a meteoric rise to become one of the United States' most valuable startups, the SoftBank-backed co-working space provider, WeWork, has made headlines by filing for bankruptcy.
The flexible co-working and office space provider's bankruptcy plea did not come as a surprise, given that its bet on increased office-sharing space usage did not materialise. The rise in global office vacancies, even post-pandemic, was a significant factor.
What led to WeWork's bankruptcy?
WeWork, once valued at $47 billion, had a business model built on the premise of more people working from the office. The company used to secure long leases on large properties, offering them to smaller businesses on more flexible and shorter terms.
However, the rise of remote work and hybrid models dealt a severe blow to WeWork's innovative office-space sharing plan. Now, as WeWork files for US bankruptcy protection, SoftBank believes that renegotiating its costly leases is critical for its survival.
WeWork said in a statement that its bankruptcy proceedings are not likely to impact its franchisees worldwide, except for the US and Canada. As of June, the company had office space available at 777 locations worldwide. However, the company has faced significant struggles due to declining demand for office workspace leasing and tenant losses, especially in the context of a slowdown in office leasing.
Jeffrey Havsy, the Commercial Real Estate Industry Practice Lead at Moody's Analytics, emphasized the adverse effects of losing tenants, especially during a time of reduced office leasing. This phenomenon has had a negative impact on office building cash flows and values. Havsy noted, "This will add to the negative sentiment in the marketplace and make financing harder, especially for those buildings that need to refinance in the next 12-18 months."
Another issue that contributed to WeWork's bankruptcy filing was the high cost and inflexibility of lease terms. To compound the situation, many corporate clients canceled their leases due to the growing trend of remote work.
Notably, in the second quarter of 2023, space costs consumed a significant 74 percent of WeWork's revenue.
The company appears to be aiming to leverage the provisions of the US bankruptcy code to eliminate burdensome leases, as suggested by the law firm Cadwalader, Wickersham & Taft LLP in a note to landlords on its website in August.