Media: Lianhe Zaobao
"What Needs to Explode Will Eventually Explode."This saying refers to the pioneer of the so-called sharing economy: WeWork. With the filing of bankruptcy protection, the myth is shattered, raising concerns about the impact on local shared office space leasing and the workplace ecosystem.
Flexible workspace and sharing economy pioneer WeWork, having applied for bankruptcy protection in the United States, faced massive losses due to substantial debts and reduced demand from key clients. WeWork, once the most valuable startup in the United States, attracted investments from blue-chip investors including SoftBank, venture capital firm Benchmark, and JPMorgan Chase. Over the thirteen years, the company disrupted the office market by leasing large properties on long-term contracts and subleasing the space on more flexible, shorter-term agreements to smaller businesses or departments of larger enterprises.
After its highly-publicized IPO debacle in 2019, WeWork's valuation plummeted to $10 billion by 2021. The company struggled with expensive leases and cancellations by corporate clients, leading to a crisis. Despite efforts to revise leases and restructure debts, WeWork could not avoid bankruptcy. Under the restructuring support agreement, WeWork converted its secured debt into equity, eliminating approximately $3 billion in debt, with around 92% of creditors agreeing to the terms.
Once seen as a disruptor immune to property ownership constraints, WeWork's rapid expansion brought in revenue but also accumulated massive losses. This year, WeWork filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy code in New Jersey. It's crucial to note that bankruptcy protection and bankruptcy are distinct; companies applying for bankruptcy protection can continue operations to reorganize or turn profitable, avoiding complete bankruptcy.
According to the related filings, the company's debt ranged between $10 billion (approximately $13.5 billion SGD) and $500 billion. This filing only affects WeWork's operations in the U.S. and Canada, leaving franchise operations unaffected.
How did WeWork reach this point?
Cause One: Unable to Find a Business Model
Despite efforts to reexamine lease locations to reduce costs and attract new members, WeWork never found a viable business model. Fundamentally, is WeWork truly part of the sharing economy? In reality, it is based on one of the oldest business models – wholesale purchase and retail sales. In the realm of real estate, it is essentially a more flexible approach to renting out office spaces, lacking revolutionary or disruptive "sharing."
Cause Two: Severe Losses and Failure to Fill the Money Pit in Time
From rapid and aggressive development to limitless extravagant renovations/alcohol consumption and high-level extravagant parties, WeWork's extravagant methods have been criticized for years. Looking at the data, from 2016 to 2022, accumulated losses exceeded $15 billion, with a staggering $6.4 billion loss just in the two years since going public in 2021. During the pandemic, the company's performance suffered as it avoided crowded office spaces, reaching a low occupancy rate of 46%. In just two years, WeWork's value evaporated by over 99%, dropping from a $9 billion market valuation at the time of its IPO to $120 million. Sandeep Mathrani, who took over as CEO after WeWork founder Adam Neumann stepped down, abruptly resigned in May this year. WeWork even took three months to find a new CEO after his departure.
Cause Three: The Cold Winter of the New Tech Startup World
2023 is undoubtedly a super cold winter for the tech industry. Over the years, WeWork leased spaces mainly to either non-tech startups or the tech/incubator departments of large enterprises. With an uncertain outlook in the tech industry, some even claim that 2023 is the year with the least investor inflow into the tech sector in a decade. This led to reduced spending and manpower for related tenants, closures, and fewer investment opportunities for WeWork, creating a domino effect that was difficult to overcome.
Cause Four: Work-from-Home Triggered by the Pandemic
The pandemic's direct impact is evident and needs no elaboration. After the pandemic, though many companies wished for employees to return to the office, there was strong resistance, leading different companies to foresee underutilized leased spaces and subsequently reduce leasing costs. With an expected increase in vacancy rates over the next few months, the global commercial real estate loan market may face difficulties in 2024. Due to weak demand and investor reluctance to invest, overall real estate values have sharply declined.
WeWork's bankruptcy protection filing does not affect Singapore or areas outside the U.S. and Canada. Over the past decade, shared office spaces in Singapore have experienced ups and downs, with closures like ClubCo, Found., and The Carrot Patch, and newcomers like Gather CoWork, Trehaus, and child-friendly innovations. JustCo and Spaces, established a few years ago, are among the few still standing.
While Singapore's overall business and tech industry development is relatively good, uncertainties in 2024 are numerous. Shared office spaces, seemingly innovative, may, in reality, be part of the old-fashioned landlord industry, with an outlook that is far from optimistic.
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