the company.

“The prospects for WeWork are incredibly gloomy,” says Scott Harmon, founder and CEO of Austin, Texas-based Swivel Inc., which provides an office leasing platform. “The odds are long that they survive in their current form as a company.”

“It just couldn’t be worse. It’s a confluence of awful circumstances,” he adds.

Heavy load of debt

As it grapples with the economic fallout from the coronavirus pandemic, WeWork has sued SoftBank for reneging on the $3 billion buyout and has struggled to pay the rent at some of its locations.

The Wall Street Journal reported on April 8 that WeWork has enlisted commercial real estate services providers JLL and Newmark Knight Frank to negotiate rent relief or renegotiate leases. WeWork’s IPO filing indicated the company held $47.2 billion in lease obligations as of June 30, 2019, with an average U.S. lease term of about 15 years.

“WeWork believes in the long-term prospects of our locations and our relationships with landlords across the world,” a WeWork spokeswoman said in a statement provided to the Wall Street Journal. “Rather than implementing a companywide policy on rent payments, we are individually reaching out to our more than 600 global landlord partners to work in good faith towards finding asset-specific solutions that benefit all parties involved.”

There’s no question, though, that WeWork’s long-term prospects are at risk.

The peril of short-term leases

In a March 18 report, Green Street Advisors LLC, a real estate research and advisory firm in Newport Beach, Calif., noted that the “odds of financial distress” seem to have increased at WeWork. One obstacle to overcoming the distress: short-term leases.

The average lease term for a WeWork member was 1.25 years as of the second quarter of 2019, Green Street reported. That term was up from previous levels. Additionally, WeWork has bumped up its share of corporate tenants to 40 percent of all members as of the second quarter of 2019. These factors could offer “somewhat of a cushion in this environment,” according to the report.

But, as Green Street researchers point out, the typical office REIT locks in leases lasting an average of seven years. WeWork could feel severe pain sooner than traditional office landlords as its shorter-term leases expire.

Reviewing the numbers

In an update published on March 26, WeWork said it can’t “reasonably estimate” how the coronavirus pandemic will affect its financial future, but conceded it “will likely have a negative impact … .”

Nonetheless, WeWork remains committed to its five-year growth plan and its 2024 goals, the update noted. WeWork previously projected $7.7 billion in annual revenue by 2024. In light of the pandemic, the company said its interim targets are being re-evaluated.

In the short term, WeWork is coping with membership cancellations prompted by work-from-home orders stemming from the coronavirus crisis, and some of those members might never return.

“Their clientele and revenues have just fallen off a cliff,” Harmon says.

A proxy for the industry

Furthermore, WeWork has come under criticism for leaving some of its co-working spaces open during the pandemic, a move that has rankled some of its members. In a March 18 post on its website, WeWork defended its open-door policy, maintaining that some of its members are “essential” businesses that must keep running to supply critical goods and services.

“As the largest player in the space, WeWork’s fortunes will provide a good proxy for how the rest of the flex office industry performs in a world increasingly under quarantine,” the Green Street report noted. “In sum, it appears likely the business model will come under strain in the coming weeks and months, but the impact should be limited at the market and office REIT level given modest … average exposure.”

Data published on April 1 by CoStar Portfolio Strategy shows WeWork occupies 37 percent of co-working space in the U.S., or 26.4 million sq. ft. Next in line is Regus, with a 27 percent share of the market and 18.8 million sq. ft. WeWork occupies at least half the square footage at 18.2 percent of U.S. properties where it’s a tenant, according to CoStar data.

Concerns over density

Further complicating WeWork’s delicate situation: The company faces a potential workforce transformation leading to more remote employees and fewer in-office employees as a way to protect workers’ health and cut costs.

Harmon notes that WeWork spaces are “incredibly dense” and might not appeal to some people trying to extend social distancing practices. According to the Axios news website, WeWork locations provide 75 sq. ft. per person, compared with the national average of 214 sq. ft. per person.

“After months of paranoia, social distancing and working from home, the millions who work from WeWorks will be wary of returning to shared kitchens, phone booths and desks,” Axios observes.

Already, WeWork is removing some seats and desks and is reducing capacity in conference rooms to improve social distancing, Axios reports. This reconfiguration will eat into WeWork’s revenue, as locations will be able to accommodate fewer people, according to Harmon.

If any WeWork locations are shuttered, Paul Leonard, managing consultant at CoStar Portfolio Strategy, envisions that at least some of them will end up being managed for the landlord by companies like CBRE, which operates its own co-working brand. A former WeWork location then could serve as a building’s flex space amenity.

What’s in store for co-working?

For years, WeWork has been the poster child for the ups and downs of the co-working business. Yet the company isn’t alone in wrestling with coronavirus-inflicted economic damage.

“I’m generally not optimistic about the whole category. I hate to paint with too broad a brush, but co-working businesses in general have not been wildly profitable,” Harmon says. “A lot of them are venture capital-backed, which means they need venture capital because they’re not making any profits.”

Chief WeWork rivals like Industrious, Knotel and Regus will fight for survival, Harmon notes, while many smaller operators will close their doors in the next three to six months, unless they’re able to stay afloat thanks to federal aid.

“I think co-working survives this, but I don’t know if all the existing co-working firms survive this,” Leonard says. “It’s sort of like a tidal wave hit—not everyone’s going to make it.”

That tidal wave could swallow 50 percent of U.S. co-working locations within the next two years, Harmon estimates.

“I just don’t think these are independently self-sustaining businesses. We’re looking at an existential crisis for more than just WeWork.”

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