Landlords Are Helping WeWork Do the Right Thing — Will it be Enough?
The same landlords that provided WeWork billions in tenant improvement dollars are now closing their pocketbooks.
The Wall Street Journal is reporting what shouldn’t be a surprise to anyone — “virtually no one will lease to WeWork.” The new co-CEOs of WeWork, Artie Minson and Sebastian Gunningham, announced they were going to resume their leasing efforts. Fortunately, their efforts have been in vain. Despite offering landlords as much as a 20% premium over market, Minson and Gunningham are getting the cold shoulder as they watch their credit rating plummet to a junk rating of single B-minus. WeWork has to get off their ‘get-rich-quick’ plan of leasing space and start focusing acquiring real estate — if it is not already too late.
For the last three years coworking companies like WeWork have represented an astounding 16.5% of leasing in the United States (yes you read that right) and in Manhattan alone the company occupies more than 7 million square feet of space. Last year I wrote a piece here in Medium calling out WeWork for their failure to invest in real estate titled, “We Work owes $18 Billion in Leases?” I argued that WeWork’s achilles heel was the fact they they were renters and not owners. Since then the company’s lease obligations ballooned to more than $30 billion — a massive overhang that threatens the viability of major landlords and their lenders across the United States.
While leasing caused WeWork to improve the value of property owned by others (i.e. their landlords) at the expense of their investors — the landlords seem to have bit off more than they could chew. Last year I concluded that this should have been a huge red flag and I recommended a massive pivot for the company. WeWork’s IPO filing reveals that the company’s founder, Adam Neumann, had the same idea just a little bit too late to save his job and maybe his company.
Shortly after the company filed its S1 we learned that Neumann was borrowing heavily against his stock to purchase buildings where WeWork is a major tenant. In a piece titled, “Why is WeWork Founder, Adam Neumann Cashing Out Early” I suggested that such a scheme was a massive conflict of interest. This is EXACTLY what WeWork should have been doing all along when the capital markets were open to the company.
WeWork’s S1 revealed the creation of an investment vehicle called “ARK” to purchase stakes in buildings where WeWork rented space. The reality is that we learned about ARK in May when WeWork announced Ivanhoé Cambridge’s $1B investment in the investment vehicle to create a $2.9 billion dollar fund to begin taking ownership stakes in the buildings WeWork occupied. WeWork realized that their presence in a building increased the building’s value as well as the values of nearby buildings. For example, WeWork’s San Francisco location on Taylor doubled in value shortly after the company began occupying the building. The same is true in Miami where WeWork’s location was bought for $25M in 2015 and sold for more than $65M this year.
WeWork’s S1 reveals that the company was growing like crazy but had razor thin margins — owning their own real estate would have improved their margins and give them a portfolio of assets that they make more valuable by simply existing. Sadly it seems as though the new co-CEOs have abandoned this plan and are going back to the drug that is killing WeWork — leasing — fortunately landlords are cutting the company off. The biggest question I have is whether or not the capital markets are open to the company at all. Oh, and if WeWork goes under, the landlords (and their lenders) who provided the company with billions in tenant improvement dollars are going to have a very bad year — I’d recommend a short position against WeWork’s biggest real estate partners…
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse and Sous Vide Science, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.