What WeWork Going Public — For Real This Time — Could Mean For The Office Market
The company announced Friday it will go public through a merger with BowX Acquisition Corp., a special-purpose acquisition company, or SPAC, in a deal expected to close in the third quarter of this year that values WeWork at about $9B.
The deal provides a new influx of capital to WeWork at a time when it has been shrinking its office footprint. WeWork had exited 106 pre-open and underperforming locations as of December, the company said in its announcement. Following those exits, WeWork has 851 remaining locations.
A source familiar with WeWork's strategy said the company plans to continue rightsizing, and that will likely include more exits. But the source said WeWork is also looking at potentially growing in select locations based on market demand. WeWork declined to comment.
Office market experts said they see the company going public as good news for landlords in the short term because it means WeWork will have the financial wherewithal to pay its existing lease obligations.
Urban Land Institute Technology and Innovation Council co-chair Dror Poleg, who wrote a book called Rethinking Real Estate, said office landlords with WeWork leases can breathe a sigh of relief.
"The immediate concern is whether WeWork could survive at all and honor commitments it already made, which is still holding up a lot of markets," Poleg said. "The fact that they managed to go public is good news. It means that WeWork is more likely to survive than it was a month ago ... and it's much more likely it will honor those commitments."
WeWork went on a leasing binge before its last IPO attempt that grew its dominance over the coworking market. WeWork added 11M SF to its portfolio between Q2 2018 and Q2 2019, bringing its portfolio to 23.4M SF, according to a 2019 CBRE report. That expansion made WeWork the largest private sector office tenant in Manhattan and Washington, D.C., and it provided a significant amount of the overall demand growth in those markets.
Poleg said he thinks the access to capital from going public will give WeWork the ability to grow again, but he doesn't expect it will ever return to the pace of leasing it pursued in 2018 and 2019.
"They were holding together the market in many cities, including New York," Poleg said of the period before its failed IPO in 2019. "The market has softened significantly regardless of WeWork since then, and if WeWork comes back at 15% of the aggressiveness it had in 2019, which kind of looks like where it will be in 2022, I don't think that will be enough to move markets in the same way it did previously."
"When you're a public company and you have a board and report to your shareholders, there's a discipline you have to adopt, and that will be very beneficial," Shooshan said.
“I am hopeful they will use this new funding to better serve the needs of their members because there is a demand for flexibility, and coworking will play an important role in the return to office," Glass said. "A financially solvent WeWork that learns from its prior mistakes will bolster key markets around the world, which is a benefit to everyone.”
Shooshan also said he sees continued demand for the coworking model, especially as companies begin to feel comfortable returning to the office and are seeking flexibility.
"They weren't wrong. I think they just got overcommitted, got over their skis, but at a different valuation and a different model, there's clearly a place in our ecosystem for them to play a useful role," Shooshan said of WeWork.
Shooshan was in talks for one deal with WeWork prior to its failed 2019 IPO that ultimately fell through. He said he is open to doing new deals with WeWork in the future.
"Once they get stabilized, yeah, I think they're a viable option," Shooshan said.
"I would not do a deal with them," he said of WeWork. "You can't even finance off of it. A lender won't give you credit for having a WeWork space, so that's a problem."
Deitelzweig said he thinks WeWork's business model of signing long-term leases and having short-term memberships is fundamentally flawed, and he doesn't think going public will change that.
"I'm not sure that it changes anything other than it gives them a little more stability, a little more leeway, but ultimately, I think it's just treading water," Deitelzweig said.
WeWork has grown primarily through long-term leases, whereas competitors like Industrious have more recently focused on management agreement models that share revenue with the landlord. But going forward, WeWork sees management agreements becoming a larger part of its business model, even as it plans to continue using leases.
In its investor filings, WeWork said it expects revenue from its core leased product to grow from $2.9B last year to $4.2B in 2022 to $5.9B in 2024. It expects revenue from its "platform" product, which includes management agreements, to grow from $5M last year to $12M in 2022 and then to $159M in 2024.
"They're hoping management agreements will help them, but I just don't believe that management agreements are great for landlords, because every building is special and you really don't want some third-party group doing what you should do," Deitelzweig said.
Shooshan said he doesn't think landlords want to assume all the risk that comes with a full revenue-sharing agreement, but he said he thinks WeWork can try to strike a balance between the two models.
"Do they take 100% of the risk and sign leases and try to make money on the markup? That's probably a tougher model for them," Shooshan said. "Does the landlord want to take all the risk just to have that management? I wouldn't say that's attractive to us. So it's about finding some balance in there."
Poleg said he doesn't see the coworking leasing model as fundamentally flawed. He said the problem with WeWork's strategy was that it signed too many leases at top-of-market rates in a short period of time. He said he expects WeWork to continue to pursue leases, especially because the soft office market could allow it to get better deals than it did in the past.
"If things go particularly well with the share price and the general performance of the company, they might be in a position to raise a separate fund and partner with investors to acquire more buildings at the bottom of the market," Poleg said. "That's an opportunity WeWork might return to later this year or next year. If you really see distress in the market, there will be large investors who would be happy to partner with a healthy WeWork to take on these projects."