The Evolution of WeWork: From Tech Darling to Real Estate Reassessment

For a considerable period, debate surrounded the true nature of WeWork – was it a technology firm, or fundamentally a real estate enterprise? Initially, perceptions largely categorized WeWork as a real estate startup presenting itself with the guise of a technology innovator.

As the company continued to acquire an increasing number of properties, the distinction between these classifications became increasingly indistinct. Subsequently, a significant decline in the company’s valuation and the abandonment of its initial public offering plans were observed by many.

Currently, reports suggest WeWork is preparing to become a publicly traded company through a SPAC merger, with an estimated valuation of $10 billion. This represents a substantial decrease from the $47 billion valuation attained after a $1 billion investment led by SoftBank during its Series H funding round in January 2019.

Leadership Changes and a Turnaround Strategy

Adam Neumann, the co-founder and former CEO, resigned from his position later that same year following accusations of arrogance and ineffective leadership. Since then, WeWork has been actively engaged in efforts to restore its reputation and regain the confidence of investors and the general public.

In February 2020, Chairman Marcelo Claure initiated a comprehensive, five-year turnaround plan. Notably, the company appointed a leader with a background in real estate – rather than technology – as its new CEO that same month, a decision that sparked considerable discussion.

As part of this plan, WeWork revised its target for achieving free cash flow positivity to 2022, aiming to both enhance its valuation and rebuild investor trust.

The company likely took note of the collapse of competitor Knotel, which ultimately filed for bankruptcy and sold its assets to an investor, and recognized the need to avoid similar pitfalls.

Has WeWork Achieved a Genuine Turnaround?

The central question now is whether WeWork has successfully navigated a turning point.

Since implementing its turnaround strategy, the company reports having exited over 100 underperforming or pre-opening locations. Despite this, WeWork maintains a global presence with more than 800 locations, as indicated on its website.

Furthermore, the company has reduced its net loss to $517 million in Q3 2020, a significant improvement compared to the $1.2 billion loss reported in the third quarter of 2019.

However, revenue experienced a decline, likely attributable to the effects of the coronavirus pandemic. Revenue decreased to $811 million in the 2020 third quarter, down from $934 million in Q3 2019.

The Impact of the Pandemic and Adaptation Strategies

The pandemic presented WeWork with both obstacles and, arguably, opportunities.

The widespread shift to remote work and the avoidance of shared spaces during the pandemic negatively impacted the office space market generally. WeWork was compelled to adapt to these changing circumstances or risk further damage to its valuation and financial performance.

WeWork’s situation mirrors that of real estate companies worldwide. The increasing adoption of remote work, both temporarily and permanently, has necessitated adjustments from landlords across the globe.

As McKinsey recently pointed out, landlords have been compelled to offer greater flexibility and renegotiate tenant leases. Consequently, all entities involved in commercial real estate have had to become more adaptable, mirroring WeWork’s own efforts.

New Offerings and Partnerships

WeWork responded by introducing new service options. Recognizing the limitations of its membership-only model, and observing a corresponding decline in membership numbers, the company expanded access to its spaces through On Demand and All Access programs.

These programs aimed to provide individuals seeking an alternative to home offices with a workspace, even for just a few days per week. WeWork also explored partnerships with companies to offer its office space as an employee benefit through the All Access program, and with universities seeking alternative study spaces for their students.

For instance, Georgetown established a unique collaboration with WeWork, utilizing one of its locations as a “replacement library and common space.” Additionally, companies such as Brandwatch have transitioned from traditional WeWork spaces to providing employees with access to WeWork locations globally via All Access passes.

WeWork also introduced new features, including the ability to book space on weekends and outside of standard business hours at the beginning of the year.

The Evolution of WeWork’s Business Model

A conversation with Prabhdeep Singh, WeWork’s global head of marketplace, revealed insights into the company’s evolving strategy and its adaptation to the changing landscape of workspace solutions. He is leading both the development of new products and the company’s transition to online services.

Singh articulated that WeWork has fundamentally altered its approach by “unbundling its space.” Previously, access to WeWork locations required bundled subscriptions or monthly memberships. However, recognizing the shifts brought about by the COVID-19 pandemic, the company sought to broaden accessibility and enhance flexibility. Consequently, users can now reserve rooms for as little as thirty minutes or purchase day passes, catering to a diverse range of needs.

Since its initial pilot launch in New York City in August 2020, the On Demand service has experienced consistent growth in popularity, according to Singh. Reservations have increased by 65%, and revenue has risen by 70% compared to the fourth quarter of 2020. It’s important to note that these gains are from a relatively small starting point. A significant portion, almost two-thirds, of On Demand reservations are attributed to returning customers.

“Over the past year and a half, we’ve been carefully evaluating our priorities, determining which areas to emphasize and which to de-emphasize,” Singh explained. “As a provider of flexible workspace, we are closely monitoring global trends. While our contribution to the overall commercial office space industry is modest, we are leveraging technology to deliver a seamless workspace experience through a user-friendly app and the digitization of our spaces.”

Recent indicators suggest a positive trajectory for the company. In February, WeWork reported nearly double the number of active users compared to January. Furthermore, there’s a clear preference for utilizing spaces during non-peak hours, with weekend bookings now representing approximately 14.5% of total reservations.

The company also observed a notable increase in All Access pass purchases by existing members in February 2020, nearly doubling compared to January, as a complement to their private office spaces during the pandemic.

During the initial phase of the COVID-19 pandemic, WeWork experienced a greater rate of departures among small and medium-sized businesses (SMBs) than among its enterprise clients. This was largely attributable to the nature of SMB operations and the immediate need for cash flow management. However, desk sales to SMBs rebounded significantly in the third quarter of 2020, increasing by 50% over the second quarter.

Notably, throughout the pandemic, WeWork’s enterprise segment demonstrated growth at nearly twice the rate of its SMB segment, now constituting over half of the company’s total membership base.

While moderating investments in new real estate assets in select markets, WeWork continues to optimize its portfolio through strategic exits.

Regarding its financial standing, as of March 2, WeWork reported that its bonds were trading at their highest level since the summer of 2019, prior to the failed initial public offering. This represents a substantial increase from a 52-week low of around 28%.

A spokesperson conveyed to TechCrunch, “With a yield of approximately 10% and a price near 92%, creditor confidence is demonstrably positive, reflecting the market’s belief in the viability of WeWork’s flexible workspace product within the future of real estate.”

Just last March, WeWork’s bonds were valued at 43 cents on the dollar, and S&P Global downgraded the company’s credit rating further into junk territory, placing it on watch for additional downgrades, as reported by Forbes.

The company’s adaptation continues. Singh shared that WeWork is developing a “business in a box” offering to further enhance its value proposition. Late last year, WeWork collaborated with various companies to provide SMBs and startups with services such as payroll, healthcare, and business insurance.

“Many of those who choose WeWork are developing companies,” Singh stated. “Therefore, alongside our core business services, we are expanding our offerings to include a comprehensive suite of HR services that can be complex and costly for small businesses to manage independently.”

Efforts are also underway to extend the availability of the On Demand product globally, enabling users to access WeWork spaces from any of its locations worldwide.

“Currently, we are witnessing the largest work-from-home experiment,” Singh observed. “I anticipate a subsequent shift to the largest return-to-work experiment ever. We are positioning ourselves to be exceptionally well-prepared.”

The company is striving to evolve into a more sophisticated real estate entity, potentially less ostentatious than during the Adam Neumann era, but more stable and in demand. However, questions remain as to whether it is attempting to accomplish too much, too quickly.

The unfolding of these developments will be closely watched.

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