WeWork was founded in 2010, as a novel workplace solution. The idea was to take long leases on large commercial properties and rent it out to small businesses and independent professionals for short terms. In its initial heyday, WeWork was valued at $47 billion.
During its 2019 IPO, investors were skeptical about the company’s piling losses, and questioned the CEO’s management style. By 2021, its value had crashed to about $10 billion. Due to COVID, many people had to work from home, and the demand for co-working spaces never increased.
As a result, there were fewer tenants than expected, and all the lavish interiors and amenities that WeWork was providing turned out to be a cause of immense financial loss. They needed huge amounts of money to pay off their leases, and profits that were supposed to pay those bills never showed up.
The WeWork bankruptcy filing
Currently, they owe about $18 billion to their creditors. In November 2023, WeWork filed for Chapter 11 bankruptcy protection and started working on a “comprehensive reorganization” of its business. Apparently, creditors to whom WeWork owes 92% of its debt, are on-board with this restructuring.
Basically, this restructuring involves cancelling certain leases and rental agreements where they are not doing much business. This is going to be a big change for the company. Earlier, it was working across 764 locations in 38 different countries. Now the number of locations is down to 660. The ones affected are mostly in USA and Canada.
How did WeWork grow?
Since the beginning WeWork emphasized on being creative and doing things differently. They identified themselves as an asset-light company, meaning that they were not responsible for ownership of property; they only provided a service.
So instead of buying commercial buildings, they just signed leases. So, as long as they could raise enough money to pay the rent, they could expand all they wanted. Also, in their marketing they kept emphasizing on the quality of the workspace experience.
They didn’t promise spacious offices. Instead, they believed that as long as a space was well serviced and designed for boosting productivity, it didn’t matter how big the space was. They were true to their word when it came to quality spaces- the spaces were aesthetic and ergonomic, sometimes even with perks like free beverages. With this reasoning, they convinced their tenants to rent out small spaces for higher costs.
It was quite an attractive offer for prospective tenants. They didn’t have to give any commitment; they could renew their contract on a month-to-month basis. But therein lay the risk- these tenants could leave anytime they wanted; WeWork still had to pay the lease to the owners. When they couldn’t find new tenants in time, they struggled with the money.
What caused WeWork’s bankruptcy?
The bankruptcy is not a sudden surprise, WeWork has been showing signs of gradual decline. The first sign was the initial doubts raised about the company’s fundamentals and business model during the failed 2019 IPO. The then CEO, Adam Neumann resigned and gave up majority control of the stock.
The second warning sign was the company’s lavish spending on the coworking space facilities, and lofty hopes of expansion, in absence of actual revenue. Even when the revenue was coming, WeWork was not able to pay off its debts.
For example, a Guardian analysis mentioned that in 2018, the company had a revenue of $1.8 billion, but still managed to lose $1.9 billion. It is evident that the company was struggling to spend its revenue diligently.
What does this mean for the co-working industry?
WeWork’s business practices
Looking at WeWork’s tragic story, it is easy to assume that the co-working industry, in general, is suffering. After all, WeWork has been one of the pioneers of the co-working concept. So, if they are failing, then does it mean that co-working is a bad idea?
Well, not necessarily. WeWork experienced setbacks not because they had a bad idea, but because they couldn’t execute it efficiently. Many people have criticized their business model, financial decisions, and management style.
If the company had paid more attention to sustainable growth and been more realistic about their expectations, things may have turned out differently. So, the lesson for other co-working companies here, is to keep an eye on long term growth, and prioritize basic budgeting over marketing and expansion, at least in the early stages.
Newer trends, leaner teams
The economic uncertainty and cut-throat competition in today’s day and age, has compelled many companies to cut costs on resources. They prefer smaller core teams, with contract-based freelancers and outsourcing partners to pick up any heavy work during specific projects.
Moreover, they also cut costs on other resources like office space, supplies, etc. That’s why, remote and hybrid work models are popular in new and emerging companies. In such circumstances, co-working spaces are the perfect piece in the corporate puzzle.
Co-working spaces versus traditional commercial properties
While the co-working idea is becoming popular, especially among the younger generations, we don’t know how much of an impact it will have in the real estate space. Some people are quite optimistic about the growth of coworking spaces, and believe they will take over traditional office spaces.
If this prediction is true, we are not seeing it happen right now, at least. Traditional office spaces still dominate the commercial real estate industry. If anything, co-working spaces are often under threat because their leasing model creates uncertainty.
If coworking spaces started grabbing more profits than traditional office spaces, it would be concerning for the property owners themselves, because it would be like competing with them. Imagine, your tenant rents out a small room in your house and earns more from it than you are earning from the entire house. That would make you uncomfortable, wouldn’t it?
To conclude, while the WeWork bankruptcy is a cautionary tale for companies to review their business model and plan for sustainable long term growth, it doesn’t necessarily mean anything bad for the coworking industry in general. That being said, while the co-working space industry is doing pretty well, it’s nowhere close to competing with commercial real estate.
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