The rise, fall and the meme end of WeWork

Regular readers of this column might recall that I covered the rise and fall of the global office space-sharing start-up in excruciating detail in the lead-up to its botched IPO in September 2019. Ten days before the IPO was abruptly yanked, I wrote that there was no way WeWork’s listing was going ahead even though the biggest global investment banks, including JP Morgan Chase and Goldman Sachs at the time, were still aggressively pushing for it to proceed. It was a daring call because the mainstream global business media was reporting that the IPO was scheduled for the following week.

I believed that Wall Street’s cheerleaders, like top investment banks and the media, were missing something. I downloaded and read WeWork’s prospectus, which made my head spin. Surely, I thought, as the IPO moved towards the listing day, more people would read the gobbledygook like “community adjusted ebitda” or earnings before interest, taxes, depreciation and amortisation, in the prospectus and realise that WeWork’s listing would be embarrassing for everyone involved in the process. I was convinced that, eventually, investment banks would realise it was better to walk away from the IPO than to risk further reputational damage.

I doubted that Wall Street’s top investment bankers would change course so late in the IPO process. Fortunately, my gut instincts were right. Seventy-two hours before WeWork shares started trading, JP Morgan, the IPO’s main underwriter, pulled the plug. WeWork claimed it was merely postponing its IPO to “focus on core business, the fundamentals of which remain strong.”

In my years of covering business stories across Asia, Australia and North America, I have never seen anything like WeWork. And, believe me, I have covered more than my fair share of corporate disasters, malfeasance, recessions, market crashes, and even a pandemic in my career.

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WeWork was founded in 2010 by Israeli entrepreneur Adam Neumann and architect Miguel McKelvey to provide shared workspaces to start-ups, freelancers and small businesses.

WeWork presented itself as a “tech” company aiming for software-like valuations. However, its business model resembled a traditional property leasing firm. It rented office space from real estate owners for the long term and then subleased to companies needing short-term office solutions. WeWork renovated the office space it leased and partitioned it for smaller clients like start-ups, freelancers, and smaller firms. Its offerings include workstations, private offices, customised floors, and amenities like private phone booths, internet, printers, mail handling, and cleaning services. The flexible workspace provider also offered services such as human resources, payroll, remote workforce solutions, dedicated broadband internet, and co-location of IT equipment to provide cloud services.

It threw in free croissants and muffins, kombucha and gourmet coffee, fresh fruits, gyms and yoga studios to lure well-heeled tenants. The business model worked in a low-interest rate environment, and when office occupancies in global cities where WeWork has substantial footprints were near all-time highs.

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In January 2019, Japanese tech investment firm SoftBank Group invested US$5 billion in WeWork at a valuation of US$47 billion. In mid-2019, Wall Street analysts valued a post-IPO WeWork between US$60 and US$72 billion. In July 2019, as WeWork filed for IPO with the Securities Exchange Commission (SEC), it was reported that losses in 2018 had totalled over US$1.9 billion, and 2019 losses might exceed that number.

In August 2019, just weeks before the IPO, initial valuations of WeWork were first cut to between US$ 20 billion to US$30 billion and later to US$10 to US$12 billion (its main rival London-based IWG, which controls Regus and is about the same size, was valued at US$3 billion at the time. IWG is now valued at around US$1.7 billion or $2.3 billion).

But WeWork’s business model was, in the words of one analyst, just a ‘house of cards’ fuelled by ‘Silicon Valley pixie dust’. After ditching its IPO four years ago, WeWork fired its controversial founder, Neumann, laid off 2,400 workers, and closed many of its locations. It also hired professional real estate executives and stopped pretending it was a tech company that deserved software-like valuation.

Top shareholder SoftBank Group injected another US$5 billion in new funding, raising its stake in WeWork to over 80%. SoftBank, and its US$100 billion Vision Fund, have lost over US$12 billion on WeWork investments so far. In a mea culpa last year, SoftBank founder Masayoshi Son admitted that “it was foolish of me to invest in WeWork. I was wrong.”
Reverse merger

In March 2021, WeWork finally listed through a reverse merger with BowX Acquisitions Corp, a blank cheque spac, or a special purpose acquisition company. During the pandemic lockdown, WeWork was forced to pivot to focus on larger corporations with hybrid work needs abandoning freelancers, start-ups and smaller firms with flexible office needs. Including the spac merger, WeWork had raised US$22.2 billion in 23 separate rounds over 12 years.

Before the merger, the spac traded at just over US$10 a share. In the lead-up to the reverse merger, the stock raced to US$13. Over the past two years, the listed WeWork trades under the stock symbol WE and has seen its shares plunge precipitously to a penny stock. In the second quarter of 2023, WeWork’s consolidated revenue reached US$844 million, a 4% increase over the previous year. Flexible Workspace’s revenues grew 7% annually in the first half of 2023.

WeWork racked up a net loss of US$397 million for the same period, an improvement of US$238 million y-o-y. WeWork’s consolidated physical occupancy rate rose to 72% by the end of the second quarter of 2023, up from 70% in 2022. WeWork currently has US$13.3 billion in long-term lease obligations and US$2.9 billion in long-term debt.

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The overall macro environment for WeWork is deteriorating. For one thing, the office real estate business is in its deepest slump in decades. The US now has over 1 billion sq ft of vacant office space. If stacked as a single office tower of 20,000 sq ft office floors, it would span 50,000 vacant floors. With a total available office space of 5.2 billion sq ft in America, the nationwide office vacancy rate rose to just over 20% in June and is still rising.

Blame the pandemic for the dramatic collapse in demand for office space in top global cities. Hybrid work — working mostly from home with a few days in the office — and rising interest rates, with the Fed Funds rate soaring from near zero 17 months ago to 5.5% currently, have wreaked havoc on US office real estate.

San Francisco has the highest office vacancy rate in the US, around 28%. That was up from just 4% before the pandemic in March 2020. New York, Washington DC, Chicago, Dallas, Houston, Los Angeles and New Jersey have some of the highest vacancies in America. New York City alone has over 80 million sq ft of vacant office space or nearly 17% of the available office space. Property consultancy CBRE Group forecasts that US office space could lose up to 30% in value this year. That’s a larger 12-month nationwide fall than the depths of the 2008-2009 financial crisis.

In March, WeWork announced that it had cut its total debts by US$ 1.5 billion through a complex restructuring deal. In May, WeWork’s CEO Sundeep Mathrani, a veteran real estate executive, left to join a private equity firm, followed by WeWork’s CFO. Vision Fund’s former CEO Rajeev Misra, who is still an advisor to SoftBank, recently helped raise US$500 million of high-interest debt for WeWork through his new investment fund, London-based One Investment Management.

In its latest SEC filing on Aug 8, WeWork disclosed that it had racked up US$11.4 billion in net losses from early 2020 to June 3. WeWork currently has a negative annual free cash flow of US$646 million and just US$239 million cash and cash equivalent left in the kitty. In its SEC filing earlier this month, WeWork admitted that time was running out. “Our losses and negative cash flows from operating activities raise substantial doubt about our ability to continue as a going concern.” Fitch Ratings last week cut its ratings on WeWork debt to junk status.

Little wonder, then, that WeWork shares fell to just 12.5 US cents valuing the firm at just US$ 99.4 million or down a whopping 99.8% from the US$ 72 billion valuation that some Wall Street analysts were ascribing it ahead of the botched Sept 2019 listing. WeWork shares closed at 15 US cents on Aug.16, giving it a valuation of just over US$ 118 million.

What next?
When its initial IPO was yanked four years ago, WeWork had 750 locations in 125 cities in 36 countries, including Singapore, Kuala Lumpur and Hong Kong. As of June 30, WeWork has 777 locations across 39 countries but nearly a third less in total space, having given up some of the less feasible locations.

So, what’s next for WeWork? Bankruptcy will help pave the way for drastic restructuring and allow WeWork to downsize its business, focus on core profitable locations and then gradually rebuild again as high vacancies and bankruptcies spread through the office sector all over North America over the next several years.

Yet it won’t be easy for WeWork to re-rise like a phoenix from its current ashes. For one thing, WeWork’s brand has been tarnished. For another, there is no shortage of funds being raised to buy distressed office property in the US by private equity players and other investors.

You are probably right if you think WeWork is a drama worthy of Hollywood treatment. WeWork’s trials and tribulations were featured in WeCrashed, an eight-episode Apple TV+ streaming mini-series starring Jared Leto and Anne Hathaway last year.

WeWork’s rise and rise as a meme stock could be the encore. The problem is that WeWork stock has just over 3% short interest. Game Stock, AMC and others acquired “meme” status because of the huge 40 to 50% short interest in their stock, which Reddit traders used to engineer their “short squeeze”. Whether more short sellers jump in and Reddit traders take their bait remains to be seen.

Assif Shameen is a technology and business writer based in North America