It’s been more than a year since WeWork’s failed IPO, and much has changed during this time. The global Covid-19 pandemic has taken real estate in New York City by storm, triggering a shift in the way we live, work, and rent office space in NYC.
The predicted demise of the coworking sector following WeWork’s very public fall from grace has not been as dramatic as most people expected. The consensus was that WeWork was as good as gone after a failed IPO that saw its valuation go from $47 billion to just $8 billion. However, the company is still around, and its new CEO, commercial real estate veteran Sandeep Mathrani, is working hard to make sure that WeWork survives the pandemic, even if it requires a shift in the coworking paradigm.
WeWork – From hero to zero?
WeWork plays a big role in the New York City commercial real estate market, being the city’s largest office tenant – or so it used to be. After last year’s controversial IPO and SoftBank’s withdrawal from a $3 billion bailout agreement, WeWork went from being a $47 billion giant to a struggling business valued at $2.9 billion in March. Dire times call for strong measures, so when Sandeep Mathrani took over as CEO, replacing Adam Neumann, he kicked off a major restructuring of WeWork.
This year, Mathrani and chairman Marcelo Claure worked relentlessly to find ways to cut costs and keep WeWork afloat during the pandemic. The company downsized its workforce from 14,000 employees to just 5,600 while also slashing expenses, terminating leases, and renegotiating existing agreements. The results were encouraging: WeWork managed to burn through $482 million in cash in Q1 2020, 60% less than the $1.4 billion it spent in 2019.
Yet despite the somewhat positive results, Fitch dropped WeWork’s rating this fall from CCC+ to CCC, saying that the company might still be in danger of default. The rating downgrade, according to the official release, reflects ‘Fitch’s concern over the viability of WeWork’s business model in light of a potential lasting shift by companies to a hybrid office model that leads to permanently lower office space demand.’
In other words, Fitch is skeptical about WeWork’s chances of survival in a market that is currently undergoing a shift towards remote work. Many major companies, including Facebook, Twitter, and Microsoft, are allowing their employees to permanently work from home, and smaller companies are following suit. Companies in the IT sector find it easy to switch to a remote work strategy, and many are realizing that the model works just fine for them, and that they don’t need an actual office after all.
The concern surrounding the eventual return to the office means that WeWork’s future is uncertain. Fitch is also worried about a potential second wave of the coronavirus, which would lower the demand for office space in NYC even more, particularly in big urban centers where WeWork has a large footprint. However, that’s just one side of the story, and the outcome could still prove positive for WeWork.
The silver lining? People will eventually return to work
The Fitch downgrade of WeWork’s rating might send the signal that the company’s business model is simply incompatible with the current global work environment, which has changed tremendously in just a few months. Yet it might be possible for WeWork to thrive again.
WeWork has started to downsize its footprint around the world, including NYC, where it used to reign. Many of its smaller clients have left behind their shiny WeWork outposts, as people are reluctant to commute to work using public transportation, or sharing an office with others, choosing to work from home instead. The good news for WeWork and other coworking providers is that working from home is not for everyone.
A recent report shows that 71% of those who used to work in a coworking space before the pandemic plan on returning to their physical offices after isolation ends. Many people thrive on being in the office, sharing ideas with coworkers, and getting work done without distractions like pets, children, or noisy neighbors. These workers are already looking for a physical office that offers flexibility and is closer to home.
This is where coworking space could make a comeback. Many people want to return to work, but they don’t want to commute or head into crowded areas like Manhattan. But they might find that renting a nearby coworking desk by the hour, the day, or the week is a great way to get some work done in an actual office without risking exposure to the coronavirus.
According to Fortune, WeWork is ‘enjoying resurgence during the coronavirus pandemic owing to increased demand from workers who are fed up with working from home and are unsure if or when their offices will reopen.’ This year, WeWork introduced a pay-as-you-go option in NYC, which they plan to expand to other markets. Anyone can reserve a desk at a WeWork location for just $29 per day, while meeting rooms can be booked for $10 an hour. Each of the available coworking spaces includes hand sanitizer dispensers, and everyone is required to maintain social distancing and wear masks. Fortune states that WeWork recorded four times as many single-day desk bookings during the pandemic, and the company sold 13 times more All Access passes in September compared to the previous month.
WeWork’s enterprise members, which constitute close to half of its total membership, are also taking advantage of the coworking business model. According to Fitch, enterprise memberships rose from 40% in June 2019 to 48% in June 2020. Larger corporations have turned to WeWork to open satellite offices, to ensure social distancing and reduced density, and to offer workers the possibility of going to the office without having to commute into the city.
During a pandemic, the coworking business model offers unique advantages
The unique business model of companies like WeWork offers some crucial advantages, which have certainly helped keep their business going during the pandemic. WeWork is designated as a membership organization rather than a commercial real estate landlord, which makes it exempt from eviction moratoriums present in cities like New York. Enterprise WeWork members usually sign multi-year agreements, but smaller businesses tend to rent their coworking spaces on a shorter term. Their contracts include a clause that says WeWork can revoke membership for any reason, at any time, and during the pandemic, the company canceled more than 81,000 memberships, according to Bisnow.
WeWork also sent out hundreds of letters this fall to member companies, demanding payments of their outstanding fees and offering a strict deadline, as short as two weeks. Essentially, WeWork isn’t constrained by eviction bans to allow tenants to remain in their space if they can’t afford to pay rent anymore. If members aren’t up to date on their membership fees, WeWork can just revoke their membership.
Regus has also been rethinking its business strategy this year, together with parent company IWG. The plan is to expand Regus’ office presence outside busy urban centers like Manhattan and instead focus on suburban markets and second- and third-tier cities. As part of this restructuring, Regus will shut down 20% of its locations in Manhattan, but this isn’t likely to affect IWG too much. The coworking provider operates each of its centers as a separate entity, so it can put each location in bankruptcy without affecting the parent company.
What’s next for coworking in NYC?
As it turns out, the reports of WeWork’s death have been greatly exaggerated. While the company is not out of the woods yet, as Fitch’s rating downgrade shows, it might benefit from the shift in workplace trends to make a comeback. CEO Sandeep Mathrani is confident that WeWork is still on track for 2021 profitability and might even revisit an IPO next year. Demand for short-term office rentals in smaller cities and suburbs is growing, and providers like WeWork and Regus are adapting fast, which signals the fact that coworking is going to be around for a very long time.