WeWork is Bankrupt.

A little over 10 years ago, I was a running an early coworking space in Shanghai, China. At the time, it was a relatively new model, and we had a local district government backing us with office space. All we needed to do was convince entrepreneurs and small international and local businesses to rent space with us. We didn’t know exactly what the model was, but we enjoyed the entrepreneurial nature and working with start-ups and small businesses.

It became clear pretty fast that this model was not the way to riches.

My partners believed that the coworking space model of leasing a long term space and subleasing to shorter term tenants could not survive as a profitable and sustainable model.

One day, one of our members asked if I had heard about a new concept based out of New York: WeWork.

I remember thinking that this was what the industry was missing. This Adam Neumann character had the vision to profitably grow and scale the business of coworking.

I was wrong, and so was Adam Neumann, Softbank, and most everyone else.

After hitting a peak valuation of $47B in 2019, WeWork recently filed for Chapter 11 bankruptcy protection.

So what went wrong?

While much can be made of the cult of the brand and the extravagant spending, it all boils down to something very simple.

As Adam Neumann was able to convince people to give him billions, he was taking on expensive long term office leases and renting them to short term tenants.

Neumann’s focus on “growth at all costs” hid a large underlying problem…

The Asset-Liability Mismatch

For those that need a reminder, an asset is a resource with economic value, and a liability is a financial obligation owed to another party.

In most healthy and sustainable companies, assets exceed liabilities. The difference between assets and liabilities is equity that would go to shareholders if all liabilities were paid off.

For example, let’s look at Apple:

Last quarter, Apple reported $352B in assets and $290B in liabilities. That leaves $62B in positive shareholder equity. That means that if everything were sold off tomorrow, and all debt paid, shareholders would be left with $62B!

Now, let’s look at WeWork’s last quarterly report:

WeWork reported just $15B in assets and $18B in liabilities - they owe more than they can afford to pay off (hence the bankruptcy)!

How did they get here?

WeWork’s business model was to sign long term leases in office buildings and then sign short term contracts with its members.

For example, WeWork could sign a lease for $75/SF and then they could charge $125/SF by renting it out to their members. In exchange, they’d offer a desk/office, all the free beer and coffee you can drink, and member events and perks.

If you were to analyze the business on the surface, it may make sense.

BUT, what happens in a recession? Or what happens when a world pandemic strikes? What happens when interest rates double in a year?

When WeWork filed to go public in 2019, many of the flaws of the model were revealed. Then, over the last few years, we saw the wheels come off.

WeWork had accrued billions in debt and expensive leases around the globe, occupancy dropped, and there was no clear path to profitability.

Does this mean that there is no hope for the coworking model?

Actually, it’s quite the opposite.

Coworking and flex office space is thriving.

With office vacancy at a high of 18.2% in Q2 of 2023, flex office is becoming more attractive for landlords looking to provide flexible options for tenants.

On the tenant side, 50% of respondents to a CBRE survey reported that flex office would make up over 10% of their office portfolios over the next two years. A JLL report stated that 41% of its tenants expect to increase flex office space use post-pandemic.

JLL predicts that 30% of all office could be flex by 2030.

This begs the question, “Since WeWork failed, how will other players survive?”

While WeWork dominated the space with its splashy new leases in expensive markets, other companies were growing more quietly with more sustainable models.

Taking a cue from the hospitality industry, some companies have grown with an “asset-light” approach, meaning they don’t buy buildings or take on expensive leases.

Here are two examples of the asset light model:

Franchising: Instead of one company holding expensive leases around the globe, a franchising model shifts that risk to individual franchisees. In exchange, franchisees use the name and receive resources and support from the parent company. IWG and Serendipity Labs are examples of companies that have grown with the franchise model.

Management model: Instead of signing a lease, a company may partner with a landlord to manage a space for a fee or revenue share. Industrious is an example of a company that has successfully grown with this approach.

While WeWork’s bankruptcy is certainly a disruption, it will not stop the flex office and coworking model from growing. In fact, it’s probably not even the end of WeWork. Although the name may be slightly tarnished from bankruptcy, WeWork became synonymous with coworking, and there’s certainly enough brand equity for a buyer to step in and revamp the company.

Key Insight →

WeWork revolutionized coworking with a flawed model. At the end of the day, WeWork didn’t fail because people didn’t like the product. They failed because their business model was fundamentally flawed. Although it took many years and billions of dollars to learn the lesson, the asset-liability mismatch proved to be too much for WeWork to overcome.