5 Takeaways for ALL Landlords from WeWork's Epic Fall
In today's episode we discussed the key takeaways from WeWork's dramatic rise and fall, including being wary of sky-high projections, balancing vision with operations experience, rigorously stress testing tenant demand, diversifying your tenant base, and sticking to your underwriting thresholds, and more.
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Key Takeaways:
Be wary of overly optimistic financial projections that are not supported by strong fundamentals in the current business model
Balance visionary leadership with experienced operations
Rigorously stress test tenant demand and credit risks when assessing viability
Diversify your tenant base across different industries and company sizes
Trust your calculated underwriting thresholds and don't get caught up in hype when negotiating deals
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
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These five key takeaways for commercial real estate investors on the incredible rise and epic fall of we work will help you protect your downside risk when leasing space to commercial tenants. While we weren't captured the imagination with its vision to transform office space and the way that 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. So let's get into it.
First, a quick background on WeWork. For those unfamiliar with their story, founded in 2010 by Adam Newman and Miguel McKelvey, we work 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, we work aggressively expanded its network of locations across major cities at a breakneck pace, peaking at around 45 million square feet globally. We work manage 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. We work was valued by investors at a staggering $47 billion based on high profits, right? Nope. Just rosy projections of future potential. The company planned to go public later that year, and one of the most hyped IPOs ever. But in the course of just a few months, we weren't completely unraveled laying off 1000s of employees ousting Newman and nearly going bankrupt. So what are the key lessons commercial real estate investors should take away from WeWorks dramatic collapse? First, be wary of sky high financial projections that tout massive future earnings without strong fundamentals in the current business model to actually support those rosy forecasts. We work 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 to keep growing. As investors you should scrutinize a potential tenants growth plans against real unit economics today, can the model sustain itself through different economic cycles without endless infusions of new funding? Most new business owners are a little overly optimistic on their businesses potential so verify scalability before buying into those hockey stick growth projections. The second lesson is to balance visionary founder leaders with experienced operations. No doubt Adam Newman 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. We work 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 trade offs weathering downturns and emphasizing consistency scrutinize the management team'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. 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. We work struggled when members cancelled and locations failed to meet projected demand, but they still had to fund build outs and honor contracts many locations blood money for years as commercial real estate investors verify tenants can service their debts. Even if projections missed the mark get protection should occupancy not materialize as quickly as envisioned. These protections can include things like performing your due diligence on the front end reviewing personal and business financials as well as having personal guarantees from any shareholders with more than 10% ownership in the business. So I structure every single one of my leases if it's a small business that isn't backed by a massive corporate guarantee, 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 the one left holding the bag when they shuttered their LLC. 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 at different industries and companies sizes can keep income more stable over the long term. Mix up the industry representation go for tech medical professional services retail Whatever just don't let one sector dominate 50% or more of your property, which seems to be all too common with that we work issue. 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 sized companies, smaller tenants, big names bring cachet and stability, but also concentrate your risk. Carve out smaller spaces to help mitigate your downside and fill in the gaps don't rely solely on one or two huge tenants. The final takeaway is to trust your underwriting thresholds and the numbers that work for you in its quest for rapid expansion. We were purportedly would play landlords against each other to drive up concessions and signed deals at sky high rates. When Lords got caught up in the hype and worried about missing out on landing this whale this frenzy led some property owners to over bid on the concessions that in hindsight just didn't justify the economics. The key takeaway is don't let the fear of missing out cloud your judgment just because a hot prospect insists your deal terms aren't good enough doesn't mean that you need to cave stick to your calculated underwriting thresholds. And if you want to learn more about underwriting 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 for you should absolutely be deal breakers no matter how much hype surrounds the tenant. having the discipline to walk away protects you from concessions and rental rates that destroy sound economics don't get caught overpaying. This is an investment and you should treat it as such we work offers a lot of lessons for commercial real estate investors. Be wary of hockey stick projections not supported by strong unit economics scrutinize both the lease obligations and the people you'll 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 WeWorks rise and fall in the comments below. WeWorks collapse doesn't mean that the Office sector is completely dead. Check out this video here on the future of office space.
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