In April, we produced an article called “Is WeWork a Bubble”. Given the IPO struggles and a closer look at their books (not close enough for most investors), we wanted to share some follow up data that has us more concerned with their financial well-being than we originally considered.
Long term leases with short term client contracts: Lehman Brothers?
WeWork has $47 BILLION in lease obligations as of June 2019. Most of these leases have anywhere from 10-15 years of term remaining.
$3.4 BILLION is the amount of rent they received as of June 2019. The average WeWork member signs a lease for 15 months.
In the final quarter of 2018, their occupancy rate was 80%. Even at full occupancy (impossible), they are well short in receiving enough rent from their members to offset their lease obligations.
The big what if’s
What happens to freelancers and entrepreneurs in a down economy?
Larger companies like Amazon or Microsoft use WeWork space for flexibility. In a down economy, do they contract back to their HQ? Isn’t that the point of flexible space?
If the IPO is unsuccessful, WeWork still needs funding to stay afloat. How long do VC’s stick around with these types of losses?
The ultimate case study
Regus, another Co-Working company, filed for Chapter 11 in the early 2000’s after quick expansion and long term lease obligations during the dot-com boom. Regus stated, “Chapter 11 was the quickest and most reliable route” to return its business to profitability. It would allow them to reduce crippling rental agreements(struck during the height of the dot.com era ) to current, lower market rates.
Sound at all familiar?
A reminder on who this impacts:
Mostly Landlords… in 500+ locations and in 29+ Countries.
A slowing economy will impact us all, but the failure of WeWork should not affect our local business. In fact, the freeing of space could provide some much needed softening.
Co-Working isn’t going anywhere. It has become an essential part of the business environment. However, we do not see the way in which WeWork operates its business as being successful long-term. The brand and offering is strong, but their books are not and adjustments will need to be made.
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