The news that WeWork has filed for Chapter 11 bankruptcy in the US and Canada has led to many commentators being quick to call the demise of the co-working operator once valued at $47bn. It has also posed several questions both for the WeWork business itself and the overarching flex sector such as: how did it get to this? How did WeWork scale so quickly and what led to the challenges it now faces? However, perhaps the most poignant of all is what does the future hold for flex space and what role does WeWork play in it?
As we consider all these questions, it is important to start with the why. WeWork came along in the early part of the last decade and re-invented to some extent what an office and, in particular a serviced office, could be, creating a whole new playground within the flex office sector. WeWork’s coworking space is somewhere with people at the heart of it, where a community of workers can interact and collaborate and where the space itself is more than doing just work but where people felt they were part of something bigger. Adam Neumann, the former co-founder, and CEO of WeWork (up until Oct 2019) created a movement and successfully convinced investors that their model was the future of work. During the three years from its initial seed funding in 2011, WeWork reached unicorn status with a reported value of $1.5bn in 2014, raising money at a similar pace to that seen by tech companies. By January 2019, the firm was valued at $47bn following a $5bn direct investment from Softbank.
The venture capital investment fuelled a period of extraordinary growth where WeWork became the largest tenant in New York in 2018 with 5.3m sq ft of space and London in 2019 with approx. 3.5m sq ft of space. WeWork quickly rose from being a provider of co-working space to freelancers and start-ups to providing flexible workspace to the majority of the Fortune 500 as businesses quickly realised the benefits of well designed, ready to move in space on flexible terms. The growth of their ‘Enterprise’ customer, a business with more than 1,000 people, was central to their strategy for global domination of the office.
What triggered the challenges?
A failed IPO in 2019 was a fundamental turning point in WeWork’s history. The leasing deals that were agreed during WeWork’s period of super growth were long leases at top rents on the buildings they occupied, which was necessary in order to achieve the scale required to support the model from a VC perspective. However, their incomings did not meet the outgoings. Real estate has obsolescence and spaces suffer from significant wear and tear over the years meaning some of the older space, which can be five or even 10 years old, were no longer the easy spaces to sell and therefore harder for WeWork to achieve the desks rates required. Furthermore, operational costs have risen and, in many cases, so have their rents, putting further stress on the financials.
The arrival of the pandemic in 2020 compounded this, especially in the US, where the firm was left overexposed in key markets such as New York and the drop in demand with a shift to hybrid working had a significant impact. WeWork had started the process of talking to landlords in these markets to renegotiate rents and help them right size the business, which was unfruitful. The Chapter 11 is therefore their next step in the process as they seek to reduce some of this rent liability and chart a course to profitability.
What happens next? And what does it mean for members of WeWork and landlords of WeWork?
The filing for Chapter 11 Bankruptcy will provide WeWork with a moratorium in the US and Canada from its creditors, therefore allowing time to reorganise the assets and debt of the business. It will, to some extent, remain ‘business as usual’ as the process is managed. They will decide on which sites to exit, and members will either be moved to another or given notice that their contract is ending. As such, for any existing members, it will mean being prepared for this eventuality and understanding what the alternate options could be in any given market will be of paramount importance.
Outside of the US, WeWork operates on a variety of different entities, some wholly owned such as UK & Ireland and Europe, and some are a franchise, such as India with the landlord Embassy Group. Many of these entities perform well and we understand it also remains ‘business as usual’ in these regions. This does not however mean any WeWork locations are immune to closure, we understand they will continue to look strategically at their global portfolio and exit locations where it makes financial sense to do so. This is not indifferent to many other operators, who can open and close sites depending in financial viability and is therefore part of the course for most flexible office customers. If WeWork decides to close, they will serve notice, and it might be that landlord will continue the operation themselves or with the help of a third party, or it might mean they close the site altogether. If the latter then a member might have the option of being transferred to another WeWork, or they might be required to search for a new space.
There is still strong demand from other operators within the market, and expect that management agreements, joint ventures and profit share leases will continue to grow as the model for operator expansion. Since the pandemic we have already seen the number of management agreements grow as a share of total new deals by operators, rising from 9% of all transactions in the UK in 2019 to 42% of all in 2022 (link to UK Flex Spotlight). We expect this trend to continue in both the UK but also globally as landlords and investors become more educated about how the model works. This is not to say that operators will not expand using a lease, we think this remains a viable form of expansion so long as the financials make sense on a building-by-building basis. Many new operators often have to acquire their first or second centre on a lease to gain traction in the market before they can use management agreements with landlords which require a higher level of confidence in the operation from a landlord perspective.
Is the rest of the global flex market under the same financial pressure?
Many associate the performance of WeWork as symptomatic of the broader flex market, the reality though is different. In the UK market for example, contract occupancy as at end of H1 2023 was 90% in London and 88% outside of London according to our research, whilst desk rates increased in London 13% year on year to £699 per desk per month. The market fundamentals therefore remain strong, and most operators have been able to benefit from this over the course of the last few years.
Globally, as referenced in our recent Flexmark, average global private office occupancy has remained largely stable at 83% in 2023, versus 83.6% in 2022. Our Flexmark survey also shows how the growth of corporate take-up of flex is supporting this. In 2020 corporates accounted for just 13% of take-up of centres according to operators, by 2023 this has risen to 34%. Often corporates are signing longer term contracts and as such average length of stay now sits at 21 months.
The underlying fundamentals for flex therefore remain strong, and whilst WeWork will now go through a period of reorganisation in which we hope they are able to chart a course to profitability as a business, the rest of the sector is set to continue to benefit and grow from continued demand for flex space from the end user. The model at which they take space might just be the one thing to change.
