SoftBank Backs Away from Part of Planned WeWork Bailout (opens in new tab)

The land owners did it to themselves pushing for tighter building codes and zoning. No one built, rent went up, the economy got more fragile because people on the bottom had absolutely nowhere to go. Now they’re going to pay for it (except the ones that saw this coming, I know the building I live in just got sold a few days ago...)

I’ve been saying for years that the housing market is irrational and that most of the US should be building more. Not that my opinion means anything but I also wasn’t the only person saying this.

The alternative is the landlords try to rent these spaces as co-working spaces themselves, but demand for that is going to drop too - which is the issue in the first place.

This is going to turn into a global commercial real estate crash in 6 months, no doubt.

I don't want WeWork to die, it would be better for it to figure out how to run in a sustainable manner. But once that happens, you may well find it's no longer differentiated from its many competitors.

They demanded that everything be done their way. Long story short, WeWork acquired the coworking space we were using and then used incredibly obnoxious tactics to "require" us to sign new contracts and move to the WeWork model (that removed a lot of benefits, like the meeting room booking credit system). Things like sending e-mails saying "This contract will expire in 24 hours, you must sign this today".

Or even afterwards, preventing my part-time employees from sitting next to my full-time desk. I could understand if the space were at capacity, but I was literally sitting in a row with 12 empty desks.

Not to mention the constant noise interruptions from community managers laughing, the music from the lobby, the printer requiring a driver installation, and so many more.

Coworking spaces are commercially viable, but I'm only going to fork over money to businesses who actually treat customers well (and not like a box in a spreadsheet to please investors). The whole WeWork company can die in a fire. Good riddance.

First, sometimes people build (or buy) office buildings, and then lease the space in them to companies. Office buildings (and the land they're built on) tend to be very expensive, so landlords tend to be levered (ie, they borrow money to build/buy them), and they like to sign long term leases to try and lock in revenue so they know they can cover their loan payments. Companies like flexibility (who knows how many staff you'll actually have in 36 months?), so they don't like that, but what are you going to do?

Being a landlord is a big business, and profitable enough, on average. In the US, there are a lot of large REIT (Real Estate Investment Trusts) that do this.

Second, some people had the bright idea of getting some office buildings in hot markets, and renting space in them flexibly - short term, no lengthy contracts, with the ability to grab more (or less) space as tenants need it. This is risky for the landlords, so they have to charge more rent to make up for it; to soften the blow they try and spruce up the buildings, offer services, and otherwise try and compete on things other than price (since they'll never be as cheap as just leasing a floor of a skyscraper for 5 years).

This is also a big business, although it traditionally hasn't been super profitable. The biggest player in this space was traditionally been IWG (also known as Regus or Spaces in some markets I believe), which had 3000+ buildings in 1000 cities, ~600k desks, and was worth, as of last year before stuff went weird, around $4B with $0.5B of profits on $3.5B in revenue.

That's not an amazing valuation considering! Basically 1x earnings, or 8x profits. Then again, a business like IWG is always going to be vulnerable to a downturn; the customers can stop paying, but you still have to pay off your loans. In any case, big, multi-billion dollar business, it's been around since 1989, it's doing fine. So are all their many competitors.

Then WeWork popped up. WeWork's big idea was to do exactly what IWG was doing, but to somehow be a little cooler, and explain very loudly to anyone who was listening that they were a tech company, and should be valued like a tech company (ie, at a crazy high multiple of earnings), and also spouted a lot of weird stuff about wanting to change the world, and to be the first "physical social network", and just generally spun a lot of guff, but ultimately they bought (or in some cases, leased) buildings, sliced them up into offices and desks, and rented them short term, which is what IWG does.

SoftBank listened and, inexplicably, believed WeWork. They pumped an eyewatering amount of money into WeWork. They spent it trying to grow to match IWG, but they never made it; at one point about six months ago they had about $2B in revenue, were losing $2B a year, and were being valued (by SoftBank, if no one else) at almost $50B. Growth is valuable, yhs, but if IWG is worth $3.5B, and WeWork $50B, then presumably WeWork is going to grow to be 15 times the size of IWG...except IWG (again) has been around since 1989 and seems to be in a pretty mature market. Where's the growth coming from? (WeWork's answer was "everywhere", and they started a bunch of spinffos, like WeGrow (a school), WeLive (apartments), and some other weirder ones. None worked out.)

Anyhow, $2B of revenue is a lot less than $3.5B. And negative $2B is a LOT less profit than $0.5B. And yet, $50B is a lot more than $4B! What gives?

Answer: It was all just a borderline scam. SoftBank gave a stupid amount of money to WeWork, and they basically piled it into a bonfire and lit it on fire. There was no secret tech; no cunning plans. Some have suggested that WeWork spaces tend to be nicer than equivalent IWG properties (famously they offered free beer, and I think in one case in London they paid to have a live band just perfoming in the lobby of a building all day?), but that was all being funded by SoftBank's money faucet. When the money ended, so did all the parks that separated them from IWG (and their competitors). Now they're just another company offering flexible office space.

Meanwhile WeWork's CEO/founder (Neumann) was engaged in a lot of dodgy things. For example, he would borrow money from WeWork, buy office buildings, then re-sell them to WeWork. In another case, he decided to change WeWork's name from "WeWork" to "We", but it so happened someone owned the trademark to We, which just so happened to be....Neumann! So he sold them the trademark. (That last one got so much negative attention they eventually rolled it back.)

TL;DR: WeWork is a boring company that rents office space. The founder briefly convinced SoftBank they were going to change how we live our lives, got a massive investment, wasted most of it, siphoned off hundreds of millions of dollars, and then got kicked out of the company.