what WeWork’s bankruptcy means for flexible working

With its stylish places and provides of free beer, WeWork succeeded in making flexible workplace house cool. There was only one downside: the corporate couldn’t make it pay.

WeWork’s slide into US bankruptcy on Monday, below the burden of greater than $13bn in workplace lease obligations, has solid a shadow over flexible workspace suppliers on each side of the Atlantic and sharpened fears about monetary misery for workplace landlords scuffling with the transfer to working from house.

WeWork chief govt David Tolley mentioned within the firm’s bankruptcy submitting that it had amended 590 leases and lower future hire obligations by $12bn, however may “not overcome the legacy real estate costs and industry headwinds”.

The query is whether or not issues for the flexible workplace sector stay confined to WeWork, and if different flexible working corporations can flip the shift to hybrid working spurred on by the Covid-19 pandemic to their benefit.

Mark Dixon, chief govt of the most important flexible workplace house firm, IWG, argues “the travails and tribulations with WeWork” have been a “sideshow” to an enormous shift within the workplace market. 

“The body blow is technology, not WeWork . . . technology is changing how people work,” Dixon mentioned.

Flexible workplace manufacturers hope that corporations wanting to economize on massive static places of work will see flexible house — starting from desks by the hour to full flooring with customized designs — as an alternative, regardless of the difficulty for the sector’s best-known identify.

“The great irony of WeWork’s bankruptcy is that it comes at the exact moment when the flex industry in general has been seeing record performance,” mentioned Jamie Hodari, chief govt of New York-based co-working supplier Industrious. He mentioned many corporations had been transferring out of “oversized-headquarter space . . . into more flexible space at a more modest size”.

“WeWork’s bankruptcy has been less about the lack of demand than the specifics of their business model.”

A guest in the entrance hall of a WeWork location in New York
WeWork gives 900,000 desks to shoppers at greater than 700 international places © Bing Guan/Bloomberg

The WeWork bankruptcy compounds the numerous challenges dealing with workplace house owners. Vacancy charges have hit two-decade highs this yr in London and massive cities throughout the US, as corporations lower their workplace house.

WeWork, which gives 900,000 desks to shoppers at greater than 700 international places, was already in talks to renegotiate a lot of its leases. As a part of its Chapter 11 submitting in New Jersey federal courtroom late on Monday, the corporate requested for permission to scrap 69 leases within the US and Canada — together with about 40 places in New York City.

The lack of rents from WeWork’s departure will hammer the worth of the buildings they go away behind. Office values are already projected to fall by about 50 per cent on common in cities reminiscent of San Francisco and New York within the subsequent three years in contrast with 2019 ranges, in response to consultancy Capital Economics. 

Its worldwide places will not be a part of the restructuring, however have nonetheless suffered disruption.

WeWork mentioned on Tuesday that beginning in October it had withheld $78mn in hire as a consequence of US and worldwide landlords. Landlord Helical final week mentioned it had ended WeWork’s leases over six flooring on London’s Old Street for “non‐payment of rent”. The corporations reached a short-term deal to reoccupy the house after WeWork paid again hire and charges.

The means of extracting itself from undesirable leases will most likely contain a minimum of some courtroom battles. WeWork’s bankruptcy submitting listed a number of multimillion-dollar claims for again hire or lease cancellation charges, a variety of which it disputes.

Still, property executives and analysts count on the direct affect from WeWork on the broader workplace market to be restricted.

People use laptops in a Spaces office workspace, which is an IWG brand
IWG operates 3,455 places globally below manufacturers together with Spaces, pictured, and Regus © May James/Reuters

Real property knowledge agency CoStar mentioned WeWork’s retreat posed a “considerable risk” to particular landlords, however its footprint was “still quite small relative to the market as a whole”. WeWork represents 0.73 per cent of occupancy in New York and fewer than half a per cent in San Francisco and Boston, CoStar mentioned.

“These are embers around the edge of the fire,” mentioned IWG’s Dixon. IWG, which operates 3,455 places globally below manufacturers together with Regus and Spaces, had already taken over “quite a significant number of WeWorks” and would goal to safe extra, he added.

Hodari, Industrious’s chief govt, mentioned a few of WeWork’s flagship places can be too huge for different corporations to take over, however most would most likely be snapped up. “This is going to look like how the hotel industry works. When a Marriott doesn’t work out, it becomes a Hyatt,” he mentioned. “These aren’t going to all go dark, they are just going to be run by somebody else.”

Cal Lee, who advises on flexible workspace at actual property company Savills, mentioned he had “had calls from operators all this week and all last week wanting to take any WeWork spaces that come back to market”.

Lee mentioned WeWork had been “trailblazers” however “how they scaled, and the model that they used to scale, has ultimately caused this stress”.

Other suppliers use totally different enterprise fashions that they argue are extra sustainable. They are eager to keep away from the costly, long-term leases that dragged down the corporate based by entrepreneur Adam Neumann.

These contracts left WeWork on the hook for hire funds even when the variety of prospects utilizing their house plummeted in the course of the Covid-19 pandemic. WeWork mentioned its occupancy numbers had rebounded to 75 per cent in 2022, from 45 per cent in 2020.

The “big change” was that flexible working rivals had been “not taking these [locations] on a full-rent market lease . . . They changed their business model to recognise that in order to get scale . . . taking long-term leases is not as sustainable as management agreements and joint ventures”, Lee of Savills added.

Under these partnership or administration preparations, landlords in impact outsource working workplace areas to flexible workspace manufacturers.

IWG reported on Tuesday that of the 204 offers for new places signed within the third quarter of this yr, 200 had been “capital light”. Still, 60 per cent of IWG centres function on normal leases, in contrast with a minority that run as joint ventures, franchises, administration agreements or the place the hire varies by income. IWG’s leases are continuously signed by particular objective company entities to restrict the chance to the corporate total.

Industrious started switching to administration contracts in 2017, and was near phasing out all conventional leases, Hodari mentioned. The Office Group, the flexible workspace enterprise majority-owned by Blackstone, has historically owned its places of work, however chief govt Enrico Sanna mentioned it had “a growing number of management agreements”.

Even with new enterprise fashions, flexible workplace manufacturers face challenges.

Some landlords have began to compete straight by working their very own flexible working choices. “Flex space is not going anywhere,” mentioned Nikki Gibson, a director at property administration agency Ashdown Phillips & Partners. More landlords had been questioning “maybe should we do this ourselves”, she mentioned. WeWork mentioned a few of its prospects had reached offers straight with landlords to stay of their house.

The wider workplace market can be awash with low-cost house out there for sublet from corporations seeking to in the reduction of. Tolley at WeWork partly blamed the “unprecedented prices and in significant volume” of second-hand house for the corporate’s woes.

“Saddled with many . . . unsustainable leases, WeWork’s existing business model has become increasingly difficult to maintain and must be repriced to align with the current real estate market,” he mentioned.

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