The WeWork saga: How easy money dreams turned into a nightmare

WeWork, the co-working space company, has officially filed for Chapter 11 bankruptcy in New Jersey, according to a report from Bloomberg. This decision followed earlier reports, such as one from the Wall Street Journal on November 1, which had already indicated that WeWork intended to file for Chapter 11 bankruptcy in New Jersey. The repercussions of this news were immediate, as the company’s stock plummeted by a staggering 50.99%.

In recent years, many investors believed that WeWork, a co-working startup, could become the next big thing, akin to Facebook. However, this hopeful vision didn’t materialize, and WeWork filed for Chapter 11 bankruptcy. This story serves as a stark reminder of how the availability of easy money can lead to speculative investments that ultimately backfire.

WeWork was founded by Adam Neumann in 2010 during a boom in “sharing economy” startups like Uber and Airbnb. Neumann’s idea was to lease office spaces for the long term, jazz them up with millennial-friendly features like hammocks, ping-pong tables, and microbrews, and then sublease these spaces to startups at higher rates.

With charisma and a vision of WeWork as a tech startup with limitless growth potential, Neumann successfully pitched his idea to investors like Softbank, T. Rowe Price Group, and Fidelity Investments. At that time, the financial climate was different, marked by an enthusiasm for easy-money investments.

Flush with cash, WeWork expanded its real estate holdings rapidly, and its private valuation skyrocketed to USD 47 billion just before its planned initial public offering (IPO) in 2019. However, this business model was only sustainable as long as financing remained inexpensive, and commercial real estate rents continued to rise, allowing WeWork to profit from the price difference between what it paid and charged.

Problems arose when WeWork revealed massive losses and Neumann’s conflicts of interest. The company’s future lease obligations far outweighed its income from subleases. Under pressure from investors, Neumann stepped down, and the IPO was postponed. Softbank provided a 5 billion bailout, and new management worked on reducing costs and liabilities.

The COVID-19 lockdowns further disrupted WeWork’s model, but the Federal Reserve’s return to historically low-interest rates fuelled more investor optimism and a quest for higher returns. In the fall of 2021, WeWork went public through a merger with a blank-check company, raising USD 1.3 billion while bypassing some disclosure requirements typically associated with an IPO.

WeWork’s struggles persisted due to its long-term lease commitments, which didn’t align with the shift towards remote work. To address these issues, WeWork plans to use bankruptcy to cancel between 50 and 100 leases and renegotiate others. This move will likely add pressure to the commercial real estate market, which had seen inflated values due to a decade of near-zero interest rates.

WeWork’s bankruptcy is undoubtedly painful, but it could have a silver lining. It might help reintroduce market discipline often lacking in an era of easily accessible funds. The WeWork story is a cautionary tale about the perils of speculative investments driven by the allure of “easy money.”

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.