“You will need to sign in. Come in and go under the balloon arch, go past the live DJ on your right, past the massive skateboard ramp that doubles as a library and then reception is on your left before the merchandise stand and the arcade machines.”
Nope, these are not directions to access a theme park or swanky new event space. These are the instructions one person used to give to visitors who were coming to see him when his company was based at a WeWork site in Waterloo – before a basketball hoop with a TV as a backboard was installed.
Who would have thought anything could possibly go wrong? Bizarrely, for a long time, the answer was: nobody. The property industry and wider business world alike bought into the whole WeWork proposition
The company wasn’t just selling flexible workspace, it was selling a lifestyle choice. No more did workers have to schlep suited and booted to a greige corporate workspace. They could dress like they were in the tech community and work in a similar hipster environment too.
Unfortunately, that was then.
Since 2019, when Adam Neumann was unceremoniously ousted from the business he set up in 2010 with Miguel McKelvey, WeWork has been in a death spiral, and few people were surprised when the company filed for Chapter 11 bankruptcy protection in the US on Monday this week.
What was perhaps surprising was that it took so long for the business to make this decision.
Earlier in the year, BE News spoke to a number of Stateside property commentators who suggested the company only had months of liquidity left unless it took dramatic action.
So, what happens now – and what lessons can be learned from the rise and fall of WeWork?
The company, which was once valued at $47bn, said in a statement that it intends to “further rationalise” its commercial office lease portfolio by implementing a “deliberate and value maximising lease rejection plan that is expected to position the company for operational and financial success”.
In the same statement, David Tolley, CEO of WeWork, said the company would “aggressively” address its legacy leases to improve its balance sheet.
The words will no doubt send shivers down the spines of UK landlords who count WeWork as a tenant. According to one London office leasing source, WeWork has already been demanding significant rent cuts – sometimes as high as 50% – in what the source describes as “take it or leave it” deals.
A spokesperson for WeWork says: “The UK and Ireland is, and always will be, one of our most important markets, and we are fully committed to providing our members with world-class, flexible workspace solutions for the long term. We continue to work collaboratively with our landlord partners on solutions that set all parties up for sustainable success. The proactive decision to commence a strategic reorganisation in the US will holistically address our high cost and inflexible lease portfolio and position the company for success.”
WeWork has already exited a handful of sites in London, where it remains the largest corporate occupier – for now – and BE News has been told it is on the cusp of leaving a handful more locations, with a number of other sites at risk of closure. Hilco is handling its lease negotiations with landlords.
There doesn’t appear to be a clear rationale behind the choice of sites that it has closed or intends to close. One source claims one of the sites WeWork has shuttered had occupancy rates of 90%-plus, which is well above the firm’s consolidated physical occupancy rate of 72% reported at the end of Q2 this year. By way of context, one UK flex source says flexible workspace operators need to have occupancy rates of 80% and above for the business to be profitable.
Many landlords negotiating with WeWork have already started reaching out to other flexible workspace providers to see if they will take the space.
Just last week, Integrated flexible workspace provider RE-DEFINED launched a partnership with Platformspace to take over the management of struggling flexible workspace centres and a London flex source says IWG has been eyeing up some of the WeWork sites that are expected to close.
But according to Jonathan Gardiner, head of Central London office agency at Savills, it need not be all doom and gloom for landlords who count WeWork as a tenant.
“There are undoubtedly opportunities for landlords of these WeWork buildings,” says Gardiner. “In some cases, these buildings will provide some immediate good quality vacant stock in under-supplied locations; in other cases, either the landlord directly or a new flex operator could step in to take on management of the operating businesses.
“It’s important to remember that many of these centres are operating at high levels of occupancy. And finally, there are those buildings and spaces which are performing less well and clearly present more of a re-letting challenge for those landlords.”
Other flex operators are keen to point out that WeWork’s problems are not indicative of wider issues facing the sector.
“It is important to note that the difficulties facing WeWork are in no way reflective of the underlying strength of the flexible office sector, particularly at the premium end of the marketplace,” says Enrico Santa, CEO of The Office Group.
“Our clients value the high quality service and inherent flexibility that we provide, allowing them to adapt as their businesses do. At The Office Group, which operates its TOG and Fora brands, we are meeting that demand and continue to grow sustainably. We are also fortunate to be supported by our robust business model, a large owned real estate portfolio and a growing number of management agreements, which form a core part of our strategy and sets us apart.”
It is a view shared by Jane Sartin, executive director at FlexSA. “WeWork has always done things differently, and its difficulties do not reflect the flexible workspace sector as a whole, either here or in the US,” she says. “While WeWork positioned itself as a tech company, other workspace providers focused on the services they offer, the working environment they create and creating a hassle-free way of working for their clients.”
Clockwise chief operating officer Alexandra Livesey also talks of WeWork’s positive impact. “WeWork did a huge amount for our sector, trailblazing the way for other providers. Clockwise intend to continue their legacy and take steps to further foster innovation, without compromise to our core values and business model,” she says.
“Flexible workspaces need to be forward thinking, for our brand, the next step is opening the first ever office space in the metaverse. The Clockwise Campus, which is launching soon, will catapult the office industry into the new age.”
Pinpointing exactly where WeWork went wrong isn’t easy. In the UK, and particularly in London, the company signed long leases on lots of space at top of the market rents. It often cannibalised its own operations by opening centres within a short walking distance of one another – and those centres then competed with one another for tenants offering them generous rent-free periods.
While it was paying high rents on the space, at many sites a significant amount of square footage was under-utilised space. And let’s not forget the free beer and Prosecco – or the live DJs, skate ramps and basketball hoops.
Although it got many things wrong, the majority of flex operators in the UK begrudgingly acknowledge the many benefits WeWork brought to the flex market.
The brand raised awareness of flexible workspace and made it actually look and sound sexy. WeWork also forced flex operators that had long subscribed to the ‘pile ‘em high, sell ‘em high’ approach to rethink their operations and offer better space and better service to customers.
And the company helped to amplify and accelerate the ‘hotelification’ of workspace trend, which arguably originated in the flex space and is now all the rage among landlords of conventional office space.
So, while WeWork’s brand equity has taken a battering, its decision to file for Chapter 11 bankruptcy may not be the final chapter in its story. As with other businesses that have found themselves in a similar predicament, someone might come along who thinks the brand is worth rescuing. If it can significantly reduce its outgoings by slashing its lease liabilities, it might even be able to rescue itself. There are still lots of people out there who like what it has to offer.
In short, it may not be easy to find a path to profitability, but it isn’t beyond the realms of possibility. Just hold the unnecessary gimmicks maybe this time.
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