In the space of about six weeks, co-working space giant WeWork went from talk of a $47 billion valuation and an IPO to talk of bankruptcy, with $6 billion in financing unraveled and maybe six months of cash left.
Without mentioning names, Boston Federal Reserve President Eric Rosengren warned that co-working could pose “a new type of financial stability risk” for commercial real estate markets.
WeWork’s business model is to sign long-term leases in commercial office buildings, build out the space into attractive, flexible work areas and then rent them out in short-term leases to small businesses, startups and freelancers — arguably the people most vulnerable during an economic downturn. WeWork has more than $47 billion in long term leases.
The two new co-CEOs chosen to replace WeWork CEO, co-founder and Chairman Adam Neumann — Sebastian Gunningham and Artie Minson — have to steer a company that until just a few weeks ago was hyped as one of the world’s most valuable private startups despite never making a profit.
WeWork has been in talks with JPMorgan Chase and Goldman Sachs about a new $3 billion loan but that depends on a successful IPO, which has been called off. JP Morgan and Goldman Sachs are two of the main underwriters of the IPO and have the most to lose if WeWork’s stock doesn’t move forward.
WeWork’s largest investor, SoftBank Group has funneled $10.65 billion into the office leasing company. Japan-based SoftBank and its affiliates hold a 29-percent stake in the rental office company and two seats on the board. A funding round led by SoftBank earlier this year valued WeWork at $47 billion, but financial advisers said recently that it would likely fetch about a quarter of that.
WeWork is now the largest office tenant in New York City, with 64 buildings in New York City where it holds leases or has an ownership stake.
WeWork is burning cash at the rate of about $700 million a quarter. It had $2.5 billion in cash as of June 30 so it could run out of money sometime after the first quarter of 2020, Sanford C. Bernstein & Co. analyst Chris Lane told the Wall Street Journal.
By the end of 2019, WeWork will have $47 billion of future rent payments due. Although it leases its buildings for 15 years, its tenants have leases for 15 months on average, and are committed to paying WeWork $4 billion, Bloomberg reported.
WeWork is the third-largest lessee in the world, according to Bloomberg.
In addition to being the top tenant in New York City, WeWork is also No. 1 in Denver, Chicago and central London. In the U.S., commercial real estate expert TREPP summarized WeWork’s exposure by state, finding that it’s a Top 5 tenant behind $3.3 billion in commercial mortgage-backed security (CMBS) loan debt across 36 properties. New York and California are the top markets with WeWork exposure for CMBS — a type of popular commercial real estate loan.
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In a potential bankruptcy, WeWork’s $47 billion in lease obligations could be frozen, and commercial real estate in cities where WeWork is very active – like New York and London – could be paralyzed, deflating one of the strongest markets since the financial crisis.
Fed Reserve Bank President Rosengren said the rise in such workspaces could make the next U.S. recession worse by triggering a run on commercial real estate.
“In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building,” he said.
