In September 2019, co-working space provider WeWork was one of the most eagerly anticipated initial public offerings (IPO) of the year. Its charismatic CEO promised that it would revolutionize the office rental business and create the “future of work.” However, a series of scandals, questionable financials, and the pandemic hit the company hard, leaving it with no other option than to file for Chapter 11 bankruptcy. Many in the commercial real estate industry consider WeWork’s bankruptcy as a significant bellwether of a broader reckoning facing the sector. In this blog post, we explore the reasons behind WeWork’s bankruptcy and its implications for the commercial real estate market.
1. Unsustainable Business Model:
WeWork aimed to bring people together in shared office spaces. It formed lengthy rental leases and then sublet workspace to individuals, freelancers, businesses, and entrepreneurs at a higher price. However, the company’s model was plagued from the outset by increasing costs and a lack of profitability. Ultimately, the real estate market bubble burst, investors withdrew interest, and the company found itself unable to raise new capital. WeWork’s bankruptcy is a signal of a much larger problem in the real estate market, where cost-cutting and increased investment are driving up rent and making crowded, urban locations unaffordable for many.
2. Weak Economic Environment:
WeWork’s precarious position helped illustrate an unprecedented challenge in an economic environment that was already struggling before the pandemic. A softening economy, the trade war, low interest rates, and Brexit had already weakened the commercial real estate market, causing many in the industry to consider a potential crisis looming in the future. Many investors worried about a deflationary spiral in the market and the potential for a global recession.
3. Overreliance on Venture Capital:
Venture capital played an essential role in the creation and expansion of the co-working industry. Unfortunately, the influx of venture capital leads businesses to prioritize growth over profits. It can become difficult to differentiate the tech companies who are equipped to sustain distribution growth from companies that are unlikely to make a profit. Venture capitalists can also become impatient when progress is not made quickly. With public markets slowing down investment interest in technology companies, IPOs become challenging for strong growth companies.
4. Structural Challenges:
Traditional real estate companies struggle to evolve their business models and keep up with co-working alternatives. Co-working spaces offer agile, flexible workspaces that are an affordable alternative to traditional office rentals. While it’s possible that the market may not need all the co-working spaces, it remains apparent that there is a growing need for flexibility in the way that companies rent office space. Many are boisterous of embracing co-working solutions since it is difficult to conceptualize what it looks like in the context of a traditional real estate model.
5. The Pandemic Effect:
The global pandemic swept across the world, halting the economy and causing widespread uncertainty. Companies across the board made significant cuts to their workforce, business operations, and expenditures. Co-working spaces and their customers were hit hard by the pandemic as customers deserted their spaces in droves. Demand for real estate rentals and sales fell sharply as businesses went into survival mode. The pandemic makes it impossible to predict how long a downturn will last – or even if it has yet bottomed-out.
The fall of WeWork and the company’s subsequent bankruptcy showed the world the true cost of unsustainable business models and overreliance on venture capital. WeWork’s fiasco signals the need for greater caution in the venture capital sector. The commercial real estate industry must now prepare for a considerable reckoning as the pandemic makes it difficult to predict when or if an economic recovery can take place. The era of easy money has ended; the time has now come to move toward more sustainable business models that consider the costs of innovation and change. Investors need to look beyond profit and at the impact their investments will have on society and the economy. The story of WeWork serves as a reminder that business models that ignore all these factors can result in disaster—all while leaving all of us receiving a fractured and unsustainable reality.