Sunday, October 6, 2019

Sunday Globe Special: Day of Rest

"WeWork rose fast on short-term leases. But can it stick around long-term?" by Tim Logan Globe Staff, August 10, 2019

These are boom times for WeWork.

The co-working giant has been scooping up Boston office space at a torrid clip, some 1.5 million square feet in 16 buildings, from downtown towers to Fort Point warehouses, but its meteoric rise in the notoriously cyclical commercial real estate industry also raises a troubling question, with broader implications beyond the fate of one company: What happens when a recession hits, or if WeWork falls?

The dynamic tech and creative companies that have flocked to WeWork for its flexible terms have helped power Boston’s explosive growth, and serve as a bellwether for the broader economy. Likewise, any decline in their fortunes may show up in empty desks at WeWork long before it hits the city’s towers of more traditional office space, making the co-working operator a newfangled canary in the economic coal mine.

WeWork’s fortunes are being closely watched by real estate executives and Wall Street types alike as the company readies for a public stock offering, likely this fall, while gobbling up ever-larger chunks of buildings in cities worldwide.

There are reasons to fret. Just nine years old, WeWork has known only boom times. It’s never reckoned with a recession. The company’s bread-and-butter clients are startups and other companies too small or too fast-growing to commit to traditional long-term real estate, and they are susceptible to vanishing just as quickly as they come.

Oh, and there’s this: WeWork lost nearly $2 billion last year.

“I’m highly skeptical,” said Mark Hickey, director of market analytics at real estate data firm CoStar. “They really could get hit on all fronts. The whole well could dry up.”

WeWork’s basic business model is relatively simple.

It rents floors of office buildings on 10- or 15-year deals, just like any other corporate tenant, decorates them in hip high style, and then re-rents spaces for a premium, but they’re far shorter than a traditional office lease.

“Essentially, they lease space at wholesale, and find companies to rent it from them at retail,” said Aaron Jodka, managing director of client services in the Boston office of real estate firm Colliers.

In other words, they are nothing more than a glorified landlord.

That works great when the economy is strong, as it has been for years now in Boston. Rents on high-end office space downtown have jumped nearly 14 percent in the last year, according to real estate firm Newmark Knight Frank, and vacancy rates remain low, but at some point, the economy will turn, and indeed there are enough suggestions of looming trouble that in late July the Federal Reserve cut interest rates for the first time in a decade.

In a downturn, it wouldn’t take much for WeWork to get hit. Freelancers and solo entrepreneurs might decide to save on their $500 a month WeWork membership by working from a coffee shop instead. The venture capital firms that float midsize startups could get cold feet and pull their funding, forcing the companies to lay off employees or close outright. Corporate tenants to whom WeWork increasingly leases satellite office space may find they have room to spare again at headquarters, and because WeWork’s business model isn’t based on the traditional 10-year office lease, with many tenants renting month-to-month, those bustling, hip work spaces could empty out fast.

That’s what happened to Regus, a co-working pioneer that prospered during the tech bubble of the late 1990s but filed for bankruptcy protection in 2003 after the bubble popped and many of its tenants folded.

Regus has long since recovered, and today its parent company, IWG, runs more than 3,000 co-working locations worldwide, but WeWork’s footprint in Boston, New York, London, and other big markets is far larger than that of Regus, and the ripples from any recession could be felt more deeply.

“It’s really hard to say what happens to them in a downturn,” said Danny Ismail, an office market analyst at research firm Green Street Advisors. “Regus in the 2000s didn’t work out very well.”

Executives at WeWork declined to comment for this story, citing their upcoming initial public offering, but they have previously expressed confidence that WeWork can weather whatever tough times may come.

Indeed, they argue that their flexible-lease model would prove even more attractive to tenants who don’t want to be locked in to a long-term lease on space they can’t fill.

For some big landlords, WeWork’s particular business model is a little too chancy, and they have opted to keep their offerings to just traditional tenants. Others have limited how much space they devote to co-working leases. Some of the bigger property owners, such as Boston Properties and Tishman Speyer, are even experimenting with renting their own flexible office spaces.

No matter what happens, a slowdown in WeWork’s growth spurt is likely inevitable, real estate analysts say.

At some point, Jodka said, the company will have to turn around its huge losses.

“They haven’t been focusing on profits, they’ve been focusing on growth,” he said. “Time will tell if they can make money at this.”

Time to clock out.

Still, WeWork has ridden a wave of young, fast-moving companies of the sort pouring into downtown Boston. Many don’t know how big they’ll be in five years, said Wil Catlin, managing principal at Boston Realty Advisors, and don’t want to tie themselves down for 10 years in space they may outgrow — or never need. Nor do they want the hassle of building and managing their own offices.

“It’s not overly complicated,” Catlin said of WeWork’s appeal. “That flexibility is what people are buying. They’re not going there for the free beer.”

Already, the company counts one-third of the global Fortune 500 among its clients. Amazon, Liberty Mutual, and General Electric have based some of their Boston employees in WeWork spaces.....

Time to pull out if you are GE, even with the rebound, as they claim to “operate with absolute integrity and stand behind their financial reporting’’ while they clean it up like they did under Welch.


So did you learn anything about WeWork from the Globe?

"WeWork IPO is withdrawn as investors grow wary" by Peter Eavis and Michael J. de la Merced New York Times, September 30, 2019

WeWork shelved its plans for an initial public offering Monday, a startling retreat for a company that expanded rapidly in recent years as it sought to transform commercial real estate in the world’s biggest cities.

The move is the clearest sign yet that investors are increasingly wary of ambitious young companies that have run up huge losses and might not become profitable for years.

WeWork’s parent, the We Co., aimed to sell enough shares to raise as much as $4 billion, and had lined up $6 billion in a bank loan that was contingent on the IPO. Without a large infusion of capital, the company is expected to slam the brakes on its breakneck expansion. Analysts estimate that at its recent growth rate, We could run out of cash by the middle of next year.

Last week, Adam Neumann, We’s cofounder, resigned as chief executive after the company and its investment bankers struggled to convince money managers on Wall Street to buy its shares. Investors were put off by the company’s losses and questions about its corporate governance.

Turns out he looted it, something the Times is obfuscating.

WeWork in recent days has been renegotiating a new loan with banks led by JPMorgan Chase and Goldman Sachs to replace the loan it was expected to get after its public offering, according to people briefed on the matter. The banks are now offering less than the $6 billion previously on the table, one of these people said.

The lenders want WeWork to raise fresh capital before they issue new loans. The company is looking to sell certain operations, and it is hoping to sell stock to private investors, including SoftBank, its largest outside shareholder, these people said.

WeWork has expanded so fast that it is now the largest private tenant in Manhattan and a major player in London, San Francisco, and other major cities. It leases office space from landlords, refurbishes it, and then rents it to individuals, small firms, and large corporations like Amazon and UBS. WeWork’s customers can leave after short periods, giving them greater flexibility than they might get with a traditional lease.

Meaning if it collapses it is going to have major repercussions across urban real estate markets all over the world. 



"Startup workers often worry that going public means the fun is about to end — quarterly financial reports, disciplined spending, cheaper coffee. At WeWork, not going public may have brought a worse fate. Just three days after withdrawing its registration for an initial public offering, WeWork informed staff of far-reaching job cuts to come by the end of the month, said people who attended the meeting. Three top executives delivered the news from a room at WeWork’s New York headquarters Thursday afternoon. Although the executives didn’t specify how many jobs were on the line, people familiar with the discussions have pegged the amount at about 2,000, representing some 16 percent of the global workforce. Deliberations are ongoing, and the number could change. Signs that the party is ending came in both subtle and more direct ways. Many staff meetings at WeWork, even somber ones, have an alcoholic beverage on hand. This one did not. An employee asked in the meeting whether the WeWork Global Summit, a celebrity-adorned event in Los Angeles that employees look forward to every year, would still take place in January. Executives said it would not. The cost-cutting at WeWork’s parent company, We Co., resembles what’s happening now at Uber. The ride-hailing company said it was cutting more than 800 employees this summer. It also eliminated celebratory balloons for staff anniversaries. Each company counts SoftBank Group as its largest shareholder, and each is deeply unprofitable. The difference is that Uber actually made it to the stock market."

Meaning some suckers put down actual money on that piece of $hit pump-and-dump IPO, and the WeWorks employees weren't there for the free beer anyway!