Will WeWork Survive a Post-Pandemic Future?
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Will WeWork Survive a Post-Pandemic Future?

28th October 2021 | 6 min read

Coworking company WeWork (WE:US) [ ] finally went public on Thursday 21 October 2021 via special purpose acquisition company BowX Acquisition, following its failed IPO attempt in 2019.

The company is currently valued at USD9 billion, which is significantly down from SoftBank Group’s rather shocking USD47 billion valuation in 2019. The merger will provide WeWork with cash proceeds of around USD1.3 billion, according to an SEC filing and pulled in USD 150 million from Cushman & Wakefield.

The decade-old company has already had a rollercoaster journey as it turned from the most magical unicorn to “the Most Ridiculous IPO of 2019” in just a few years.

Co-founder Adam Neumann opened the first WeWork space in New York in 2010, promoting the company as more than just a provider of commercial office space, but one that brings people together, forming a “We Generation”. 

Start-ups and even big enterprises were fascinated by the idea of working in offices with cool designs, convenient facilities and like-minded communities. The revolutionary concept fostered the company’s rapid expansion into 52 locations in 2015, with its valuation quadrupling to USD10 billion.

WeWork caught the eye of Masayoshi Son at Softbank – a relationship that later turned into a sweet spell. Softbank invested in WeWork in 2017, which valued the company at USD20 billion. In January 2019, this rose to a staggering USD47 billion.

Image credit: Brandon Hooper on Unsplash

Given a boost by one of the world’s most important tech investment firms, the company ambitiously rebranded as the We Company and expanded into other sectors, such as co-living subsidiary WeLive and WeGrow, a “conscious entrepreneurial school”.

Only when the company decided to go public in 2019, did investors raise concerns about WeWork’s business model, and Neumann’s toxic managerial style began to surface. The We Company also revealed that its losses doubled in 2018 to almost USD2 billion. As a result, the IPO was halted, Neumann was ousted and SoftBank bailed out WeWork from bankruptcy with more than USD9.5 billion.

Whether the IPO is a lifebuoy for a sinking ship or the start of WeWork’s revival is still difficult to tell, but here are some factors to think of before investing in WeWork.

WeWork still not profitable 

Although WeWork installed a new CEO in 2020 and cut staff after the IPO withdrawal in 2019, the company continues to record huge losses amid continued expansion.

One of the major reasons the company lost trust from investors was the USD1.9 billion net loss by the end of 2018, despite USD1.8 billion in revenue.

In 2021, the company is gradually increasing its membership base and earning more income quarterly, which is a glimpse of hope for its revival. The company recorded revenues of USD 658 million in 3Q2021 and hit its highest monthly sales of the year in September, at USD228 million – its fifth consecutive month of growth.

Total occupancy fell to 47% at the end of 2020, but rebounded to 60% in 3Q2021, after the company positioned itself as a flexible office provider for companies that want to adopt a remote-working model during the pandemic.

Image credit: Kamal Kant Kosariya on Unsplash

WeWork currently operates 762 spaces, compared to 425 at the end of 2018. Membership rose to 575,000 from 400,000, with growth from enterprise membership. Some of its global customer base includes marquee names like Amazon, Facebook, Google and Bank of America.

The company has also cut its Selling, General & Administrative expenses (SG&A) by USD 1.1 billion on an annualised and run-rate basis.

But the company did not mention whether it was profitable during the third quarter. 

Despite all these good signs, investors need to keep in mind that the company still hasn’t turned profitable. Its revenue in the second quarter was USD593 million with a net loss of USD923 million, and the revenue was down from USD882 million from the same period last year. 

Challenging business model

CEO Mathrani has announced a five-year plan to be free cash flow positive by 2022 and have USD1 billion of free cash flow by 2024. 

No one can really tell if WeWork will be able to achieve its goal, but the company has made various changes to its business model and laid the groundwork for its recovery.

Before its IPO failure in 2019, WeWork expanded aggressively into sectors such as co-living, education and childcare. The first few steps of its reformation started with a massive layoff and terminations of peripheral businesses like WeLive and WeGrow.

WeWork also kicked out Neumann and surprisingly appointed real estate – not tech – exec Sandeep Mathrani as CEO, positioning WeWork as an office-leasing company rather than a tech startup like before.

But thanks to Neumann’s promotion of WeWork in earlier years, the company is still one of the most visible co-working space companies in the industry, associated with a hip, cutting-edge and lively brand image.

WeWork used to depend heavily on membership-only plans, but now it is absorbing more members by offering flexible packages like “On Demand” and “All Access” options, that allow users to use WeWork office space freely across locations and even during weekends and outside of business hours.

Image credit: Charles Koh on Unsplash

According to an internal memo, WeWork has also spent more than USD20 million to renovate spaces for social distancing, which could provide quality workspaces that are sanitized and comfortable during the pandemic.

The company is growing its partnerships to increase its membership base and upgrade its value proposition. For instance, it has partnered with Georgetown University to provide a replacement library and common space for its students. It is also working with companies to offer insurance, healthcare and payroll services for small-and-medium-business and startups. 

But the fatal problem of WeWork is its upside-down cost structure. WeWork is purchasing long-term leases for 10 to 15 years, yet offering short-term contracts to tenants with the option to exit rental plans at any time, which places huge financial risk and excessive leverage on the company. 

During the pandemic, WeWork negotiated shorter leases and optimised its real estate portfolio. In fact, it has terminated 150 full leases and amended 350 leases with a partial exit since the beginning of 2020. It estimated that approximately USD400 million was achieved in annualised rent savings in 2Q2021. 

However, this can only prove the business model has become healthier but the fundamental upside-down structure has yet to be tested. 

Uncertain future demand

According to a market report published in August, coworking spaces will grow by only 2.1% in 2021 in terms of market size from USD7.97 billion in 2020 to USD8.14 billion, but it expects a surging demand for flexible work space in near future. 

It expects the market for coworking spaces to reach USD13.03 billion by 2025 at a compound annual growth rate of 12%.

So far, the potential biggest drivers for WeWork come from corporations who are shifting to a hybrid work model following the pandemic, but surveys show companies have mixed feelings about such arrangements. 

PwC’s survey finds US executives and employees are planning changes for a post-pandemic future yet few are prepared to completely abandon the office space. Although 83% of employers think remote working has been successful, there’s no consensus on the optimal balance of work days at home versus in the office.

Image credit: Kamal Kant Kosariya on Unsplash

It would be complicated as companies need to transform their culture, work model and the usage of office space. Some executives even expect to increase office space or change their real estate strategy, which could be a threat to the attractiveness of co-working space.

The pandemic, along with COVID-19 restrictions and unpredictable outbreak of cases also brings uncertainties to co-working businesses.

The co-working space booking platform Coworker surveyed more than 14,000 coworking spaces in 172 countries, and found 71.67% of them have experienced a significant drop in the number of people working from their space since pandemic, with reasons like cancellations on events or meetings, cancellation of membership, space closure or sick members. 

In the long run, WeWork, and other co-working spaces, need to come up with a business strategy that can sustain its membership base and converge with the post-pandemic hybrid working model.

Written by Lawati Ning Sang

Ning Sang previously worked as a business news reporter in Apple Daily with experience in feature writing, video production and news anchoring. Her past news coverage included stocks, real estates and immigration policies. She is currently interested in writing about the opportunities and challenges in Asian markets.

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