WeWork’s Uncertain Future – August 14, 2023
WeWork’s latest quarterly earnings report, issued last week, included a phrase that sent shock waves through the office sector. To wit: “substantial doubt exists about the company’s ability to continue as a going concern.” Staying around for the long haul, the earnings announcement continued, “is contingent upon successful execution of management’s plan to improve liquidity and profitability over the next 12 months.”
The language suggests viability concerns over the near to intermediate term, rather than imminent danger of WeWork pulling the plug on all of its leases. Moreover, the days when WeWork was the largest private-sector office tenant in Manhattan are long past: five years ago is now ancient history. Nonetheless, with 777 locations and approximately 906,000 desks in 39 countries, it’s still a significant presence in many office portfolios worldwide.
Although the outlook for the office sector generally is turbulent, WeWork’s position as a leader in the shared workspace market may or may not represent a tailwind, said analysts from BTIG. “We expect the company to benefit from a supercycle in flexible workspace demand created by uncertainty regarding long-term office usage in the post-pandemic world,” BTIG said in a report issued after WeWork issued its second-quarter report. “That said, weaker than expected occupancy, stubbornly high cash burn and recent management turnover give us reason for pause.”
Green Street noted WeWork’s “fall from grace” in its take on the company’s announcement. “The one-time darling of the flex office industry – which was valued by the VC world at $47B at one point as a quasi ‘tech company’ – has been facing problems since the onset of the pandemic,” according to Green Street. “The key challenge has been the huge flaw in the company’s business model: the duration mismatch between assets and liabilities (i.e., short-term rental contracts backed by long-term lease liabilities). This mismatch makes it very difficult to cut costs as revenue was negatively impacted by weak office demand.”
WeWork’s issues don’t reflect the health of the flexible workspace sector as a whole. Some companies in the sector are poised to capitalize on the demand “supercycle” predicted by BTIG.
In an interview on Yahoo Finance, Lea Overby, head of CMBS research at Barclays, put the WeWork situation into a larger perspective.
“Last year, in September or October, we put out research that proposed a 30% decline in office prices,” she said. “At this point, I would be quite happy if it ended up being just a 30% decline. We have seen some indications that already prices have fallen closer to 40% and in some instances, even more than that.
“So this is one more thing that we’re going to have to end up working through.”