Is WeWork too big to fail?

From $47bn decacorn to bust in under five years. That is the extraordinary fate facing WeWork after it revealed earlier this month in a financial update that “substantial doubt exists about the company’s ability to continue as a going concern”.

Blaming “continuing losses, projected cash needs, increased member churn and current liquidity levels”, the business appears to be in a death spiral, one that by its own admission will require herculean efforts to break free from. 

In the financial update, it reported a net loss of $397m and said its ability to continue as a going concern was contingent on the “successful execution of management’s plan to improve liquidity and profitability over the next 12 months, which includes, without limitation: reducing rent and tenancy costs via restructuring actions and negotiation of more favourable lease terms; increasing revenue by reducing member churn and increasing new sales; controlling expenses and limiting capital expenditures; and seeking additional capital via issuance of debt or equity securities or asset sales”. 

That is quite an undertaking and the market is far from convinced. In the space of just two months, the company’s credit rating has nosedived, with Fitch Ratings downgrading it this month to ‘CC’ from ‘CCC-’. Late last week, the company also announced a one-for-40 reverse stock split, under which 40 of its existing shares will be swapped for a single new share in a drive to push its share price above the $1 threshold needed to retain a listing on the New York Stock Exchange – a move that saw its share price plummet 11%.

So, what is going to happen to WeWork? Will it be able to get itself back on track? Will Softbank, or some other white knight, ride to the rescue? Given that the company has never made a profit – and as things stand, is unlikely to for some time – is it even worth salvaging?  

BE News asked some US-based property experts what they think lies in store for the former poster child for the flexible workspace sector.

The first two concerns most experts we spoke to raised were WeWork’s burn rate and its liquidity. At its current burn rate, WeWork has just six months of cash in hand, estimates Bradley Tisdahl, CEO of Tenant Risk Assessment, a financial analyst who represents numerous institutions owners and investors on their real estate throughout the US. 

“Outside a dramatic turnaround in demand, coupled with further rent concessions from its landlords, there are two high level options that we think are possible,’ says Tisdahl. “Bankruptcy – I’m not sure if it would be liquidation or restructuring, but both would be painful for landlords – or a strategic buyer. In the US, we’ve seen CBRE investing in co-working company Industrious, and Newmark acquired Knotel. Given this, it’s possible that we could see a brokerage or institutional office owner step in to acquire a portion of the company.”

However, he says, the debt exchange WeWork recently completed may make the latter option more challenging, as former creditors could see a further write-down and might not approve the deal.

Tisdahl adds that WeWork will find it increasingly tough to raise capital due to the “sluggish office market in the US and higher interest rates. Its track record and management churn are also likely to make matters worse”.

It’s a view shared by Matthew Debbage, CEO of the Americas and Asia at Creditsafe. Debbage says that, according to Creditsafe data, 72% of WeWork’s payments are overdue, as of this month.

“This could mean a few things,” he says. “For one, it could mean that WeWork wasn’t bringing in enough revenue and it was spending too much on operational expenses – which happened a lot during Adam Neumann’s tenure. And we’ve already seen several news reports this week saying the company’s mounting debt has become too much to handle. 

“To make matters worse, our data also shows that WeWork has a DBT of 67 – meaning it typically pays invoices 67 days past the payment terms. So, if they agreed to 60-day or 90-day payment terms with suppliers and then pay those invoices 67 days past the payment date, just imagine how late those payments will be? That’s not just annoying, it’s going to put a lot of financial pressure on those suppliers who are relying on that income to keep their own businesses running.”

WeWork recognises that it needs to reduce its outgoings and in its recent SEC filings, the company said it would look to landlords to provide some of this support.

But what are the chances of its landlords playing ball and allowing WeWork to surrender leases on space or renegotiate better terms after it has already used this tactic in the past? 

For some landlords, it will be a bitter pill to swallow, believes Robert Gilman, partner and co-chair of the real estate services practice at accountancy business Anchin. 

“If you’re an office landlord with WeWork as a tenant, it’s not so easy to just say you’re going to re-lease the space,” says Gilman. “You’ve got the post-pandemic issue with people not coming back to the office and many companies downsizing. There is a lot of sublease space on the market at the moment and rents are decreasing, while costs, including real estate taxes, are increasing. You not only need to find a tenant, you need to lease the space at lower than what WeWork was paying. In addition, you’re going to have to put a lot in to convert the space back into a normal office layout.”

Given how tough the office leasing market is at the moment, some landlords may well favour renegotiating with WeWork and offer revised terms on rent, lease length or the amount of square footage occupied, but many have already done this and could well prefer to find alternative tenants. 

One option they could consider is securing a deal with a rival flexible workspace provider like an Industrious or Regus. Joseph Iacono, chief executive officer at Crescit Capital Strategies, thinks this could be a workable alternative for some landlords.

“When you look at some of those WeWork spaces, they have 100% of the building – or a large majority of the building – so in those cases, the landlord is faced with a significant amount of build out and cost to refit the space for other tenants, or bring in another flexible workspace tenant to take the space as is,” he says. 

“Given the state of certain office markets, it will be interesting to see if WeWork does walk away, how landlords will react – either reconfigure or chop up the space.”

It is difficult to accurately predict how things will play out in the coming months, but Gilman argues that landlords may have to cede ground given the challenging office leasing environment.

“I don’t know what direction they are going in, whether it’s a chapter seven or an 11. To be honest with you, I don’t know what’s better for a landlord with WeWork as a tenant. If there’s a company worth saving, I’m sure landlords are going to be willing to play ball, because in this commercial market, it’s better to have a paying tenant than no tenant at all. It wouldn’t surprise me if landlords are prepared to renegotiate lease deals with WeWork because at least they can generate current rental income.” 

In 2018, US financial writer Andrew Ross Sorkin, who wrote a book called ‘Too Big to Fail’ suggested WeWork potentially fell into that category 

In his DealBook column for the New York Times, he wrote at the time: “If they were to let WeWork fail, those landlords would risk depressing commercial real estate prices to such a degree that it would create a serious sense of pain for the country’s largest real estate owners.”

He added that it was “most likely landlords would swallow hard and renegotiate the lease agreements on more favourable terms to keep WeWork from creating a full-on panic”.

That was then. Five years on, as WeWork itself casts doubt on its future, Sorkin’s theory that WeWork is too big to fail no longer looks so robust.