11/7/2023: WeWork Files for Bankruptcy
WeWork filed for bankruptcy yesterday evening. This is no shocking news. The company has been insolvent for a while. WeWork never made one cent of operating profit and managed to burn $16B of cash, mostly from Softbank, into bankruptcy.
There are already books, TV series and podcasts discussing WeWork’s wild journey and its charismatic founder Adam Neumann, who managed to spin the idea of shared office space into a hyper growth tech unicorn story and raise billions from Masayoshi Son. I don’t have much to add to the very fascinating story. I will just say WeWork’s offices are indeed very nice but its business model was fundamentally flawed. WeWork signed up for long-term 10-20 year office leases around the world with corporate guarantee, made expensive improvements and rented the office out on the short-term basis. Tenants can move out after a month or a year but WeWork has to pay its landlord rent consistently for 10+ years. It’s a very risky model. I actually had a $299-a-month WeWork membership for a while. The amount of free coffee I drank from this place made it worthwhile and I honestly didn’t know how they made money. I later canceled the membership and it was a good experience with no annoying fees. Overall, I had a very good experience with WeWork and that’s probably why they lost so much money. WeWork was burning tons of cash already before the pandemic. Then, many short-term office tenants left WeWork during the pandemic to work from home while WeWork was still locked into expensive long-term leases. WeWork also did not benefit from the post-pandemic office rent reset and high vacancies for their space accelerated its downward spiral into bankruptcy. It appears that right after the bankruptcy filing, WeWork plans to walk away and renegotiate its expensive leases and it might finally emerge as a sustainable business.
From a macroeconomic perspective, I believe what we are seeing right now is that a lot of zombie companies like WeWork which have negative cash flows and very high debt loads are declaring bankruptcies. It’s a healthy detoxification process for our economy. But the pendulum might again swing too far that we will start seeing good businesses with strong cash flows have financial problems because they took on too much debt during the ZIRP era and at some point they will need to refinance at high interest rates they couldn’t afford. When these companies start to declare bankruptcies, it will be super painful but the ZIRP era excess will be completely washed out. It’s probably going to take a couple more years to get there. But once that happens, the economy will be on solid ground again.