Investors ignore risks: “WeWork bankruptcy forces new reality on office market”

Investors ignore risks
“WeWork bankruptcy forces new reality on the office market”

November 11, 2023, 5:46 p.m

From 47 billion dollars to practically nothing: WeWork, once the highest valued startup in US history, is fleeing into bankruptcy. In an interview, tech investor Philipp Klöckner explains to what extent the office broker can benefit from the real estate crisis and what investors have missed.

ntv.de: WeWork, the highest valued startup in US history, filed for bankruptcy this week. Is the entire coworking space market now collapsing?

Philipp Klöckner: I don’t think so. It may be that other providers have similar structural problems. Smaller competitors have certainly also signed long-term rentals at top prices, which they have to repeatedly re-let on short-term basis and which do not pay off today. Due to the bankruptcy, WeWork now has the chance to negotiate new rents. Although office real estate prices are falling, that is no reason to declare the end of coworking. On the contrary. The rents have to become cheaper, which makes the model even more attractive. Provided WeWork manages to renegotiate long-term contracts with landlords. In addition, there will continue to be high demand for coworking due to alternative working models. The concept will definitely stay.

WeWork has an AFiled for Chapter 11 bankruptcy. What does that mean?

With the restructuring under US bankruptcy law, WeWork wants to reduce debts and get rid of or renegotiate unprofitable rental agreements. The debts are putting pressure on sales. Separating yourself from these is a great opportunity to bring the company closer to profitability. In addition, the locations will certainly be divided into three major budgets. Locations that would no longer be opened today will be closed. Locations with high rents that can be profitable will negotiate new contracts. Once the debts are gone, the locations in prime locations, which already have a high occupancy rate, will particularly benefit. Maybe you can negotiate the prices again.

Will office property landlords engage in such negotiations?

You will have no choice. They are currently suffering greatly from the fact that large companies are closing more and more offices. In the USA, the office property market is facing the next big crisis. WeWork can benefit from this. Of the current 780 locations, I estimate that around 500 will survive.

WeWork has never been in the black. Will that change in the foreseeable future?

Yes I’m sure. Many small providers are already profitable. If WeWork manages to shrink itself to health, the company can be in the black. Half of WeWork’s massive losses are caused by high interest rates on loans. In addition, the company only earns 15 percent more from rents than the company itself pays in rents. And then the overhead costs are still too high at around $500 million per year.

Two years ago a share cost $500. Are similar flights of fancy realistic in the foreseeable future?

This is out of the question for the next ten years. On the one hand, new shares were repeatedly issued in order to take on debt. There are now more than twice as many WeWork shares than there were a year ago. The shares are becoming more and more diluted. From a purely mathematical perspective, such flights of fancy are very unlikely. The current interest rate scenario also makes this unlikely.

The bankruptcy is also a serious blow for investor Softbank. The company is making billions in losses due to WeWork’s bankruptcy. What do investors have to learn from bankruptcy?

Softbank has not only invested billions in the company, but also in the restructuring of the office landlord. In order to keep the company running, the tech investor had to submit guarantees so that WeWork could incur further debt. These guarantees are now being drawn and are causing losses. Softbank founder Masayoshi Son is someone who is willing to take a lot of risk. Like many successful investors, he knows that there is a lot of money to be made in bubbles. Just don’t miss the exit. He didn’t succeed. The lesson should be to reduce such exposures in bubbles in the medium term.

Have investors ignored warning signs?

Absolutely. On the one hand, investors should have been aware that this business model presents many risks. In such cyclical market phases, the prices paid by short-term tenants can change significantly, especially compared to the competition. At the same time, the long-term prices WeWork pays are fairly rigid, lasting 10, sometimes 20 years. Another area where investors should have paid attention is the company’s governance structure. For example, founder Adam Neumann rented his own houses to the company. Under German law this would probably be called embezzlement. These structures, if properly examined, would have addressed all warning signs. While WeWork is only worth $50 million, Neumann is still a billionaire.

So were the investors blind?

The job of venture capitalists is to rely on people and teams. And without a doubt, Neumann is someone who was able to draw a vision and collect more and more money with it. If some journalists and analysts hadn’t scrutinized the business model very closely during the IPO, it might have continued to go well for so long that investors would have gotten a large part of their money back and or even made a profit from it.

The US market for office properties is already under pressure. Is the bankruptcy putting him under even more stress?

The bankruptcy of WeWork is forcing a new reality on the market. However, the office broker himself only makes this difficult to a limited extent. In recent years, too many companies have relied on offices that are too large and that they no longer need. Major tech companies have laid off up to 20 percent of their employees. Accordingly, they no longer had any use for their large offices. In addition, more and more employees want to work remotely. These aspects have a greater impact on the industry than WeWork’s bankruptcy.

Juliane Kipper spoke to Philipp Klöckner