In another example of how the pandemic has changed everything, WeWork’s most scathing critic, NYU Prof. Scott Galloway has now declared himself if not quite bullish, at least “cowish” on the co-working company. He has said as much recently on his Pivot podcast with Kara Swisher.
And last week Galloway published a post detailing why in the smoldering wasteland that is post-Covid commercial real estate, WeWork might emerge as a winner.
The current situation is without question grim.
“In New York, new office space is coming on the market 59 percent leased, down from 74 percent pre-Covid,” Galloway wrote last week. “San Francisco went from its lowest-ever office vacancy rate to its highest in the same year, and office rents are set to decline by 15 percent. The worst may be yet to come. Analysts predict that commercial vacancy rates will rise from 17.1 percent in 2020 to 19.4 percent in 2021, besting the previous high of 17.6 percent in 2010.”
To make things even worse, Galloway notes that $430 billion in commercial and multifamily real estate debt is maturing in 2021. This could prompt a brutal reckoning.
Covid was the catalyst for the current wreckage in commercial real estate. Remote work is the culprit. Major companies like Twitter, Facebook, and Slack, just for starters, are moving to permanently remote or semi-remote workforces. And as this occurs, they are shedding office square footage like a rattlesnake sheds its skin. Only faster if they can. And this is why WeWork is poised to be a big winner. Many companies are going to want to hang on to at least a little bit of office space. And WeWork and its mostly nameless competitors are a great option here.
But first, let’s recall a little WeWork history. Just for fun.
A Real Estate Firm in Techies’ Clothing
This is the same Scott Galloway, by the way, who penned the legendary “We WTF” screed almost two years ago. At the time, WeWork had unveiled its S-1 and was planning to go public via the IPO route at a $47 billion valuation. Galloway’s point, colorfully expressed, was that WeWork was a grossly overvalued house of cards led by an incompetent, messianic founder, e.g, Adam Neumann. Here is a taste of what Galloway said back in August 2019.
“Adam” (as in Neumann) is mentioned 169 times, vs. an average of 25 mentions for founder/CEOs in other unicorn prospectuses. Uber’s CEO, Dara Khosrowshahi, is mentioned 29 times in their prospectus. Granted, “Adam” is super dreamy, in sort of an Argentinian polo player way (he’s Israeli). But he’s not 6x dreamier than Dara, who has a whole “Omar Sharif, if he went to Brown” thing going on. But I digress. We’s mission is “to elevate the world’s consciousness.” Maybe, but it’s clear the mission of the prospectus is to dampen our consciousness ahead of the sh*tshow that is “The Story of Us: We.”
Fast forward to today. Everything has changed. Dreamy Adam is gone. But he’s not forgotten thanks to a scathing (Full disclosure. I haven’t seen it yet.) new Hulu documentary. WeWork’s current CEO, Sandeep Mathrani, who took over in February, is a veteran commercial real estate executive. And by all accounts, he is a competent manager with no visible messianic qualities.
Sandeep’s hiring is a clear signal that WeWork has [mostly] abandoned the original conceit that it was a technology company. There is still some lingering tech-enabled future rhetoric, but it’s nothing like the original. At the time, analysts like Galloway gave the original assertion the side-eye. They saw it for what it was, a ploy to massively increase the company’s valuation. A little more on this from that epic “WTF” takedown.
Find the hottest sector, and if you don’t have the insight, IP, genius, capital, code, skills, human capital, or a clue, then just borrow the words. SAAS firms trade at a multiple of revenues (yay), vs. real estate firms, which trade at a multiple of EBITDA (boo). So, We isn’t a real estate firm renting desks, it’s a Space as a Service (SAAS) firm. I know, use the word “technology” over and over, despite having little R&D and computers and stuff, and voilà … we’re Salesforce.
WeWork now plans to go public via the increasingly popular SPAC route. And it will do so at a more down-to-earth $9 billion estimated enterprise value.
As an aside, if you are looking for a good primer on SPACs, check out my Localogy colleague Mike Boland’s interview with Progress Partners’ Chris Legg and David Arslanian. If you don’t understand what a SPAC is, you will after watching the back half of this interview. We’ve teed it up here at the beginning of the SPAC discussion. SPAC, by the way, stands for special purpose acquisition company.
Specifically, WeWork is going public through a merger with the SPAC BowX Acquisition Corp. As part of the transaction, WeWork will be infused with $1.3 billion in cash. Some of the names associated with WeWork’s cash infusion include Insight Partners, Starwood Capital Group, Fidelity Management & Research Company, Centaurus Capital, and Black Rock.
Here is how Sandeep describes the deal in a press release.
“WeWork has spent the past year transforming the business and refocusing its core, while simultaneously managing and innovating through a historic downturn. As a result, WeWork has emerged as the global leader in flexible space with a value proposition that is stronger than ever. Having, [BowX Co-CEO Vivek Ranadivé] and the BowX team will be invaluable to WeWork as we continue to define the future of work.”
Cleaning Up the Mess
As Galloway points out, WeWork has cleaned up the WeWork 1.0 mess. Now it’s in a position as WeWork 2.0 to seize its post-Covid opportunity.
“Despite losing $60 million per week of Softbank’s money in 2020, WeWork didn’t go out of business. Instead, to the board’s credit, the company fired the Jesus of reclaimed wood and smoked glass, Adam Neumann, and brought in an experienced manager,” Galloway wrote. “Sandeep Mathrani shed 100 of the company’s worst-performing properties along with the self-dealing arrangements foisted on the company by Neumann, and laid off 8,000 employees. A crisis is a terrible thing to waste, and if WeWork turns the corner to profitability in Q4 of this year, as it has promised investors, it will be the case study in fire intensity and germination.”
The Kleenex of Co-Working
So what has changed for WeWork? As noted earlier, the massive pandemic-driven shift to remote work is actually great news for the co-working industry. Why? Because many of the most sought-after employees, i.e., younger knowledge workers, often prefer an office environment. Especially if it has free beer and bean bag chairs.
In his most recent piece, Galloway makes a similar point. “Most companies aren’t going 100 percent remote. But when we return to the office, we will want less space that is more flexible, and more appealing to the premier asset of any firm: its ability to attract skilled, young human capital.”
And let’s face it, “WeWork” is to co-working what “Kleenex” is to tissues. So it remains poised to be the big winner in this shift.
For the record, this is what we wrote in December 2020.
Commercial space is beginning to hollow out, driving down the cost per square foot on quality office space. Remote-first companies are reaping piles of savings which, if they were wise, they will reinvest in their workforce. Some of it anyway. They can subsidize their workers’ WFH stack — chairs, microphones, and cameras, various WFH tech subscriptions, etc. But what about our 28-year-old content strategist in Brooklyn? The best perk you can offer them is a co-working membership. Even if it’s only for a once or twice a week hot desk pass. That would be a coveted perk.
Companies giving up millions of square feet of downtown office space can afford a lot of hot desk passes.
Lucky or Good?
The comments from WeWork’s new team suggest WeWork’s great wisdom and foresight led it to this point. While we credit Sandeep’s hard-nosed turnaround effort, in many respects WeWork is just plain lucky. If Covid hadn’t swept through and turned the office market on its head, WeWork would likely still be seen as a bloated, drug-hazed cautionary tale. Instead, cleaned up under sober management, it is poised to seize an opportunity that few could have predicted. WeWork emerges as the symbol of how the new way of working intersects with the new where of working.
Now, how many WeWork pretenders will emerge in the coming months?