As corporate America scrambles to lure workers back to their cubicles by way of meditation classes and elevator apps, the pandemic may have opened up a new opportunity for beleaguered flexible lease company WeWork to make a turnaround and thrive, according to real estate analysts.
“The headwinds facing WeWork and other flexible office providers are similar to those facing traditional landlords: getting people back into the office and signing new leases,” said Daniel Ismail, senior analyst and head of office sector coverage for Green Street, a commercial real estate analytics firm. “Luckily, what the flexible office industry has going for it is the ability to be flexible with leases.”
The pandemic gave WeWork an opportunity to “reinvent” itself, said Marcelo Claure, executive chairman of WeWork and chief operating officer of SoftBank, which owns about 80 percent of WeWork. Now, demand for WeWork space is “higher than it was prior to the pandemic,” he said last week at a Bloomberg Businessweek virtual summit.
WeWork gained notoriety in 2019 as a Silicon Valley unicorn implosion after it was forced to drop its IPO as investors raised concerns about its financial strength, debt and corporate governance practices. Softbank, which invested $18.5 billion in the company, initially valued the company at $47 billion. But it later dropped that figure to $5 billion after it took over WeWork. SoftBank CEO Masayoshi Son told investors this month that WeWork is among “many investments which failed.” He said: “Those are my regrets.”
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Over the last year, the company has been under the new leadership of CEO Sandeep Mathrani, a veteran retail real estate executive. The company cut overhead costs by $1.1 billion and trimmed $400 million in operating expenses, which improved its free cash flow by $1.6 billion. By December 2020, the company had exited 106 underperforming or not yet opened locations and negotiated more than 100 lease amendments that added up to an estimated $4 billion reduction in future lease payments to its landlords. In the first quarter of this year, it signed $850 million worth of lease contracts which is the highest level the company has achieved in a quarter since the end of 2019, according to the company.
“The pandemic has fundamentally changed the way people work, accelerating the demand for flexible workspace among organizations of all sizes,” Julia Sullivan, a spokesperson for WeWork, said in a statement to NBC News. “Over the last year, WeWork demonstrated the resilience of its business model and emerged as a partner of choice for businesses large and small looking for flexibility as they return to work.”
But cuts to overhead may have come at the expense of smaller tenants. Market researcher Alan Klement, a WeWork tenant at the company’s 43rd Street office in New York City, told NBC News he does not plan to return to WeWork after his lease expires at the end of the month. In November, he renegotiated a six-month extension for his office. But in April, the company said they would require a two-month minimum lease and would increase his rent by 40 percent.
“I was shocked,” he said. “Stuff around here is broken, no one is around. Sometimes I’m the only person here for a whole week. What do you think you’re doing here raising the price on me?”
When the building’s IT closet air conditioner broke, the company brought in a loud portable air conditioner that clients can hear during conference calls, Klement said.
“It’s just kind of a train wreck,” he said. “I can go anywhere for what I’m paying now, and other places will happily take my money.”
Another former WeWork tenant in New York City, who runs an environmental nonprofit organization and asked to remain anonymous out of fear of retaliation, told NBC News that no longer rents space from the company after her lease ended in November.
WeWork held her responsible for about two months of rent during April and June when the state closed all offices to stem the spread of the coronavirus — a problem commercial landlords and tenants across industries faced last year. She emailed the company in June to try to negotiate a rent deal, with no response. The next month, she began receiving calls from a collection agency demanding $11,000 to settle her debt with WeWork. In December, the collection agency threatened legal action if the debt wasn’t paid.
“It escalated quickly and the number went up shockingly high,” she said. She said she has not received a court summons and has not heard from the company. She’s now leasing an office from a traditional real estate company.
WeWork did not respond to an NBC News request for comment on the allegations, citing company policy not to comment on individual tenants.
Still, co-working spaces could be here to stay. A survey by the commercial real estate services firm CBRE found that about 86 percent of tenants said they see flexible office space as a key part of their future real estate strategies. Last fall, Dropbox announced its plan to become a “virtual first” company where employees will have access to what it calls “Dropbox Studios.” These studios function as flexible office hubs for employees to meet and use for daily individual work. Facebook, which leases WeWork office space in San Antonio, Texas, said it will not require workers to return to the office.
“The need for agility by traditional enterprise tenants stems from continued economic uncertainty and new workforce behaviors.”
“The need for agility by traditional enterprise tenants stems from continued economic uncertainty and new workforce behaviors,” according to CBRE’s 2020 North America flexible office market report. “The reasons for engaging with flex space are also evolving from ones that were focused on simply exploring the concept to ones that are more sophisticated.”
WeWork’s business model is set up to capture the difference between what it pays landlords for offices and what smaller tenants pay them as subletters at those offices, said Ismail with Green Street. Like the retail industry, co-working companies used the economic downturn to lighten their assets, “whereby many of the upfront and ongoing costs are shared with landlords,” Ismail said.
“More partnerships or revenue sharing agreements with landlords appear to be a likely path for future growth,” he said.
As the country increases its vaccination rate and workers consider going back to the office, WeWork is going public again through a merger with the special purpose acquisition company BowX Acquisition with an initial value of $9 billion.
WeWork said it is on track to earn $1.9 billion in revenue this year. It reported $3.2 billion in losses over the course of the pandemic with an additional $2.1 billion in losses in the first quarter of 2021 as it lost more than a quarter of its members, according to the Financial Times. Mathani told CNBC that when looking at the company’s EBITDA (earnings before interest, taxes, depreciation and amortization), its losses amount to about $1.8 billion in part because of its reduction in administrative expenses. To compare, in 2019, the company’s losses were about $3.9 billion, he said.
Like many building tenants, WeWork has struggled with rent collection and was even accused of skipping out on paying millions of dollars of its own rent. In April, the company was sued for $37 million by one of its landlords, Walter & Samuels, for defaulting on a lease in Manhattan.
WeWork told NBC News that the litigation was “meritless given the fact that there is no default on our lease whatsoever” and said it finds it “unfortunate that Walter & Samuels has regressed to such frivolous tactics.” The company has since paid, and earlier this month the court ordered WeWork to prepay three months’ rent, according to documents filed earlier this month with the State Supreme Court in New York County.
As office companies consider hybrid workspaces, co-working spaces may find a second life.
Separately, a group of WeWork tenants sent a letter to the company last year demanding that it discontinue rent collections due to the pandemic. Jim Walden, an attorney with Walden Macht & Haran, who represented the tenants, declined to comment on the case to NBC News. WeWork did not respond to NBC News’ request for comment.
As office companies consider hybrid workspaces, co-working spaces may find a second life. Around 10 percent of the returning office workforce will be permanently remote, with the remaining 90 percent either back to full-time office work or working a hybrid model, said Paul Leonard, managing consultant with CoStar Advisory Services, a commercial real estate advisory group.
“I don’t know how comfortable people will be going forward being in an office where people are just jammed in like in a subway,” Leonard said. “Regardless of the causes, we’re going to go through some changes in the market through the end of year and into the beginning of next year… It just takes a while for that all to start to kick in.”
Source: | This article originally belongs to Nbcnews.com
