In March, WeWork went through a restructuring that helped it reduce its debt burden by $1.5 billion. But that did not seem to be enough to keep the company afloat. In August, WeWork executives warned of a possible bankruptcy. Now, the company stopped paying on its loans and announced that it planned to file for Chapter 11 bankruptcy next week. This sent its stock to all-time lows, almost 98 percent from its highs a few short years ago, and had many people wondering if WeWork would even be around next year.
It is hard to tell what will happen during the bankruptcy proceeding, but there is a good likelihood that they will still be a company after the ordeal. Chapter 11 is known as a “reorganization” bankruptcy and will allow the company to continue to operate while it shores up its finances and strikes new payment terms with its finances. WeWork has around $3 billion of long-term debt that it will need to restructure. A bankruptcy judge will be responsible for either forcing WeWork to sell its assets to pay these debts, determine new payback terms for the loans, or forgive them altogether. Either way, WeWork will not have the same debt burden coming out of bankruptcy as it does now.
An even more important consideration for the judge is what to do with the more than $13 billion of long-term lease obligations. In Chapter 11, tenants have 60 days to assume or reject their leases. This will allow WeWork to keep their most favorable leases at their best performing locations and get out of all of the rest. Since many of WeWork’s leases were started long before the pandemic, they are surely paying above market rate for many of them. Getting out of these leases will help WeWork reduce their expenses but might hurt them in the long run. Any landlord who got burned by WeWork could be reluctant to do business with them again, and others will certainly not look at them as the strongest tenants going forward. But the office industry is struggling right now, so it might be as good of a time as any. Leasing to WeWork after the bankruptcy might not be a landlord’s first option, but it certainly beats having vacant space.
With all of the negative press that WeWork gets, I think it is easy to forget the positive fundamentals of the company. WeWork has become synonymous with co-working like Kleenex is for facial tissues, and Frizbee is for flying pieces of round plastic. It is foolish to think that the company will just fold and go away. In fact, the co-working and flexible office sector is growing; by some metrics it has grown by 11-13 percent last year.
WeWork’s troubles had less to do with the co-working market or its ability to provide a flexible office and more to do with how fast it grew. Thanks to big investments by investors like SoftBank and a bombastic founder whose growth strategy was not grounded in reality, WeWork was given unrealistic growth expectations. These expectations caused it to have a balance sheet and a valuation that would ultimately be its downfall. But like any good idea, WeWork will resurface. Will WeWork ever become the hub for the entire business community that Adam Neumann promised? Probably not. But it still proves to be a successful business and a damn fine co-working operator.
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