“How do you change the world? Bring people together. Where is the easiest big place to bring people together? In the work environment,” WeWork’s messianic former CEO and co-founder Adam Neumann once said.
With most offices shut down across the US, and Neumann pushed out of the company after its spectacular failure to go public last year, the notion of bringing people together in a work environment now seems quaint at best and potentially dangerous.
As WeWork’s board meets on Tuesday the question is what to do with millions of square feet of office space as the company is deserted by both its financial backer and tenants. The larger question is whether the co-working company can ever recover.
WeWork is still open for business despite New York governor Andrew Cuomo’s coronavirus-mitigation edict to close all non-essential businesses. The company, which has shed thousands of jobs, could now be headed into a new phase of economic destruction as it seeks rent holidays from landlords but resists passing them on to struggling tenant businesses.
As it has for countless companies across many sectors, the Covid-19 pandemic has emphasized the underlying weaknesses of WeWork’s business model to lease commercial properties long-term and sublet to thousands of small or new-economy businesses on the short-term – a strategy that’s never been tested by an economic downturn and certainly not by a global economic shutdown.
The company hasn’t paid April rent for some locations and has approached landlords for rent stays or revenue-sharing agreements. WeWork has kept its locations open – though in practice its locations are empty of tenants – and continues to charge clients.
It’s a practice that New York WeWork tenant Mark Macias said is in open disregard of Cuomo’s executive order. “Are you joking? Are you tone-deaf? Do you not see where we are? We’re in the epicenter of the pandemic,” Macias said he told his WeWork liaison.
In April, Macias said, he wrote to WeWork revoking their authority to deduct rent from his account and informed the company that he would reinstate the order once the governor’s order was lifted. But WeWork has continued to charge his account, he said, and offered only to halve his rent for April and May if he signed a one-year contract.
“For them to even pretend that essential workers are in this building is a lie,” Macias told The Guardian. “We’re not allowed to be in this building. The governor says non-essential businesses will be fined, and there’s no way they can argue these are essential businesses. They’re just keeping it open so they can bill people.”
While most other firms, from credit cards to car lease companies, are working with struggling clients, “WeWork is just focused on itself. It’s ridiculous. It claims to be a community group but they’re blatantly disregarding the health of the community for the sake of profits,” said Macias.
Marcelo Claure, WeWork’s executive chairman, and Sandeep Mathrani, CEO, wrote in an email to employees that the company has “an obligation to keep our buildings open”.
In a full-page ad taken out in the New York Times WeWork thanked customers providing “services to tackle Covid-19 and all those helping the wider community”.
Last week, WeWork, which lost $2bn last year, sued its principal investor, the multibillion investment fund SoftBank, for abandoning a $3bn share buyout agreed in October as part of a $10bn bailout designed to shore up the company’s financials in exchange for an 80% stake.
WeWork’s board said SoftBank and its CEO, Masayoshi Son, are now suffering from “buyer’s remorse”. In its response, SoftBank argued that WeWork failed to fulfill conditions required to complete the deal, including the existence of pending criminal and civil investigations.
SoftBank called the lawsuit “a desperate and misguided attempt” to rewrite an agreement that would have furnished Neumann with a near billion-dollar windfall. The company noted that Neumann, his family and Benchmark Capital would have benefited the most from the arrangement since their equity made up “more than half of the stock tendered in the offering”.
The collapse of the deal means Neumann’s fortune has dropped 97% to $450m from $13.5bn in less than a year, according to the Bloomberg Billionaires Index. The pain is broadly shared: on Monday, SoftBank said it expects to record an investment loss of 1.8tn yen – or $16.6bn – at its $100bn Vision Fund for the year, plus a further 800bn yen on its WeWork and OneWeb investments.
Analysts say WeWork’s fall from grace – it is currently worth less than 10% of the $47bn it was valued at last summer, when the company published a highly flawed sale prospectus that triggered an investor revolt – is a warning for the commercial real estate market as tenants seek to unwind agreements and investors head for the doors, threatening a $16tn market and $4.5tn in mortgage debt secured by it.
In Manhattan, according to the brokerage firm JLL, new office leasing volume fell 47% in the first quarter.
Work-share companies like WeWork accounted for 6.5% of new leases in the US in the first six month of 2019, according to the brokerage CBRE Group, with pre-Covid-19 high estimates pushing the share to 22% by 2020. Those figures must now be in doubt, say analysts and investors.
“For late-stage startups like WeWork and Airbnb, the pandemic is having a significant impact on their business models,” said Mike Jones at the Santa Monica, California-based investment firm Science Inc. “Even if their businesses had been hyper-profitable, they’d be super-challenged right now.”
But there has also been a leveling between those companies and their traditional peers, Jones points out. “I don’t know if WeWork or Airbnb’s ability to sustain this market change is any better than for incumbent industries, like airlines or physical retail.”
But, Jones warns, the era of endless rounds of venture capital funding may not survive the turbulence of the markets, and bring to a stop the era of the unprofitable unicorn which has been under threat at least since the disappointments of Uber’s and WeWork’s IPO experiences last year.
“In a world of plentiful venture capital, market share and growth-at-all-costs becomes a favourable way of operating because you can sustain your losses with new rounds of capital,” he says. “But in a world of restricted venture capital, a path to a self-sustaining business model is much more important.”
Still, he says, the crisis could have a silver lining allowing more nimble, low cash-burning companies to come in, like Zoom, who are able to take advantage of the turmoil. “At a minimum, we’re going to see a major change in remote work and remote education. Companies that can establish themselves now in that pattern will not return to traditional methods.”
That in turn suggests that flexibility in terms of physical location will become more desirable, rendering the traditional, long-lease office irrelevant for many companies – and that could play into the hands of companies like WeWork, Jones adds.
“The idea of a short-term, transitory office space becomes a better idea than a five-year, loss-lease office space. So WeWork’s approach and methodology to office is fundamentally better than traditional office space. WeWork will be impacted negatively by people working from home, but the impact on traditional real estate could be greater.”