WeWork, once considered a major disruptor in office space, commanding a $47 billion valuation, is now on the verge of bankruptcy. The startup’s model—take existing office space, transform it, and sublet it in portions to smaller businesses and freelancers at a cheaper rate—was revealed to be a little more than a traditional real estate transaction by a company that had vastly overestimated the never-ending demand for flexible workspace.
In actuality, WeWork has far too much space, too many long-term leases and declining demand. The company operates 720 coworking spaces across the globe and owes $47 billion in future lease payments with a committed revenue of just $4 billion. They reported losses of $905 million in the first half of this year.
WeWork said in a recent SEC filing that it does not see a path forward. “Our losses and negative cash flows from operating activities raise substantial doubt about our ability to continue as a going concern.”
WeWork’s collapse was inevitable, says Jason Hughes, founder of Hughes Marino, who notes that Hughes Marino even leased from WeWork in New York and Boston in the past. “They wanted to grab as much space as quickly as possible,” says Hughes. “To push out their financial obligations as far out as possible and hope it would work out. They took 15-year leases with as much free rent as possible, and little regard for how high the future rental rates were—and now we’re seeing how susceptible they are to market gyrations. They are dealing with thousands of tenants on short-term leases. Now, it’s become a day of reckoning.”
While smaller companies and startups did need flexible space options, says Hughes, WeWork grew too big too quickly, taking on far more space than it could fill as it chased a big IPO. That left it vulnerable when the market took a turn, reeling from a series of successive hits including the COVID pandemic, the rise of remote work and the sharp decline in funding for tech startups.
What WeWork’s Bankruptcy Means for Tenants
For current tenants, WeWork’s collapse poses a real business risk, says Hughes, who noted that businesses utilizing these spaces must begin taking steps now to minimize disruption to their operations. As a bonus, he adds, they can also capitalize on a very favorable sublease market.
One concern that Hughes highlights is that WeWork could shut down without notice to tenants, who could potentially lose access to their IT closet or other essential equipment for a series of days. In an alternate scenario, landlords might allow WeWork’s tenants to stay and pay directly for a period of time, but how this transition will work is not clear and the arrangement will likely pose challenges for both parties.
For WeWork tenants currently in a month-to-month lease, Hughes Marino recommends taking steps now to control the inevitable transition and secure the best terms in the process. Those looking to remain in a coworking space can find alternative options that have a much more stable financial model.
One such alternative is Industrious, which offers stylish and flexible coworking spaces at more than 160 locations in over 65 cities globally and is used by companies including Pfizer, Lyft and Spotify.
And tenants with long-term WeWork contracts still have options, Hughes says, including exploring their termination rights. As they are looking to find new space, they have the benefit of ample premium office space availability and the opportunity to lock in historically favorable rates.
Across the country, office space availability has skyrocketed, trending toward 20% availability—the point at which it tips in favor of tenants—with even higher rates in metro areas like Denver, Dallas, San Francisco and Houston.
Following the COVID pandemic, corporate America has largely shifted to a new hybrid work model, leaving businesses with lots of available office space for subleasing. The national sublease market is at historic highs, with inventory double that of pre-COVID times, and even triple in cities like Raleigh-Durham, Austin and Phoenix. It presents a great opportunity for WeWork tenants to seize the moment, Hughes says.
“WeWork tenants now have an opportunity to secure space at a fraction of the cost and with greater flexibility than leasing directly,” says Hughes, adding that Hughes Marino can help businesses take the right steps now to protect their interests and find alternative spaces that offer added security and a win for their bottom lines.
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