WeWork Inc has filed for bankruptcy in a fitting coda to the free money era. However, once shorn of the liabilities amassed during its go-go years, might the flexible workspace provider actually succeed this time?
Just asking the question makes me sound hopelessly naive. Having once boasted a US$47 billion valuation, WeWork crashed to earth in 2019 prior to a planned initial public offering amid widespread horror at its financials and corporate governance. It has since tried to start over on at least two occasions: First when it appointed new management and went public via a special purchase acquisition company in 2021, and again when creditors equitized some of the billions of dollars owed to them earlier this year. Both attempts failed.
On Monday, the company’s cofounder Adam Neumann called the bankruptcy “disappointing,” neglecting to mention how he doomed a good idea to failure by saddling the start-up with tens of billions of dollars in lease liabilities (at near top-of-the-market rates) while splashing cash on corporate fripperies such as a Gulfstream jet. Japanese benefactor Softbank Group Corp was left to pick up the check.
WeWork failed because it does not make money — it has lost almost US$17 billion since 2010 — but since Neumann’s departure in 2019 it has dramatically slimmed down, while amending hundreds of rental contracts. It must now cut even deeper.
The bankruptcy filing paves the way to cancel US leases that management thinks have little chance of profitability. The proceedings would also swap a further US$3 billion of debts for equity, meaning WeWork should emerge from bankruptcy protection with a much less ugly balance sheet. Having filed for creditor protection it now has more leverage to persuade other landlords to cut rents at locations it wishes to keep.
WeWork’s bankruptcy is bad news for an already depressed urban office market. The reluctance of workers to return to offices — particularly in the US — has created a surfeit of downtown commercial property. WeWork has a large footprint in New York, Boston, San Francisco and London. Dozens of properties currently occupied by WeWork might be vacated, and a recession could yet worsen the real-estate bloodbath.
There is a risk clients continue to abandon WeWork following such a high-profile failure or press for fee discounts or deferrals.
However, demand for hybrid working is stronger than ever. Just look at rival IWG PLC, which reported a 7 percent increase in quarterly revenue and falling net debt, according to figures published on Tuesday.
“The reality is large corporations globally are moving to a much more flexible approach to how they support their people,” IWG chief executive officer Mark Dixon told investors in August. “They are moving towards hybrid working. And it’s universal, and it’s gathering pace.”
IWG has some advantages compared with WeWork. It has more suburban locations — an advantage in an era when workers are looking to shorten their commutes. Lately it has prioritized franchising and partnership agreements that reduce its outlay on rent.
IWG’s valuation is also sobering — though the British firm generates a similar amount of revenue, its market capitalization is just ￡1.4 billion (US$1.7 billion).
If you were starting a business to profit from the hybrid working boom, you certainly would not set it up like WeWork, but flexible working is not going away. Gutted and reformed, WeWork might just work this time.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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