WeWork Is Bankrupt. Where Do We Go From Here?
It finally happened.
After years of speculation, handwringing, and infusions of capital, coworking pioneer WeWork has entered bankruptcy, the culmination of one of the biggest destructions of value in real estate history.
The question now is: what's next?
For WeWork itself, the bankruptcy process is likely to be messy and complicated — it will look to shed unprofitable locations and emerge as a viable business, or it will find a buyer willing to take on what is still one of the best-known brands in real estate.
“It's kind of like WeWork is losing weight. It was a fat slob, and now it's going to get on Ozempic,” said Leo Jacobs, a commercial litigation and bankruptcy attorney and founder of Jacobs PC in New York. “It's going to stick itself, it's going to have a balance sheet that is worth looking at, and it's going to become investable again.”
WeWork is one of the world’s largest private sector office occupiers. As recently as last year, it occupied 44M SF, with 15M SF in the U.S. So its collapse will have inevitable knock-on impacts for cities around the world and the coworking sector it helped to revolutionize.
Complicating the effort will be landlords looking to fight for what they are owed, creditors battling for control over the process and other operators eager to pick over the carcass of a fallen rival.
“It’s a global brand. Anyone that’s occupied an office in the last few years knows WeWork,” former The Office Group co-CEO Charlie Green said. “The fundamentals of the model work, so if they can reduce the lease liability, then there may be a way to extract value.”
In the wake of WeWork announcing it had gone into Chapter 11 bankruptcy on Nov. 6, Bisnow analyzed what the future holds for a company that changed the way real estate works — but ultimately failed to work itself. Bisnow also looked back at the roller coaster ride that took it here, the likes of which real estate had never seen before, a tale of vaulting ambition, “megalomaniacal” leaders, wave machines, free beer — and billions and billions and billions and billions of dollars set on fire.
Ernest Hemingway famously wrote that bankruptcy happens slowly at first and then all of a sudden, but that isn't really the case with WeWork.
Moments like August’s warning about its ability to continue as a going concern, and October’s missed interest payments were clear signs that bankruptcy was imminent, but WeWork has been desperately trying to slash costs and stop burning cash for four years now.
The undoing began in August 2019 with the release of the company's initial public offering prospectus, which revealed the depth of the hole it would have to climb out of: a leveraged capital structure in the form of $47B in lease liabilities, a mounting debt load and power consolidated with then-CEO Adam Neumann.
The situation was the result of an attempt to grow fast in the same way a tech company might, the strategy of Neumann and Masayoshi Son, CEO and chairman of Japanese investor SoftBank, WeWork’s principal backer.
To dig itself out, the company laid off thousands of employees, sold off or shuttered the side businesses Neumann had accumulated and began the hard work of renegotiating leases and closing down locations around the world. It wasn't enough.
“The problem was the capital structure,” said Manish Chande, managing partner of Clearbell Capital, a London-based real estate fund manager. “They were taking long leases that didn’t match the income that was coming through. Plus, you had a megalomaniacal CEO, who was a brilliant innovator and created an amazing product, but that kind of founder is often not the right kind of person to take the business forward.”
Where We Started
WeWork came a long way and fast. The company famously began in 2008 as a 3K SF, one-floor lease at 154 Grand St. in SoHo, where Neumann and co-founder Miguel McKelvey were said to have soda-blasted the brick walls and painted the elevator.
That title was won, in large part, thanks to WeWork’s leasing tear in 2018 and 2019, which at times involved inking deals with landlords spanning hundreds of thousands of square feet within a few blocks of each other.
McKelvey was the quiet one, Neumann the charismatic, almost messianic public figurehead who espoused an ethos that WeWork was more than a mere flexible office company — the second line of the company’s 2019 IPO prospectus declared, “Our mission is to elevate the world’s consciousness.”
The company held its own festival in the UK for staff, which intermixed music with inspirational speeches from Neumann. It later became the focal point of at least one of the sexual harassment lawsuits the company faced in that period.
Neumann won the backing of SoftBank’s Son, who was looking for big investment targets for SoftBank’s $100B Vision Fund. After Neumann pitched him in 2016, Son reportedly told him in the back of a car to put away his business plan and think bigger, sketching out a plan on an iPad that would see Vision Fund invest an initial $4.4B in the company.
WeWork grew and diversified, moving into co-living and an educational division called WeGrow to be run by Neumann’s wife, Rebekah. It acquired Meetup and a surfing startup, plus a $60M private jet for the CEO. Neumann reportedly expressed a desire to be the world’s first trillionaire.
SoftBank ultimately invested about $20B in WeWork between 2016 and 2022, including debt, even as the company continued to post bigger and bigger losses as a result of its rapid growth. The plan was to grow as large as possible, and then use its scale to increase prices and turn a profit. It is a strategy that comes from the tech world, with mixed success: It worked for Amazon and Netflix, but less so for companies like Uber and Lyft.
SoftBank’s last round of investment in WeWork at the start of 2019 valued the company at $47B, even as it lost more than $2B that year. But those losses meant it needed more cash, and so it unveiled an IPO in August of that year with a mooted valuation of $50B.
The prospectus for the IPO, besides talking about elevating the world’s consciousness, touted the possibility of the company’s revenue reaching $3T, since every office worker in the world was a possible customer.
But potential IPO investors focused instead on those huge losses and lease liabilities, the fact that there was no clear path to it ever turning a profit, and the amount of control over board decisions that Neumann would retain even after the company theoretically went public.
The IPO was pulled and Neumann was ousted with a payout that looked huge at the time, but all but $200M of it came in the form of shares that are now worthless. The whole debacle was documented in a drama, WeCrashed, starring Jared Leto and Anne Hathaway.
SoftBank put up $9.5B of capital to keep WeWork afloat, and Sandeep Mathrani, a real estate executive who turned around mall giant General Growth Properties in the wake of its own bankruptcy, was drafted in to begin that process of exiting unprofitable locations.
The pandemic hit revenue hard, representing the worst type of crisis for a company that relies on people traveling into city centers to share offices.
In spite of that, Mathrani steadied the ship to the degree that WeWork did eventually go public in October 2021 at a valuation of almost $10B, merging with a blank check company with investment from SoftBank, Cushman & Wakefield and Starwood, even though the company made a $3.2B loss in 2020.
The company went public at $10 a share, and after a slight rise in the first week of trading, its stock price dropped dramatically soon thereafter, never again trading above its IPO price.
The initial appeal to shareholders was that once the coronavirus was in the rearview mirror, a profit wasn't far behind. When he was appointed, Mathrani predicted the company would turn a profit by the end of 2021. While he managed to shrink the amount of red ink, it never went away.
By this June, WeWork had cut its gross lease liabilities to around $25B, or $13.3B on a net basis, across 777 global locations. It still reported a net loss of $397M for the prior three months, down from $635M in the same period the year before, but it was unsustainable for a company running out of cash to pay interest and operating expenses.
How Do We Restructure?
In many ways, WeWork is still undertaking the same process it started in 2019, but it has substantially increased its leverage over landlords by entering into Chapter 11 bankruptcy, giving it an offramp to shed underperforming locations and clear its books of overdue rent in a bid to emerge as leaner business that can attract new investment.
The statements made by WeWork alongside its filing show that terminating leases where it isn't making a profit will be central to its plans to emerge from bankruptcy as a viable company.
Chapter 11 gives the firm the ability to walk away from locations with few penalties and provide cover for the company from landlords that would try to recoup losses or sue for breaching lease contracts.
“As part of today’s filing, WeWork is requesting the ability to reject the leases of certain locations, which are largely non-operational and all affected members have received advanced notice,” WeWork said in a statement released Monday night with its bankruptcy filing.
It called this process “rationaliz[ing] its commercial office lease portfolio.”
WeWork will be able to reduce landlords’ claims for back rent by treating those claims as unsecured debt, putting office owners only above equity holders in the pecking order of who gets paid through claims on the company’s assets.
“Generally speaking, the motion to reject [leases] is more often than not approved because all the debtor has to prove is it’s in furtherance of their business,” said Rocco Cavaliere, vice chair of bankruptcy and corporate restructuring at the New York law firm Tarter Krinsky & Drogin.
The process of giving back space will take at least 60 days as the Chapter 11 claim advances, Cavaliere said. That period could see landlords that were unwilling to cut deals prior to bankruptcy come back to the negotiating table in a bid to keep the coworking firm at their properties.
Some landlords will be more sanguine than others, as they have bank guarantees or letters of credit that means they are paid some or all of their rent if WeWork walks away. Others aren't so lucky.
“If you're on that initial rejection list, you could potentially get off if you say, ‘Well, we didn't really mean it [that we didn't want to negotiate] early on, outside of bankruptcy, and we actually want to work out something,’” Cavaliere said.
By shifting back rent payments into unsecured debt, which WeWork is unlikely to be able to fully pay, the coworking firm may be able to negotiate more favorable repayment terms and lease conditions moving forward. While Chapter 11 requires WeWork to make rent payments during proceedings, no such guarantee exists for those rent debts already due — and reports of WeWork falling behind on rent rose through the summer.
Of the top 30 creditors listed in WeWork's bankruptcy filings, 27 list accrued unpaid rent and/or lease termination fees as the nature of the claim, each counting in the millions of dollars and owed to landlords including CIM Group, Jamestown, RFR and Nuveen.
Landlords at locations that WeWork walks away from may also end up as shareholders in the company as it emerges from Chapter 11, said Wayne Greenwald, a senior counsel at Jacobs PC focused on debtor-creditor law. With WeWork having too little cash on hand to repay them, they may instead be offered stock.
“There's generally very little left over for unsecured creditors, but you need to make unsecured creditors happy to some degree in order to confirm a plan of reorganization,” Greenwald said. “It's a publicly traded company, and therefore, they've got some value there and creditors could be getting it. It's basically what would generally be called the debt-for-equity swap.”
Now We Enter A New Reality
For the past few months, as WeWork has been trying to shed unprofitable leases or cut rents to make locations profitable, landlords and rival coworking operators have been hovering around the stricken company, looking at whether they can pick off better-quality locations and take them over. Contracts are being scoured to find ways to make this happen.
In a recent trading update, UK-based rival IWG, the parent company of Regus, said it had taken over 50 WeWork locations globally, changed the leasing structure and often refit the space. CEO Mark Dixon said on Nov. 6 that it could buy up more post-bankruptcy.
“We have taken over quite a few defunct WeWorks and maybe there will be more of those to come,” Dixon said to CoStar News.
However, the shift into bankruptcy protection complicates this process, as it effectively stops landlords from using unpaid rent as a means to force WeWork out of their buildings and reclaim the space.
Also, rival operators are likely to want to take a management agreement rather than a lease to run the former WeWork space, which will change the income profile of a building.
“A landlord is not allowed to necessarily take back their space once the bankruptcy case is filed, because the lease is arguably an asset of WeWork,” Cavaliere said. “The lease could be assigned to a different party for value, and so the [bankruptcy] code essentially requires the landlord to stand down.”
The picture that emerges is of a messy, complicated process involving debt providers that want to be repaid, a company that wants to keep the good bits and get rid of the dross, and hundreds of individual landlords trying to work out what happens next for them.
“You're facing what I see is a very interesting three-way fight between the debtor, the landlords and the secured creditors,” Greenwald said. “The three of them are going to have to figure out what to do.”
Some landlords will have no choice but to take back defunct spaces. They will have to decide whether they take their chances trying to lease the space themselves in a tough market or stick with the devil they know and make a new agreement with WeWork.
Either way, debt refinancings for buildings where WeWork occupies or used to occupy space are likely to be tricky. There are $7.9B of CMBS loans with exposure to WeWork, according to Barclays, and likely billions more in the wider debt market.
Especially in WeWork's largest market, that difficult choice will face owners in already dicey situations. As of August, 64% of WeWork's Manhattan leases were in Class-B and C buildings, according to Avison Young data supplied to Bisnow this summer.
That data is from just one market, but it tallies with anecdotal evidence of the company signing leases pre-2019 in mediocre buildings at top-of-the-market rents in order to achieve its growth goals.
Class-B and C properties aren't wearing the effects of the pandemic well. WeWork out of the game will be yet another obstacle to navigate.
Take 83 Maiden Lane in New York’s Financial District, where WeWork signed an exit agreement in late 2022 as part of its ongoing strategy to shut underperforming locations. The company signed up for 56K SF in 2019, reportedly paying $44 per SF — but it was hardly touched because of the pandemic, according to the brokers for the property.
“This is practically brand-new office space,” said Kate Hrobsky, a senior transactions manager at Denham Wolf, who is leasing the space WeWork left behind. “We are going to consider all offers. … We're really just seeing what the market wants and what it will deliver.”
The asking rent is $43 per SF, she said, and it is being offered as a whole or in pieces of 14K SF. The offering is a discount to the rest of Manhattan, where the average asking rent is roughly $76 per SF, but she conceded the building has a lot of competition. Manhattan has an availability rate of 19.6%, according to Colliers’ third-quarter analysis.
“It will be difficult to lease,” Hrobsky said.
While individual landlords looking to lease former WeWork space might face problems, there is little worry that the coworking company’s demise could have a systemic impact on office markets. WeWork might be the biggest private sector office tenant in markets like London or New York, but it occupies less than 2% of the offices in those markets.
And besides, there isn’t much that could make things worse for the secondary office market right now.
Speaking at a Bisnow event in London, GPE Head of Flex Customer Experience Jack Kelly said there was “no market” right now for poorly configured, outdated space in fringe locations.
“That market has been so badly damaged already that I don’t think this will have an impact,” Chande said.
There is a sentiment in the broader flexible office market that WeWork's demise won't have a systemic impact. WeWork commands a bigger market share in that sector, but the sector is now seen as so well established that it can survive the travails of its most famous name.
“I think a lot of the problems that WeWork is experiencing aren't reflective of what's going on in the broader coworking market,” Industrious Chief Operating Officer Liz Simon said. “Their problems are business model problems and operational management and financial challenges.”
Neumann signaled his belief that coworking is healthy and that WeWork can be again, too.
“It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before,” Neumann said in a statement Monday afternoon before WeWork declared bankruptcy. “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”
Many companies want to have flex space as a part of their real estate strategy, mainly because of the growth of hybrid work schedules, said Paolo Catania, founder of Metspace, which has two coworking locations in Montreal but is looking to expand elsewhere in Canada and the United States.
“WeWork spaces are full, and they're doing well in that regard. They just spent too much money, and that's hurting them,” Catania said. “Apart from that, their model is phenomenal. They built the largest community in the world.”
Some of its customers might have to find new space, but the business model underpinning that space will likely be different.
Industrious has about 160 locations in 65 cities around the world, but rather than subleasing its space to end users, either individuals or corporations, as WeWork does, Industrious partners with owners to create coworking spaces in their properties, then operates them under a revenue-sharing arrangement.
IWG, the largest flexible office provider, operates with management and revenue-sharing models, as well as via the franchise model.
“In all cases, our fixed obligation to the landlord is lower, which is what really allows us to have a more sustainable business instead of the overwhelming kind of debt obligations that WeWork has,” Simon said.
Are We Buying?
WeWork’s aim during the bankruptcy is to make itself into a leaner company with fewer locations and only those that are profitable, and no one would be willing to buy the company until that process has been undertaken, multiple market sources told Bisnow.
But Green, the former Office Group exec, said the brand has value, and if that weight loss process can be achieved, there could be buyers for the company if it can emerge from the bankruptcy process.
IWG is one potential buyer that was cited by multiple sources. The company went through bankruptcy itself following the dot-com crash, and Dixon, the CEO, made sure it had a more flexible capital structure, focusing on management and franchise agreements rather than leases, which allowed it to weather the economic impact of the coronavirus better than WeWork.
But IWG has already been taking on WeWork locations on an ad hoc basis, raising the question of whether it makes sense to buy the company when it is already profiting from its woes.
Private equity firms could turn their attention to a slimmed-down WeWork if its capital structure can be rationalized.
“It will go through the receivership process, it is going to have to let stuff go, and a phoenix can then rise from the ashes,” Clearbell’s Chande said. “It could be a private equity firm or a REIT. It’s a lot like when a retailer goes belly up. You have buyers picking up the decent pieces and leaving the bad parts.”
The alternative is death by a thousand cuts, those hundreds of individual negotiations playing out and leaving nothing behind but the memory of a company that burned brightly, changed the industry it gatecrashed, but ultimately couldn't transcend it.
“WeWork and its founder gave the industry a kick up the backside,” Chande said. “It was a true disruptor, it created a product and spaces that made the industry re-examine how it was doing things. The problem was the capital structure.”
CORRECTION: NOV. 10, 12:30 P.M. ET: In an earlier version of this story, Paolo Catania's name was misspelled. The story has been corrected.