The WeWork logo sits on the exterior of a glass door at the co-working office space, operated by the… [+]
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On November 17, The New York Times ran what either makes for a very provocative or very obvious headline.
Sometimes it’s hard to tell these days.
“WeWork May Lay Off Thousands,” it declared, adding in the subtext that, “The beleaguered office space company is said to be planning to cut its work force by at least a third in a bid to stabilize its business.”
On the one hand, the whole WeWork saga has been fascinating, from its founding to its fall from grace. However, its fall from grace has been hard… with not a single shred of good news to announce since it decided to “delay” its IPO.
That was back in late September, and it’s been doom and gloom since. That much is evidenced by headlines such as the following:
Incidentally, also on November 8, CNBC ran “WeWork Says It Will Divest All ‘Non-Core’ Businesses.”
Clearly then, things haven’t been looking up for the company. To say the least.
Too Good to Be True
Then again, it wasn’t exactly all sunshine and roses before September 30 – hence the reason why the “delay” happened in the first place.
In short, WeWork was a great idea that has fallen into potentially hopeless chaos. Who can save it is anyone’s guess. But I’m sure that SoftBank CEO Masayoshi Son – who not only invested heavily in the company but then went on to much more recently bail it out – must be regretting his purchase.
So are his investors, not to mention all those employees who signed on to the WeWork dream… not realizing it was a nightmare.
As Forbes writes, “WeWork Was a $47 Billion Unicorn – Months Later, It Now Plans to Layoff Up to 6,000 Employees.” That’s a major switch, as the article goes on to acknowledge paragraphs in:
“This is quite a change of fortunes for the once-darling and celebrated unicorn company. Only a few months ago, WeWork planned a much-anticipated initial public offering (IPO). Former CEO and cofounder Adam Neumann was heralded as a wunderkind and was a multibillionaire on paper. The company was valued at a staggeringly high $47 billion.
“After the financial crisis, real estate was cheap, unemployment was high and the gig economy had just started. There were large numbers of businesspeople looking to downsize their offices to save money and entrepreneurs starting businesses after losing their jobs or unable to find new positions.
“Astute to this trend, Neumann capitalized on this movement. He took the boring and stale shared-office-space concept (which had been around for years), added a lo-fi, hip-hop music background soundtrack, free-flowing kombucha, and the air of being part of a young, cool club. And people clamored to set up their offices at WeWork.”
It was office space done the millennial way.
Big Head, Deflated Company
That millennial model no doubt generated a lot of great, productive work. But perhaps it also generated some less productive ideas, at least in management.
The aforementioned article goes on to note how WeWork “rapidly expanded all across the U.S. and abroad. Along with the growth, cracks started to show in the façade.”
And very, very odd cracks they were, complete with “financial self-dealings (on the part of the former CEO), quirky behavior by cofounder Rebekah Paltrow Neumann (Gwenyth Paltrow’s cousin and wife to Adam Neumann), questionable trophy acquisitions (such as a wave pool operator) and a disturbingly high burn rate of cash.
Judging by the details, Neumann’s success went to his head. How else can you explain him telling reporters that he wanted to be leader of the world someday? Or how, after he held a meeting to announce the firing of 7% of his employees in 2016… he passed around tequila shots to all attendees.
With that behavior – and a list of other oddities on record – it suddenly makes sense how he tried valuing his company at $47 billion for the IPO. It also makes sense how WeWork essentially wasted $1.6 billion in 2018. And how it will lose another $1 billion this year.
Of course, WeWork isn’t anything we ever recommended here on this platform. It wasn’t a real estate investment trust, or REIT. (Full disclosure: I am so thankful I didn’t have to add WeWork to my coverage universe.)
Yet there were office REITs that did and still do lend it space. So what about them?
Well, they might not lose out entirely as the WeWork situation plays out however it does…
The WeWork REIT Reach
Last week, I attended REITWorld in LA. And I picked up some interesting nuggets of wisdom all around… including while listening to a fireside chat with Boston Properties (BXP) CEO Owen Thomas.
(Incidentally, he’s of no relation to me.)
He told the crowd that, “Shared workspace is a big positive for the office business, and it’s here to stay. WeWork has a 50% market share (Regus amounts to 35%, and others account for 15%).”
Thomas went on to say that his own company started a version of WeWork as well. And that tells me the landlords in the shared workspace environment will be the real market movers.
With that said, he does “ see a world going forward where WeWork and others work through [their current] management agreements.”
Whew!
That’s no doubt a big relief to anyone covering this technology-based office/hotel/bar/dating service/hipster property sector. I’ll stick with the trusted REITs that – for the most part – are managed by respectable C-suite execs who are focused on shareholder value and not the quick buck (in billions).
That means those WeWork contracts that office REITs are currently holding could still fail – but with much better prospects of fast turnaround if they do.
I’ll keep monitoring the situation and keep you upraised as needed.