Investors ignore the risks
“WeWork’s bankruptcy imposes a new reality on the office market”
November 11, 2023, 5.46pm
From $47 billion to practically nothing: WeWork, once the most valuable startup in US history, is escaping into bankruptcy. Technology investor Philipp Klöckner explains in an interview to what extent the office brokerage can benefit from the real estate crisis and what investors have missed.
ntv.de: WeWork, the most valuable startup in US history, filed for bankruptcy this week. Is the entire coworking space market now collapsing?
Philipp Klöckner: I don’t think so. It may be that other suppliers have similar structural problems. Surely even smaller competitors have signed long-term leases at high prices, which they have to re-rent repeatedly in the short term and which they are not repaying today. Because of the bankruptcy, WeWork now has the ability to negotiate new rents. Although office property prices are falling, this is no reason to declare the end of coworking. On the contrary. Rents need to become cheaper, which makes the model even more attractive. Provided that WeWork manages to renegotiate long-term contracts with the owners. Additionally, there will continue to be strong demand for coworking due to alternative working models. The concept will definitely remain.
WeWork gets an AYou have filed for Chapter 11 bankruptcy. What does this mean?
By restructuring under US bankruptcy law, WeWork wants to reduce debt and eliminate or renegotiate unprofitable leases. Debts put pressure on sales. Separating yourself from these is a great opportunity to move the company closer to profitability. Furthermore, the locations will certainly be divided into three main budgets. Places that would no longer be open today will be closed. Locations with high rents that can be profitable will negotiate new contracts. Once the debts are paid off, the locations in prime locations, which already have a high occupancy rate, will especially benefit. Maybe you can negotiate the prices again.
Will office property owners engage in such negotiations?
You will have no choice. They are currently suffering greatly from the fact that large companies are closing more and more offices. In the USA, the office property market is facing the next big crisis. WeWork can benefit from this. Of the current 780 locations, I estimate that approximately 500 will survive.
WeWork has never been profitable. Will the situation change in the near future?
Yes I’m sure. Many small suppliers are already profitable. If WeWork manages to nurse itself back to health, the company may be in the black. Half of WeWork’s huge losses are caused by high interest rates on loans. Furthermore, the company earns only 15% more in rent than the company itself pays in rent. And then the overhead costs are still too high, around $500 million a year.
Two years ago a share cost $500. Are such flights of fancy realistic in the near future?
This is out of the question for the next ten years. On the one hand, new shares were repeatedly issued to take on debt. There are now more than double the number of WeWork shares compared to a year ago. Shares are becoming increasingly diluted. From a purely mathematical point of view, such flights of fancy are very unlikely. The current interest rate environment also makes this unlikely.
The bankruptcy also represents a serious blow for investor Softbank. The company is suffering billions in losses due to the bankruptcy of WeWork. What should investors learn from bankruptcy?
Softbank has not only invested billions in the company, but also in the renovation of the tenant office. To keep the company running, the tech investor had to post collateral so WeWork could take on more debt. These collaterals are now being withdrawn and causing losses. Softbank founder Masayoshi Son is a person willing to take a lot of risks. Like many successful investors, he knows there is a lot of money to be made in bubbles. Just don’t miss the exit. He didn’t succeed. The lesson should be to reduce such bubble exposures over the medium term.
Have investors ignored the warning signs?
Absolutely. On the one hand, investors should have been aware that this business model presents many risks. In such cyclical market phases the prices paid by short-term tenants can change significantly, especially compared to the competition. At the same time, the long-term prices that WeWork pays are quite rigid and last 10, sometimes 20 years. Another area that investors should pay attention to is the company’s governance structure. Founder Adam Neumann, for example, rented his own homes to the company. Under German law this would probably be called embezzlement. These facilities, if properly examined, would have addressed all the warning signs. Even though WeWork is only worth $50 million, Neumann is still a billionaire.
So were investors blind?
The job of venture capitalists is to rely on people and teams. And without a doubt Neumann is someone who has managed to draw a vision and raise more and more money with it. If some journalists and analysts hadn’t carefully analyzed the business model during the IPO, perhaps it would have continued to do well for so long that investors would have made much of their money back and/or even made a profit.
The US office market is already under pressure. Is the failure putting him under even more stress?
WeWork’s bankruptcy is imposing a new reality on the market. However, the office broker himself makes this difficult only to a limited extent. In recent years, too many companies have relied on offices that are too large and that they no longer need. Major tech companies have laid off up to 20% of their employees. As a result, their large offices no longer had any use. Additionally, more and more employees want to work remotely. These things have a bigger impact on the industry than WeWork’s bankruptcy.
Juliane Kipper spoke to Philipp Klöckner