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ResearchThe Weekly (8/18)

The Weekly (8/18)

Aug 18, 2023

WeWork is back in the news and unsurprisingly it’s not celebrating a new company milestone. From unicorn to penny stock, the company is teetering on financial ruin (again).

For years, WeWork was the company that defined co-working. It quickly expanded around the world and outfitted its offices with millennial catnip like free beer, snacks, and community events. After fumbling the IPO and evaporating billions in venture funding, the company quickly became the poster child for excess and greed. 

The proliferation of work-from-home policies along with the rapid rise in global interest rates in the last year—which generally reduces profits for the commercial real estate industry—have magnified an already flawed business model.

Despite its recommitment to core business fundamentals in the last few years, WeWork’s management set off a signal flare about the company’s future as “losses and negative cash flows” have “raised substantial doubt about our ability to continue as a going concern.” In accounting, the term “going concern” means a business has enough resources to stay afloat. Translation: the company is on the brink of bankruptcy. 

WeWork’s business model never made sense, but can it be salvaged? Maybe.

The current business model requires WeWork to be world class in two arenas: real estate arbitrage and property management. Balancing the two has created an unfocused approach to a co-working trend that is fundamentally intriguing. 

Doing away with the rent arbitrage model that was born in an era where money was cheap and growth was everything, might allow the company to refocus towards its core competencies. Leaning on management agreements rather than being burdened by leases, the company could partner with real estate developers as opposed to acting as the landlord themselves.

Co-working peer Industrious has made this model work, partnering with landlords to manage their office properties and converting them to co-working spaces. By charging a fee for its office management services, which can include tasks like accounting, marketing, legal and more, it allows the company to focus on the experience without being so capital intensive. 

Industrious also keeps a portion of the revenue it collects from landlords, once their locations earn more than the equivalent market rent (focused experience and lux working environment = higher rents). In other words, the economic benefits of real estate, without the debt burden and capital requirements. 

WeWork’s brand is formidable but they lack focus. Pivoting away from a model that barely survived in a zero interest rate environment may be the final act in Adam Neumann’s vision for the future of work.

There’s no guarantee of success but to quote Stephen Covey, “The main thing is to keep the main thing the main thing.”

Have a great weekend.

- Your Titan Team


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