The Rise and Fall of WeWork (5 Takeaways for CRE Investors)

Overview

These 5 key takeaways for commercial real estate investors on the incredible rise and fall of WeWork will help you protect your downside risk when leasing space to commercial tenants. 

While WeWork captured the imagination with its vision to transform office space and the way we work, they have also provided commercial landlords with cautionary lessons on why protecting your downside risk is so important. While you might not be targeting the next tech unicorn for your commercial buildings, these lessons will show you how to evaluate any businesses that are looking to rent space from you.

Background On WeWork

Let’s start out with a quick background on WeWork for those unfamiliar with their story. Founded in 2010 by Adam Neumann and Miguel McKelvey, WeWork sought to revolutionize office real estate by creating hip, flexible co-working spaces with abundant amenities for entrepreneurs, startups, freelancers, and more. 

Backed by billions in investment capital from groups like SoftBank, WeWork aggressively expanded its network of locations across major cities at a breakneck pace, peaking at around 45 million square feet globally. WeWork managed the properties, built out the spaces with cool designs, and created community-driven environments meant to attract small businesses and even corporate tenants.

At its peak in 2019, WeWork was valued by investors at a staggering $47 billion dollars based on high profits, right? Nope, just rosy projections of future profits. The company planned to go public later that year in one of the most hyped IPOs ever. 

But in the course of just a few months, WeWork completely unraveled, laying off thousands of employees, ousting Neumann, and nearly going bankrupt.

1. Scrutinize Growth Projections

First, be wary of sky-high financial projections that tout massive future earnings without strong fundamentals in the current business model to support those rosy forecasts.

WeWork expanded aggressively at any cost, opening new locations that operated at a loss for years just to quickly gain scale. Many of these offices never reached profitable occupancy before needing fresh capital raises to keep growing.

As investors, you should scrutinize a potential tenant’s growth plans against real unit economics today. Can the model sustain itself through different market cycles without endless infusions of new funding? Most new business owners are a little overly optimistic on their business’ potential, so verify scalability before buying into those hockey stick projections. 

2. Balance Vision and Experience

The second lesson is to balance visionary founder-leaders with experienced operations. 

No doubt Adam Neumann deserves credit for envisioning a futuristic utopian office community which attracted legions of followers. However, vision alone does not translate into disciplined execution or building sustainable value, let alone enough capital to continue making those rent payments each month.

WeWork lacked financial acumen and real estate expertise to construct the operational foundations and governance needed to properly manage their extreme growth.

Look for business owners that complement ambitious innovation with grounded wisdom earned from understanding tradeoffs, weathering downturns, and emphasizing consistency. 

Scrutinize management's track record. What deals have they executed? How have previous projects performed? 

Projections are great, but experience and planning are better. What steps will they take to actually achieve this vision?

3. Stress Test Lease Economics

The next key takeaway is to rigorously stress test tenant demand and credit risks when assessing viability, especially with longer-term lease obligations.

Burdened by leases signed during optimistic growth, WeWork struggled when members canceled and locations failed to meet projected demand. But they still had to fund buildouts and honor contracts. Many locations bled money for years. 

As CRE investors, verify tenants can service debts even if projections miss the mark. Get protections should occupancy not materialize as quickly as envisioned. These protections can include performing your due diligence on the front end by reviewing personal and business financials, as well as having personal guarantees from any shareholders with more than 10% ownership in the business.

That’s how I structure every one of my leases - if it’s a small business that isn’t backed by a massive corporate guaranty, each of the partners in the company will be personally signing on the lease so that if the company goes belly up, I’m not left holding the bag when they shudder their LLC.

4. Diversify your tenant Base

The fourth lesson is to diversify your tenant base. 

While signing one hot company with steady growth seems ideal, putting too many eggs in one basket can leave you exposed if they stumble. Spreading out your risk across multiple tenants in different industries and company sizes can keep income more stable over the long-term.

Mix up the industry representation. Tech, medical, professional services, retail - don't let one sector dominate 50% or more of your property. If that sector has a downturn, your building may struggle and you might have to step in to cover debt payments. Balance it out across resilient sectors that are less prone to volatility.

It’s also good to have a healthy blend of business sizes - major corporations, mid-size companies, and smaller tenants. Big names bring cache and stability, but can also concentrate your risk. Carve out smaller spaces to help mitigate your downside and fill gaps. Don't rely solely on one or two huge tenants.

5. Trust your numbers

The final takeaway is to trust your underwriting thresholds and the numbers that work for you.

In its quest for rapid expansion, WeWork reportedly would play landlords against each other to drive up concessions and sign deals at sky-high rents. Landlords got caught up in the hype and worried about missing out on landing a whale. This frenzy led some property owners to overbid on leases that in hindsight didn't justify the economics. 

The key takeaway is - don't let FOMO cloud your judgment. Just because a hot prospect insists your deal terms aren't good enough, doesn't mean you need to cave. 

Stick to your calculated underwriting thresholds. And if you want to learn more about underwriting commercial real estate, check out the playlist in the video description below, along with the underwriting spreadsheets that we use to underwrite every single one of our deals. 

Requirements that don't work should be deal breakers, no matter how much hype surrounds the tenant.

Having the discipline to walk away protects you from concessions and inflated rents that destroy sound economics. Don't get caught overpaying - this is an investment and should be treated as such.

WeWork offers a lot of lessons for CRE investors. Be wary of hockey stick projections not supported by strong unit economics, scrutinize both the lease obligations and the people you will be working with in these deals, diversify your tenant base, and stick to your numbers.

Let me know if you have any other takeaways from WeWork's rise and fall in the comments below!