WeWork, the once high-flying startup that provides shared office spaces, has issued a warning about its ability to continue as a going concern due to its financial losses and cash flow problems. The company, which was once valued at $47 billion, has seen its shares drop to near zero after the announcement, raising doubts about its future and the impact on the commercial real estate market.
WeWork’s troubled history
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey, with the vision of creating a community of entrepreneurs and freelancers who could rent flexible and affordable workspaces. The company grew rapidly, expanding to more than 800 locations in 124 cities across 38 countries. It attracted investors such as SoftBank, which poured billions of dollars into the company, valuing it at $47 billion in 2019.
However, WeWork’s plans to go public in 2019 collapsed after investors raised concerns about its governance, profitability, and business model. The company revealed that it had lost $1.9 billion in 2018 and $904 million in the first six months of 2019. It also faced scrutiny over Neumann’s leadership style, conflicts of interest, and lavish spending. Neumann was forced to step down as CEO and chairman, and SoftBank took over the company in a rescue deal that slashed its valuation to $8 billion.
WeWork’s pandemic woes
The Covid-19 pandemic dealt another blow to WeWork’s business, as lockdowns and social distancing measures reduced the demand for shared office spaces. Many of WeWork’s members canceled their memberships or stopped paying their fees, while the company still had to pay its long-term leases to landlords. WeWork’s revenue fell from $3.5 billion in 2019 to $3.2 billion in 2020, and its net loss widened from $3.2 billion to $3.6 billion.
WeWork tried to cut costs by laying off thousands of employees, selling off assets, and renegotiating leases. It also hired a new CEO, Sandeep Mathrani, who focused on improving the company’s operations and profitability. However, these efforts were not enough to stem the bleeding, and WeWork continued to burn through cash. In August 2021, WeWork finally went public through a merger with a special purpose acquisition company (SPAC) called BowX Acquisition Corp., but its shares have since lost nearly all of their value.
WeWork’s bankruptcy warning
On Tuesday, WeWork filed a quarterly report with the Securities and Exchange Commission (SEC), in which it warned that it had “substantial doubt” about its ability to continue as a going concern for the next 12 months. The company said that its ability to stay in business depended on improving its liquidity and profitability, as well as securing additional financing from debt or equity markets.
The company also said that it had received a notice from SoftBank that it might not receive the remaining $1.1 billion of a $3 billion tender offer that was part of the 2019 bailout deal. The tender offer was meant to buy out some of WeWork’s existing shareholders, including Neumann. However, SoftBank claimed that WeWork had breached some of the conditions of the agreement, and that it was not obligated to complete the transaction.
WeWork’s shares closed at 12 cents on Wednesday, down from $10 when it debuted in October 2021. This brought its market capitalization down to about $260 million, a fraction of its peak valuation. The company also announced that it was looking for a new CEO, after Mathrani stepped down in May. Three board members also resigned this week.
WeWork’s impact on the real estate market
WeWork’s bankruptcy warning has raised concerns about the state of the commercial real estate market, especially in New York City, where WeWork is one of the largest tenants. According to CBRE Group Inc., a real estate services firm, WeWork leases about 8.5 million square feet of office space in Manhattan, or about 2% of the total inventory.
If WeWork goes bankrupt or defaults on its leases, it could create a glut of vacant office space in the city, which is already struggling with low occupancy rates due to the pandemic. This could put downward pressure on rents and property values, and hurt landlords who rely on WeWork as a source of income.
However, some analysts believe that WeWork’s troubles are not indicative of the broader demand for flexible office space, which could rebound as the economy recovers and workers return to offices. They argue that WeWork’s problems are largely self-inflicted, and that other players in the industry, such as IWG Plc or Industrious Inc., have more sustainable business models and stronger balance sheets.
