WeWork’s unravelling has been so spectacular as to cast it the poster child of what not to do with a co-working business. From overspending to the tune of billions to ignoring the nuances of international markets, analysts and industry stakeholders are pointing to a laundry list of mistakes that led to the New York-based firm filing for bankruptcy yesterday.
The announcement followed the previous day’s suspension of trading ahead of the opening bell on New York’s stock exchange and is a massive blow for the former juggernaut once valued at $US47 billion at its 2019 height. In the past year alone WeWork’s share price fell 98% and its valuation plummeted to the wrong side of $50 million. After years of following a now much-criticised business model based on taking long-term leases and renting them for the short term, executives were dealing with $2.9 billion in net long-term debt and more than $13 billion in long-term leases.
Not such a great idea
“They [WeWork] never really understood the unit economics of the business,” said Tobi Skovron, founder of Melbourne-based flex and co-working space provider Creative Cubes. “In essence it was as though they were selling a cup of coffee for 20 cents that was costing $3.50 to make. But the demand WeWork created was very real and now that they can’t service it that demand has to go somewhere.”
In past months Mr Skovron has gained more insight into WeWork’s machinations thanks to being offered several locations the beleaguered company was trying to offload.
“I tried to make sense of the business - the size of the offices, the retail rent, the membership pricing, cost of goods, running costs… and it didn’t stack up,” Mr Skovron said, adding that he would not even design the floors in the same way as the spaces were too cramped and claustrophobic. “They failed to localise the product. They rolled out a concept that suited and was tailored to New York to 700 sites across the planet – and that just doesn’t work.” International observers echo such views. UK based investment director Jane Sydenham was quoted by the BBC describing WeWork as "a great idea" when it started out.
"We all know that flexible working and being able to use offices on an ad-hoc basis is a helpful opportunity to have," she said.
"But I think the problem with WeWork was it over-expanded, borrowed too much money, took on too many sites too quickly, and didn't really put in place all the checks and balances and controls that a company needs to have."
Despite WeWork’s woes, Australia’s co-working and hybrid workspace industry is on the up, growing 2.1% in major east coast markets in the 12 months to June according to CBRE data. Hub Australia is opening one of the latest sites, inside the glamorously refurbished 1930s commercial building at 44 Martin Place, as it continues to expand along with other industry players. Creative Cubes is going from strength to strength with tenants such as Aesop, KFC, Lululemon and Porsche on its books. The company has grown to five locations since opening in 2017, has a sixth under construction, eight more in the works and plans for the first Creative Cubes site in NSW next year. Co-working business Wotso saw revenue rise 21% in the first half of this year as occupancy climbed after it expanded into the healthcare and hospitality sectors. CBRE noted that most new office developments are also incorporating some level of flex space, and the over the past three years, the average flex centre size has grown by 30% to average 2300sqm.
WeWork launched in the US with much fanfare in 2010 and came to Australia in 2016. But the one-time industry darling started imploding after a 2019 attempt to list on the New York Stock Exchange was met by Securities and Exchange Commission questions over the company’s long-term viability, profitability and quality of leadership. The warning bell had sounded. WeWork went on the decline, accelerated by events including the loss of controversial co-founder Adam Neumann in 2021, the massive shift in working habits and economic headwinds triggered by the pandemic, and its own costly business model. WeWork eventually listed in 2021, but at a far-reduced valuation, and then continued to haemorrhage money even as its major investor SoftBank poured tens of billions into keeping it afloat.
As for Australia, WeWork’s local arm began pulling down the shutters in 2021, giving up offices in Perth, Melbourne and Sydney as the pandemic tightened its grip. Then, just one month ago, almost to the day that trading of WeWork shares was suspended and the subsequent bankruptcy announcement, the company revealed it was closing two of its most prestigious locations, both in Sydney: 66 King Street in the CBD and 50 Miller Street in the heart of North Sydney. WeWork was the anchor tenant at 66 King, and at the North Sydney address, had committed in 2018 to a 12-year lease for 4100 square metres at about $700 per square metre.
“WeWork shed an incredible light on how people can work in a far more advantageous lifestyle-driven way,” Mr Skovron said. “So it’s disappointing that they couldn’t get their back office in order and make it work.”