1) WeWork Finally Admits That It Doesn’t Work

WeWork, the office coworking giant, recently released a statement that “substantial doubts exist” about the ability to continue as a going concern.

Wow!

In 2019, WeWork was valued at $47B and now the stock is valued at roughly $300M and trading for pennies on the NYSE.

Here’s a timeline of what happened:

2011 - WeWork opens its first space in NYC.

2013 - WeWork becomes a unicorn, raising $157M Series C at $1.6B valuation.

January 2019 - Raised $2B from Softbank, valuing the company at $47B. The company at this point is operating over 400 locations with over 600k members.

September 2019 - After S-1 is released ahead of a planned IPO, WeWork’s financials show $1.9B losses in 2018! The company is heavily scrutinized and the IPO is scrapped. The company loses 70% of its value. The founder, Adam Neumann, steps down as CEO.

2020 - During the pandemic, WeWork occupancy plummets to 47%, and the company sees losses of $3.2B.

October 2021 - WeWork goes public via SPAC, at a valuation of $9B.

August 2023 - WeWork announces that it has “substantial doubts” about its “ability to continue as a going concern”.

What were some of the key drivers that led to the fall?

• WeWork took on a LOT of debt and long term leases. They racked up $47B in long term lease obligations by 2019. While they have long term obligations, their customers are short term and can move out at any time.

• The Adam Neumann problem: The founder, Adam Neumann, was widely considered to be a charismatic visionary in the company’s heyday. However, there were concerns with his lack of focus, expanding to other investments such as an artificial wave pool maker and superfood company. In his personal life, he spent extravagantly on things like private jets and real estate. Turns out, he could be a really good cult leader!

• Tech or Real Estate? WeWork was valued as a tech company, but operating as an out of control real estate company. WeWork burned through $700M of cash last year, and that was after major restructuring!

Key Insight→

Be wary of businesses that are creating long-term liabilities and short-term assets (and also watch out for egomaniacal founders). The late Sam Zell said that every other time in history when this has has happened, the “results are predictable”. Turns out he was right! WeWork look out loans and leases (long term liabilities) to create their co-working office product (short term assets). While WeWork could show how the unit economics may work in one location, the crushing liabilities that they took on ultimately brought down the business.

2. Warren Buffet, the King of Boring But Profitable Investing, Sees Opportunity in Home Building

Sky high home prices and interest rates have buyers wondering when they may see some relief. Turns out a housing supply shortage has been propping up prices and keeping homes unaffordable for many Americans. Freddie Mac estimates that America is short 3.8M homes! What will help create more affordable homes? Build more of them! Its simple supply and demand. Buffet’s betting on home builders to bring more homes to the market.

Here are three builders Berkshire Hathaway is backing with the following purchases:

• 5.97M shares of D.R. Horton worth more than $700M

• 152k+ shares of Lennar worth roughly $17.2M

• 11k+ shares of NVR worth roughly $70.6M

D.R. Horton stands out as the big investment here, with an investment of over $700M. Horton focuses on low-cost homes for entry level buyers, exactly what the market is demanding.

Key Insight →

Berkshire Hathaway is betting on builders to create more supply in the market. Buffet and Berkshire make long term bets on the economy and they likely see the demand for more low-cost homes to create desperately needed affordable housing. When more homes are built, this should relieve pricing pressure and help create more affordable housing.

3. Real Estate Funds Have Raised $145B to Pounce on Distressed Assets

Firms like Goldman Sachs, Cohen and Steers, BGO, and Starwood are sitting on an estimated $145B in dry powder to capitalize on real estate distress.

With interest rate hikes, rising expenses, and decreases in occupancy, building owners with expiring loans are feeling the hurt. Some of the biggest names in real estate are sitting on a mountain of dry powder, waiting to swoop in on the distress.

Barry Sternlicht, CEO of Starwood, said their firm was “foaming at the mouth” to capitalize on real estate. Sounds like Starwood is rabid for distress.

Here are some stats breaking down the state of distress:

• One study predicts office could see 43.9% of value destruction in NYC by 2029. The report showed that offices nationwide had lost more than $500B in value from 2019-2022.

• Even multifamily is feeling the pain, with Green Street showing their multifamily index down by 21% over the past year.

• Morgan Stanley warned that commercial real estate prices could fall 40%, with 50% of $2.9T of commercial mortgages expiring over the next 24 months.

Key Insight →

Market pain can lead to profits for the well capitalized. When the largest firms in the world are raising billions of dollars for distress, take note. Many existing building owners are feeling the pain of the markets, and distress funds are circling and waiting for their opportunity to pounce. In times like these, their access to capital is an advantage.