A US central bank official adds to the scrutiny of WeWork’s business model

And what happens when the economy sours?
And what happens when the economy sours?
Image: Reuters/Eduardo Munoz
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Investors have been wary of WeWork’s corporate governance, leading the co-working startup to delay its initial public offering plans. But the company’s business itself is coming under additional scrutiny as well.

A US central banker was the latest to cast doubt on the co-working business model. Boston Federal Reserve Bank president Eric Rosenberg warned that the growing popularity of co-working amplifies risks to the US economy during the next economic downtown.

Rosenberg, who has publicly dissented from the Fed’s recent interest rate cuts, did not mention WeWork in his Sept. 20 remarks, but said he believes the co-working model could run into “runs and vacancies.” Co-working spaces like WeWork sign long-term leases with property owners, and then sublease the offices to tenants through short-term leases and memberships. An economic downtown could leave WeWork with expensive long-term commitments and not enough revenue to cover them if its customers cut their office-related spending. 

“This segment of the economy is likely to be particularly susceptible to an economic downturn, potentially resulting in office vacancies rising more quickly than they have historically,” Rosenberg said in prepared remarks before a speech. “Thus, in a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building.” 

As Quartz has previously noted, WeWork has only $4 billion—about a year’s worth—of revenue commitments from its members. It has $47 billion of lease commitments—about 28 times its current lease expenses. Writing in Quartz, Dave Edwards and Helen Edwards cited this as a primary risk for its business: “Commercial real estate traditionally includes long-term commitments, but WeWork only has long-term commitments for expenses, not revenue. That doesn’t create resiliency.”

WeWork—which this year officially changed its name to the We Company—has yet to offer any indication that its business model can be profitable. The company lost $1.93 billion in 2018, on sales of $1.82 billion.

“Maybe the core problem with WeWork is that its business model has less potential than people thought,” Josh Barro wrote in New York Magazine on Sept. 21. “Maybe the lenders are realizing it has unattractive technology-company aspects (high risk, few tangible assets) and the equity investors are realizing it has unattractive real-estate-company aspects (big, annoying physical footprint).”

The New York-based company started with renting out spaces to freelancers, startups, and small businesses, but in recent years has pushed to sign contracts with large companies. WeWork, which has not experienced a recession yet, noted its IPO filing that a recession could hurt its business. “While we believe that we have a durable business model in all economic cycles, there can be no assurance that this will be the case,” WeWork said in its S-1 filing with regulators. “A significant portion of our member base consists of small- and mid-sized businesses and freelancers who may be disproportionately affected by adverse economic conditions.”