Does WeWork at All?

The CEO is selling that $20 billion valuation to a lot of smart, rich guys. But WeWork’s entities are known as SPE’s (“Screwing Probably Expected”), and its landlords will be the first to go down.

By John E. McNellis, Principal at McNellis Partners, for The Registry:

Wall Street’s biggest houses hawked $702 million in junk bonds for WeWork. The junk pays 7.875 percent interest and is due in 7 years. With 10-year treasuries hovering almost a full 5 percent less, this offering sounded better to the bond-buying public than happy hour at Denny’s, especially if they read the part about WeWork valuing itself at $20 billion. In fact, the bond buyers clamored for so much more that WeWork, which had initially planned to steal only $500 million, said what the hell and increased its haul by 40 percent.

A private company, WeWork was legally required to pull back the curtain as part of the bond offering, revealing it lost $934 million last year, that it now leases 14 million square feet of office space, that it has 220,000 “members” (formerly known as subtenants), that it needs 60 percent occupancy to break even on its rental obligations (at the moment, $5 billion accrues through 2022 and another $13 billion after that) and that it is diversifying away from its long-time business model—leasing long and then subleasing short to pony-tailed entrepreneurs—by buying and managing some properties and by subleasing large blocks of space to Fortune 500 companies.

So much has already been written about the company’s finances that this single observation may suffice:

If, instead of merely subleasing 14 million feet, WeWork owned 14 million feet of office buildings at a valuation of say $500 a foot, the company would be worth $7 billion or roughly 1/3rd of its self-touted value. And that $7 billion valuation would presuppose owning all of those buildings free and clear of debt.

For those in the office leasing business, one other fact leaped off the bond disclosure page: WeWork neither signs nor guarantees its own leases; rather, for each lease it signs, it creates a single purpose entity with very limited capitalization; i.e. its leases carry almost no financial exposure to the parent company. These entities are known as SPE’s (“Screwing Probably Expected”).

Before we get to the forthright Adam Neumann, founder and CEO of WeWork, a slight digression may be useful. Some years ago, we were negotiating a retail lease with a Russian immigrant, another forthright man. After agreeing upon minimum rent, the topic of percentage rent arose. “Percentage rent? What is this,” Alexi asked.

“It’s simple: It’s the extra rent you would pay us if your clothing store sales are greater than we jointly anticipate. We’re setting your rent at $60,000 a year because we both expect you to do $1 million in sales. If you do $2 million, you pay us more rent.”

As unsophisticated as he was in American retail, the Russian was yet a shrewd businessman. He pondered this issue for a long moment and then said, “John, tell me: Why you want to force me to keep two sets of books?”

Recognizing a lost cause, we signed the lease without this provision and all went well with his tenancy until it didn’t. The candidly dishonest Alexi lived down to his word and screwed us, but only when he absolutely had to.

Back to Adam Neumann. Take another look at his picture: the guy is a rock star’s rock star—he’s the best-looking CEO in the country. And, by all reports, he’s absolutely mesmerizing. He has to be. He’s selling that $20 billion valuation to a lot of smart, rich guys by declaring, according to the New York Times, that his isn’t a real estate company, but “a state of consciousness.” Jimmy Buffett could sell that line, Warren Buffett couldn’t. You might just ask yourself this: What do rock stars do to their biggest fans, the ones who beg to get on the bus?

Like our Alexi, Neumann has made no secret about his business ethics, about what he intends to do to landlords holding his worthless SPE-backed leases. One top San Francisco broker put it this way, “WeWork’s openly been saying for years that if the market tanks, it’ll renegotiate every lease it has.”

It may be that WeWork will shiv its landlords only when it becomes truly desperate, but with $18 billion in short and medium-term debt and losses running nearly a billion a year, desperation may arrive sooner than anticipated. This, by the way, is where WeWork’s pivot to the Fortune 500 is going to bite harder than a third grader in a schoolyard fight. Sublease 100,000 feet to 400 dinky entrepreneurs and start-ups and chances are some will prove to be cockroaches that survive the next downturn—the space may stay half-leased. Sublease that same 100,000 feet to General Motors or Microsoft, companies with better—and more conservative—economic forecasting models than you’ve ever dreamed of, and they will go dark before your feet hit the floor.

If WeWork tumbles, its landlords will be the first to go down, but if it gets bad enough, its junk bondholders may be reminded that rock stars are no strangers to the ménage à trois. By John E. McNellis, author of Making It in Real Estate: Starting Out as a Developer. The article was first published on The Registry.

When is it gonna pop? Read…  Peak-Bubble for Junk Bonds, Says WeWork Bond Sale

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  46 comments for “Does WeWork at All?

  1. Rates says:

    “A billion here, a billion there, and pretty soon we are talking about serious money.”

  2. I’ve been writing about the commercial real estate market for the past seven years and am still amazed at the stupidity shown by allegedly sharp office market pros. Apparently, WeWork fools everyone more than most. Is it that many of these landlords are playing with other people’s money? Or is it they simply can’t imagine that the office rental market can head south … again? In any case, the sh..t should hit the fan within a year.

  3. Nick says:

    All this stupidity, financial malinvestment, and irresponsibility wouldn’t even happen if we didn’t have so much g-damn debt in this country and relied on our debt fueled monetary system to even function. America is becoming a free for all. Where are the REAL business men of generations past that knew how to build sh#t, run companies, be profitable and most importantly take care of their employees and give back to the greater good. Adam Nuemann… looking CEO in America? Please he looks like a clown and his only claim to fame is the IDF? Wow I’m impressed. These companies have become such a joke. WeWork……yeah everyone wants to sit around elbow to elbow working like a bunch of lemmings in what equates to small room with cheap decorations, lounging around like teenagers. What a joke.

    • Rates says:

      “Where are the REAL business men of generations past that knew how to build sh#t, run companies, be profitable and most importantly take care of their employees and give back to the greater good?”

      They gave birth to the generation whose primary belief in life is “I believe I can fly” So yeah, this is partially their fault too.

      • William Smith says:

        Question: How does one make a small successful company? Answer: Bequeath a large successful company to the offspring of the founder(s).

      • kevin says:

        Your last sentence cues music for the inspirational song (sung by Whitney Houston… who incidentally committed suicide): “I believe I can fly”…

        Lots of people are really going to fly out the top story of their magnificent buildings when WeWork collapses on them, just like many unicorns before it.

        Believing you can fly does nothing when gravity meets the cold hard concrete floor a hundred floors below, Unicorns notwithstanding.
        And no, I don’t believe unicorns exists, much less ones that can fly.

        They would have called all those unicorn firms “Pegasus” instead,, if they really were strictly committed to the belief that they can fly. lol

        Well, I guess the screwed horn image of unicorns is a clearer hint not to try riding one? ;-)

        • Baritone Woman says:

          Just remember, folks: It’s not the fall that kills ya, it’s the sudden stop.

    • Joe says:

      I love your style. Patience. Your philosophy will come back in fashion apres the flood.

  4. Nick says:

    At least the robber barons of yesterday year took an entire generation to build their wealth……….and gave back to society in the form of museums, theaters, parks, public places. What do these young, techie morons even do for society? Besides starting worthless companies that allow other techie morons to start worthless companies that just distract Americans with worthless time wasting endeavors. Social media has destroyed the fabric of American society on so many levels, especially in younger generations. They don’t even know what it means to live without the matrix of technology, cell phones, and constantly being tuned in. Snapchat…….worth billions? Meanwhile, all these morons don’t realize Brazil owns the American meat packing industry. American farmers are more and more beholden to foreigners and foreign companies. Read about JBA Swift and how they pretty much control the global beef industry. But yay! Americans have WeWork!

    • Tom T says:

      Yeah Nick … you tell ’em !!!

    • Michael Fiorillo says:

      Oh come on, Nick, you’re way too harsh…

      These clueless plutocrats are doing plenty with their unimaginable wealth: they’re funding research for increased longevity (for themselves).

      They’re planning delusional colonies on Mars for when they’ve stripped every blade of grass off this poor planet (for themselves).

      They’re busy starting for-profit “philanthropies” that pursue projects in their direct financial interests (for themselves).

      They’re buying citizenship and building survival bunkers in New Zealand and elsewhere (for themselves).

      Pity the poor Silicon Valley squillionaires, who never seem to get the love and respect they so desperately need.

    • Rates says:

      Fake it till you make it!!! If you have no work, then create the appearance of work.

  5. Arizona Slim says:

    So, here I am, writing this comment from a coworking space. No, it isn’t a WeWork space.

    Two things to understand about these places:

    1. Tremendous turnover. Which means that sales and marketing is a never-ending job. From what I’ve read, WeWork doesn’t seem to be up to this kind of thing.

    2. We’ve had more than a few questionable startups and unicorns come through here. They tend to arrive with great fanfare, then, a few months or years later, they disappear. As in, you see the occupied office (with no one in it) on a Friday, then wait a minute, on Monday morning, Uber’s gone! Where’d they go? No one knows.

    Oh, one more thing: Most of us long-time members recognize the talk about community and collaboration for what it is: BS. We’re here to get work done, and if we make a few friends and business deals in the process, cool.

    • Vegas Jhon says:

      Good to see Slim. Why no more visiting the housing bubble blog?

    • kevin says:

      Frankly, all that “collaboration / community” BS by WeWork and other co-working startups is just that, BS. Same like artisanal beer or BS job titles.

      I call these co-working offices, spaces for fake work or trying to look busy or “cool” when your’re neither.

      I’ve seen a guy once who spent half his day playing the dart machine with friends in one corner and drinking free beer lounging on some kind of brightly colored bean bag … at the “lounge”. I guess you can say he is actively “networking” or schmoozing with potential partner-investors?

      But man, he did look impressive talking so loudly that everyone figured like he had a handful of global business deals lined up each with at least a quarter billion in seed funding. For a moment, I thought I saw the next Steve Jobs incarnation or Elon Musk wannabe in the making. lol.

      I can’t wait till every major city has these co-working spaces for fake workers or “gig” acts. Thats when I know to short these unicorns or at least where to get some nice-looking second-hand furniture, before they close their doors for good.

      • Cynic says:


        Good beer is never, ever, BS!!

        The ‘artisanal-botanicalgin’ BS in Britain is very amusing though: pretty shopfronts with distilling equipment in the window popping up everywhere.

        • kevin says:

          Where did you read me say that good beer is BS ?
          I said “artisanal” beer…whatever the heck it implies, is BS by those millennials marketing it.

          Anyway, I forgot to add that some of those co-working furniture would probably be close to brand new since they are hardly used. Too bad their avant-garde designer carpeting cannot be re-sold though. lol.

        • Kraig says:

          These used to be called craft (as in cottage craft) or micro brewery. Small time buyers.

  6. JB says:

    Wasn’t Apple and Amazon started in garages ? great contribution/good read

    • Mike G says:

      The story goes that Bezos purposefully looked for a house with a garage, so he could later say Amazon started in a garage like the Apple legend.

      • Michael Fiorillo says:

        Just for the record and fwiw, Hewlett-Packard was the first company that mythologized is beginnings in a garage…

    • sierra7 says:

      That’s when garages were useful as small shops or/and storage for the family auto….today garages are just full of useless consumer junk…purchased with useless debt….maybe a metaphor????

      • Tom T says:

        Use one’s garage for commercial purpose? … an open invitation to the local zoning board official or condo association busy body to make your life miserable.

  7. Sounds like Venture Capital meets the Retail Meltdown.

  8. Duke De Guise says:

    When the CEO of some perpetually money-losing startup that is trying to re-brand a traditional industry and become its rentier gatekeepers, tells me their company is “is a state of consciousness,” I immediately hold on to my wallet with one hand, and wish I had a baseball bat in the other…

  9. Harvey Darrow Cotton says:

    Ugh. That headline does not work on either of the levels.

  10. alex in san jose AKA digital Detroit says:

    I don’t get these “co-working” spaces. If I want a dedicated work space, I can rent no end of small offices for less than the $400 a month a “co-working” space wants. If I want to network with the Kool Kids who went to Stanford, I can take up Segway polo or first-person-view drone racing, of any of a number of hobbies the Kool Kids are into, and hey, the fun of Segway polo or first-person-view drone racing. There are tons of ways of getting into the good graces of the Kool Kids in this valley, if that’s what one desires.

    Conclusion: Co-working spaces are this decade’s front for money laundering.

    • Kraig says:

      Most offices are all or nothing and can make it hard to add one or two people in perhaps for a short term project. You have that office if you need to ramp home down your left with a building the wrong size your still paying you might need a meeting room for clients but not very often so that’s a large expense. This is the idea behind hot deskin and fixed desk. Rent by the desk.

      Most to working spaces offer a by the desk booking. However Regus and others offfer A bs free version. It’s basically a cubicle farm that’s shared between multiple companies. Regus manages and subleases. Meeting rooms can be rented as needed as can extra desks. Not a single arteisnal beer or pretzel in sight. Usually water cooler and tea and coffee though.

  11. Randy says:

    I really enjoyed reading the article by John E. McNellis.
    It’s funny and depressing at the same time.

  12. Bruce says:

    It will be interesting to see what the bigger property owners, like Boston Properties and others, do when WeWorks falls. I’m guessing landlords are going along for now since having WeWorks in their building may give the building more of a feel.
    I read somewhere recently that We Works is also selling space to the bigger guys (like Microsoft, etc) with the sales pitch of “Hey, look what companies you can work elbow to elbow with!” They have large amounts of data on what small tenants do what, what industry they are, company names, etc etc. So the startup and small tenants become chum in the water for the bigger guys to hunt for sales. Kind of wonder if it will result in the little guys feeling pestered and harassed by the equivalent of telephone pitch men.

  13. ZeroBrain says:

    “If, instead of merely subleasing 14 million feet, WeWork owned 14 million feet of office buildings at a valuation of say $500 a foot, the company would be worth $7 billion”

    Could someone who knows comment on whether $500/foot is a reasonable number for comparable commercial real estate?

    • Wolf Richter says:

      These are five transactions of office buildings last year in San Francisco, one of the most expensive office markets in the US. Price in million $ and in $ per Square Foot:

      1) 44 Montgomery St. — $475 million — $690.08
      2) 760 Market St. — $374 million — $1,256.19
      3) 505 Howard St. — $332 million — $1,140.63
      4) 211 Main St. — $293 million — $701.91
      5) 100 Pine St. — $287 million — $714.23

      Most office markets in the US will be cheaper to a lot cheaper.

  14. Max says:

    I asked a friend of mine who recently visited a WeWork what was so special about it – he said it was mainly a bunch of people sitting around/working? and there was lots of free beer and other amenities. Years ago people who needed office space rented a small office (with a conference room) from the company that provided the space. I still don’t understand the concept of WeWork and how it is supposed to make money.

    • notJustme says:

      Free beer at We work? I’m there !

    • Ambrose Bierce says:

      It has to do with a sea change in the way corporations hire (exploit) labor. Everyone will be an independent contractor. Have you been to Amazons Mechanical Turk? The office at home is migrating to the office at large, where you have better internet, delivery service and access to subcontractors. Amazon already hires its own independent delivery drivers. Their policy of offering you a job while impoverishing you, is similar to Walmarts consumer business model, cheaper products, jobs with even cheaper wages, (or how did you think stocks got where they are?) Communities which accept Walmart know they will have to kick in Social Services. Now cities in the PACNW are TAXING Amazon businesses, to pay for their poor, and Amazon is threatening to leave. Those jobs are coming back from China, they won’t pay a living wage and you will HAVE TO HAVE ONE when the safety net is dismantled. On another level if you want to set up a store front business with no inventory and drop ship from China you might find this suitable. Its a brave new world.

  15. raxadian says:

    Well, talk about shady dealings.

  16. Leser says:

    Ok, lots of old-timers here who have no idea what attracts both tenants and investors to co-working places like Wework.

    First of all, any business catering to today’s proliferating over-funded start-ups is mining gold. Spending on a cool office is one of the first and easy items for a newly funded start-up.

    Secondly, to hire millenials, start-ups need to provide a cool workspace with cool music, other cool people, good coffee, and just a nice design/vibe. For a busy little start-up team this is impossible to provide, a dull corner at Regus or the proverbial garage are a guaranteed hiring turn-off. Wework (and others) have absolutely mastered this aspect.

    Thirdly, the freelancers and other hot-deskers love these places. Their inferior alternatives are withering away working from home, or sitting amongst students and tourists in Starbucks et. al.

    Lastly, in the bigger cities there are several Wework buildings, each with a fairly defined crowd. I.e. one full of designers/tech people, another more dominated by finance-related professions. Tenants can basically jump right into their target group and network away. Of course the ‘community’ value is exaggerated and a shy programmer might wait in vain at his desk for jobs to find him, but it’s easy to see e.g. an extrovert accountant drum up substantial business without even leaving the building.

    Probably a whole category of office users won’t return to standard office leases, much like many AirBnB users wouldn’t dream of ever checking into a budget hotel.

    • Mean Chicken says:

      The millenials I know, play rap music full blast and just turn it louder if/when you ask them to turn it down.

    • JohnnySacks says:

      My son spent about 3 months in one of those BS pseudo-frat dorms and had to bail due to the level of disgust with both the types who get off on it and the level of work getting done. Guess we did something right. What a complete waste of resources, what fool buys into the thought that hanging out at a ‘cool’ workspace is even remotely related to having a life? Makes me want to take up farming.

      • Arizona Slim says:

        Preach it, JohnnySacks!

        Here’s one of the things that coworking has done for me: Refined my Business BS Detector to a very sharp edge. (Ouch, I could cut someone with it!)

        I will admit that this workspace is a lot cooler than being at home, all by my lonesome. Matter of fact, they run the air conditioner at levels that my home AC has never seen. It’s why some people wear sweaters here.

        I’ll bet you can probably tell that I have a well-developed snark muscle. Co-working has helped me build it. Oh, has it ever!

  17. RagnarD says:

    Fun read, thanks!

  18. Mean Chicken says:

    Not clear as a bell, ie: a difficult read.

Comments are closed.