Thesis Driven dives deep into emerging themes and real estate operating models. This week’s letter features an ensemble cast of perspectives on how WeWork should navigate the next step of its journey.
For a moment, there was hope that now-departed CEO Sandeep Mathrani would be WeWork’s savior. In reliable, experienced hands, the managed office juggernaut would shed its kombucha-on-tap summer camp baggage—and unprofitable leases—to join the ranks of serious (and EBITDA-positive) companies.
It was not to be. Mathrani—a veteran of Vornado, GGP, and Brookfield—departed WeWork in July as its market cap sagged below $300 million and the company warned about its ability to continue operating as a going concern. Occupancy has hovered a bit north of 70% for over a year, while in Q2 the company chalked up a $349 million (GAAP) net income loss on $844 million of revenue.
"What should WeWork do next?" is a business school case study in the making. To get a head start on it, we polled a handful of industry insiders with unique insights into WeWork’s situation—and the managed office industry—to get their take on what they would do if they had total control over WeWork’s business as it stands today.
Each was instructed to write their own short summary of where they’d take WeWork from this point. Contributors include:
Caleb Parker, Founder of Bold (acquired by Newable)
Preston Pesek, Co-Founder and CEO, Spacious (acquired by WeWork)
Michael Falgione, Co-Founder and Managing Partner at GreenSpace Capital (& former Director of Strategy & Operations at WeWork)
Morris Levy, Managing Partner at Sarona Ventures (& co-founder of The Yard)
Contributors share their thoughts on the future of the office market, how WeWork should approach the public markets, landlords, and bankruptcy, and how the brand should position itself to rise from the ashes. Read on for more.
WeWork has a major role to play in the office market of the future. But that future is yet to arrive. The market is currently in limbo, and it will be 24 months (or more) before rents and planning policy re-calibrate to the new normal. Our goal during this period of transition is to survive the office crisis and emerge as a different company on the other side of it.
How different? Once the market has been reset, we will finally be able to implement the 'asset light' strategy that the company's founders have always talked about — but never managed to achieve. This means that instead of signing leases, we'll have landlords paying us to operate their buildings. Instead of being turned down by lenders, we'll have banks requiring landlords to bring in an operator like WeWork in order to de-risk a project. And in some cases, instead of us being brought in to fill buildings once a project is ready, we'll partner with investors before they even acquire a building and contribute our market expertise to help shape the building long before it reaches the market.
Landlords need WeWork's brand, network, technology envelope, and operational expertise. Our vision for the future of offices has been vindicated by the events of the past few years. A variety of factors—including unforced errors on our part—have kept us from realizing this vision. But the market is changing, and once the dust settles, we'll finally be in a position to fulfill our full potential.
Our goal for the next 24 months is to cut whatever we can in order to survive until that moment, line up and educate the relevant partners, and invest only in capabilities that are part of WeWork's future (as opposed to rent and physical expansion). Marriott is a $60 billion company that hardly leases or owns any space. There's no reason the office market won't have a similar brand that is just as valuable.
WeWork is that brand, and the onus is on us to keep it alive while the headwinds for the market become tailwinds for our ultimate triumph.
Ryan Simonetti, Co-Founder & CEO at Convene
If I were given total control of WeWork tomorrow, I would be working closely with the board, core stakeholders and external advisors to prepare the company for a prepackaged Chapter 11 bankruptcy. I don’t see how WeWork can survive without going through a formal restructuring process. The business is too large, too complex and there are too many stakeholders with divergent objectives to successfully restructure the business out of court.
While the word "bankruptcy" has negative connotations, the legal process exists for a reason, and in my opinion offers WeWork the best path to emerge from this crisis financially healthy with a viable business that can thrive moving forward. As part of this process, I would be working closely with my leadership team to split the business into "good" WeWork and "bad" WeWork based on location, product quality and financial performance. The goal would be to keep the best locations and either fully exit or convert the underperforming locations into management agreements as part of the formal reorganization plan.
At the same time, I would right-size the corporate infrastructure and overhead to support a smaller but profitable business. While the bankruptcy process was playing out, I’d be running an extensive heart and minds campaign internally and externally to regain credibility, build trust and inspire confidence in the future of WeWork.
At the end of the day, this will be the hardest and most important step in the entire process because without inspired team members, happy customers and committed investors a business doesn’t stand a chance to be successful.
[Founder & CEO of a major managed office operator who asked to remain anonymous]
Over-communicate the plan (whatever it is, no matter how ugly) with transparency. Yes, with investors, but mostly with customers and team members to preserve revenue and talent. If revenue and talent go, there is no company.
Cut overhead by at least 70% (most costs above the store level) immediately or sooner and simultaneously get a retention plan in place for a handful of key executives, managers and contributors. WeWork corporate overhead per location is still $1M per year. It needs to be $300k or less to be in line/competitive with the industry leaders (and for profitability).
Consider that any so-called "enterprise location" lease will be upside down sooner or later as the space will compete with gobs of sublet and direct availability when these short term customized facilities come up for renewal. Then relocate those "enterprise" customers or negotiate for them to go direct short term lease to LL. Don’t work things out temporarily on these enterprise leases in an attempt to preserve upside, and then get dragged back down by that toxic, cynical business model that is fatal lease arbitrage on steroids.
If there is time (i.e. cash), hire a third party work-out advisor like FTI or Alvarez and Marsal and of course Bankruptcy Lawyers to attempt a pre-packaged, management-led restructuring of all leases and further concessions from bond holders to convert to equity. This is a plan equivalent to what the bankruptcy court process would yield but avoids the bankruptcy filing, which would change the fiduciary responsibility of management to act for the best interests of the creditors, not for equity or others.
Clean house (see #2 above). Transform the culture of the company to align with the service business that coworking / flex office needs to be: serving companies, members, landlord partners, investors and each other.
Aleks Gampel, Co-Founder & CEO, Cuby
Editor’s note: Aleks was in a Strategy & Growth role at WeWork from 2017-19
If I were given total control of WeWork tomorrow, I would embark on a bold journey of transformation, drawing inspiration from the remarkable stories of Apple and Steve Jobs. Just like Apple's resurgence when Steve Jobs returned, I believe in the power of revitalizing a company by honoring its original vision.
To begin, I would take WeWork private, delisting it from the stock market. This move would provide the freedom and focus needed to implement strategic changes without the pressure of quarterly results. This approach offers an opportunity to reshape the company's culture and values, making them align with the authentic spirit on which WeWork was founded.
One key step would be bringing back Adam Neumann. While his leadership had its controversies, he was the visionary behind WeWork's initial success. His understanding of creating dynamic, collaborative spaces could reignite the company's potential. Much like Steve Jobs' triumphant return to Apple, Neumann's reintegration could spark innovation, inspire employees, and lead WeWork toward a brighter future.
I'm reminded of Apple's acquisition of NeXT, which played a pivotal role in Apple's resurgence. Similarly, the lessons from Andreessen Horowitz's investment in Flow highlight the significance of visionary leadership and product-market fit in revitalizing companies.
Change won't come overnight, but a holistic approach involving cultural rejuvenation, technological innovation, and a strong sense of purpose could reignite WeWork's spark. By taking these steps, WeWork could rediscover its roots and rewrite its trajectory, much like Apple's remarkable journey under Steve Jobs' second coming.
Jason Fudin, Co-Founder and CEO, Placemakr
If I were given total control of WeWork tomorrow, I would… Start by reciting the Serenity Prayer every morning: "Grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference." And then, I’d parallel-track the work preparing for one of the two needed outcomes 1) a major restructuring of my debt or 2) a bankruptcy where I can cancel and restructure leases.
The strength of WeWork lies in its brand (customer acquisition is tough in co-working) and its tech stack (which is second to none). Its failures lie in how it secures inventory and the current scale of its debt.
The biggest immediate changes I would make are: (1) moving entirely to management agreements in lieu of leases (like Marriott/Hilton) for new deals, and burning off or canceling as many leases as possible; (2) offering 5-10 year periods for areas of protection for the management agreements to induce urgency with partner sign-up; and (3) partnering with a couple of PE/Hedge funds that are buying office assets, who will sign management agreements as part of those transactions where WeWork participates in the promote (PropCo/OpCo model).
These steps would all be focused on getting to positive EBITDA as soon as possible, as well as capturing the significant value the company is capable of creating over the next 5-10 years. No matter what, it will be a tough job for whoever takes on this challenge, but it is one of the largest opportunities in institutional real estate today, given the evolution of work. Good luck to the next leader!
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Caleb Parker, founder of Bold
Before I share my views I think it’s important to note that most of us lack all the details and data to inform a proper strategy to execute. With that context in mind…
If I were given total control of WeWork tomorrow, I would first review the unit economics of my portfolio. I’d want to know which locations are profit centers and which are loss leaders. I would want to know who the landlords of each location are, how their own business plans are stacking up for each asset, and who their lender is (if applicable) - all ranked by their risk of insolvency.
Then I’d task my leadership team with presenting me with a 2 part Plan A strategy:
We would case study our best performing locations and release a white paper on why they’re successful and make sure every lender and landlords sees the successful unit economics.
Then we would map them to other locations that are trending well and have potential to become above average to high performing locations if given more time. We would put a business plan in place for each location that articulates a timeline for success, including an option to convert entire locations into managed HQs for enterprise companies.
This becomes our tool for renegotiation.
In parallel, we would publicly announce "we’re planning for Chapter 11, but have one last ditch effort to salvage our company and help our landlord partners stay afloat in this turbulent time."
Knowing which landlords are on the brink of insolvency and who their lenders are, we would prioritize who we met with to negotiate our contracts. First we would present our business plan for success, which would include a proposal to convert to a management agreement with waterfall payments or a significantly lower lease payment (with upside potential for the landlord).
That’s the carrot.
Then we present Plan B as the alternative.
Plan B - The Grenade
Plan B would be to wind down any SPVs that hold poor performing locations and/or file for Chapter 11.
Preston Pesek, founder of Spacious (acquired by WeWork)
"If I were given total control of WeWork tomorrow, I would…"
Immediately develop a franchise-only model of the WeWork consumer brand, licensing both the flag, and any IP for proprietary software and/or operating systems.
This would involve filing for Chapter 11 Bankruptcy protection, citing inability to pay creditors, including landlords, which would result in a series of evictions.
I would appeal to the local judges in each applicable jurisdiction, stating that WeWork is actually host to a number of smaller businesses who license the space from the tenant, who should be protected from eviction if the parent licensor is evicted. This defense would enable WeWork time to renegotiate all of its leases, transitioning them to management agreements as a hospitality operator and/or franchisor of the WeWork brand and software IP to the landlord, or any manager of its choice.
Pesek’s company, Spacious, converted restaurants into co-working destinations during daytime hours. It was acquired by WeWork in 2019.
WeWork would need to develop a similar quality control system to hotel franchises, who use customer surveys and QA inspections, plus property improvement plans with FF&E standards.
This model mimics hotel franchises, which are otherwise completely decoupled from whether or not they have ownership, tenancy, or license rights to any real property.
Michael Falgione, Co-Founder and Managing Partner at GreenSpace Capital
Editor’s note: Michael was Director of Strategy and Operations at WeWork for two years.
If I were given total control of WeWork tomorrow, I would leverage the current anemic state of the office market to try and renegotiate as many of its non-performing leases as possible – either converting them to management agreements with a revenue sharing structure or pushing for reduced rents and terms. With rent expenses costing the company 74% of its revenue, this is the only meaningfully impactful lever that can be pulled in a last-ditch effort to try and avoid bankruptcy.
While WeWork’s business model certainly has fundamental flaws and they’ve made huge management missteps over the years, the reality is they still have nicer spaces and more robust leasing capabilities than most office landlords. They can also accommodate a broader range of company sizes and offer more flexible rental terms, so chances are if they can’t fill a space then their landlord will struggle to as well.
With office vacancy rates around 17.1% (82.9% economic occupancy) and true physical occupancy rates closer to 47.2% as of 2Q23, landlords have to carefully consider the cost benefit analysis of keeping WeWork as a tenant at less favorable terms versus bringing their space to market and potentially having it sit dark for an extended period of time.
On the revenue side of the equation, I’m not sure there’s much more that WeWork could be doing to grow its membership base. They’ve already made a big push to expand their lower cost, all access product and have plenty of options for companies looking for everything from a small office co-working setup up through a dedicated enterprise space.
My focus would instead be on monetizing WeWork’s 650k+ members through b2b advertising. They have so much valuable data about their member companies and could offer such a high-engagement distribution channel for advertisers to interact with these companies in their physical places of work on a daily basis.
Morris Levy, Managing Partner at Sarona Ventures
Editor’s note: Morris is also a co-founder of The Yard, a NYC-based coworking company.
If I were given total control of WeWork tomorrow, I would de-list it from the public market so I could have some fun.
Running a profitable coworking business is not as difficult as it seems as I am currently doing so in a post pandemic world. That said, the opportunity at hand seems greater.
Being forced to grow with Other People’s Money took what may have been a great company way off the mark. That is, a creative community and what the power of a curated talent pool can achieve.
What is left today is only liability and unfortunately it is going to have to file [bankruptcy] and start over and that is where the fun begins.
Without the trappings of short term profit, reducing exposure and focussing on its best locations in each major city, management technology and network. I would invite small groups of talent focused by industry and have them work on problems that are funded by sponsors from across the globe.
Carbon, food tech, mental health and on and on. I am not saying that this is purely an idealistic play, the money will follow.
The carcass of WeWork is not its empty spaces but the network that was a physical reality and not an abstract social fakeness.
Inviting talent to create companies of their own by industry to occupy only the best spaces in each city and funding it through sponsors with specific projects that they can turn into businesses of their own with fractional pooled profit that funnel into one company that can be, invested in by the community, sponsors and outsiders using blockchain.
This would be a slow process and closer to the intended kibutz ideology that was touted as the original intent. Over a 5 year period it would be the start of powerful change and eventually handsome returns.
Zach Aarons, co-founder and General Partner at MetaProp
I would bring back the nursery school and the kombucha on tap
WeWork is in a deeply challenging position. They’re beset by unprofitable legacy master leases, an unforgiving market, a tepid return-to-office, and now financial challenges playing out for everyone to see. But they are still by far the most recognizable brand in the office market and own a valuable roster of hundreds of thousands of paying members.
This letter’s contributors were evenly split on whether WeWork’s bankruptcy is inevitable or should merely be threatened in an attempt to extract concessions from office owners holding WeWork leases. But there was general consensus that a pivot to management and franchise agreements and dramatic cuts to overhead are necessary to ensure WeWork’s long-term viability.
The CEO that turns WeWork around will join the annals of business legends. Perhaps these hot takes will give him or her a place to start.
— Brad Hargreaves
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