I first heard about coworking around 2006. At the time, there were a handful of grassroots outfits like The Hub in the UK, The Centre for Social Innovation in Toronto, and New Work City in its semi-eponymous city. My interest in coworking was connected to a thought leadership event series I was producing in New York City. The events needed a permanent home, and coworking spaces, which promised diverse membership and an atmosphere that broke down distinctions between work and social lives, seemed like a logical home. Around 2007, The Hub was the world’s most established and ambitious coworking outfit, with plans for developments with event spaces, a hotel, and more. I had a few conversations with The Hub founder Jonathan Robinson about helping them set up in the U.S .
While my conversations with The Hub didn’t lead anywhere, I soon thereafter became involved with a coworking and maker space called Metropolitan Exchange, aka MEx, in downtown Brooklyn. The ramshackle MEx was run by an eccentric named Al, who was frequently described by his friends as a foul-mouthed Santa. Al, the scion of a New York real estate family, was a prodigious collector of objects and people, and MEx, which Al had run a few decades by the time I arrived, teemed with both. The first three floors were too filled with stuff to occupy; the fourth and fifth floors had an assortment of formal and informal tenants like me doing different stuff (coffee distribution, video production, etc.); the sixth floor housed several innovative architecture and urban planning firms; and seventh floor hosted a cadre of MIT Media Lab alums. Several of MEx’s tenants later became the founding group of the super-slick New Lab at Brooklyn’s Navy Yard.
At the same time I was at MEx, WeWork was being birthed in the nearby DUMBO neighborhood of Brooklyn. WeWork co-founder Miguel McKelvey was working at DUMBO-based Jordan Parnass Digital Architecture (JPDA), which was the architect for the fashion and commercial sensation, American Apparel. American Apparel’s expansion was greatly helped by JPDA’s interiors that cheaply converted bare retail spaces into 80s-chic fashion outlets with thoughtfully-placed fluorescent lights and wire racks. These low-cost, high style interiors would later factor heavily into WeWork’s growth. Miguel later met Adam Neumann, who was pursuing a variety of money-making schemes, including a children’s clothing company.
Adam apparently caught wind of the coworking model (likely from places like MEx, The Hub, and NWC). Coworking must have struck him as a potential goldmine. With coworking, landlords didn’t have to fill their buildings or floors with a handful of large tenants with long leases. Instead, landlords master leased their buildings and floors at a wholesale price to a coworking operator like WeWork. Those operators fitted out the spaces’ interiors and rented them to individuals and (typically) small organizations on flexible terms. The operators could fit more people into spaces than conventional tenants, and because of their readymade interiors and flexible terms, the operator could charge higher rates than large tenants on a square foot basis. The operator made money on the delta between their wholesale master lease price and the combined membership rent roll.
Miguel and Adam eventually met British-born, Hasidic real estate developer, Joel Schreiber, with whom they started their first coworking space, Green Desk, in 2008. In 2010, Miguel and Adam sold their stakes in Green Desk to Schreiber for cash and equity, which they put into their new venture, WeWork.
WeWork was founded in the middle of the recession of 2008–2012, which is critical to understanding their growth and eventual collapse. The Fed’s strategy for reinvigorating the U.S. economy during the recession was to purchase and resell billions of dollars worth of distressed real estate, thereby saving banks from mass defaults on the dodgy loans those banks issued. The Fed also lowered interest rates to encourage investment and development in existing and new real estate — rates that remained low until early 2022. While rates were low, post-subprime lending criteria became stringent, so the main beneficiaries of the low rates were wealthy individuals and institutional borrowers, many of whom converted the loans into high yield real estate investment products like build-for-rent single family housing. It was during this period that real estate investment trusts (REIT) like Blackrock started to multiply.
One of the chief repositories for these low interest loans were the glass-clad commercial and multifamily high rises that dominate most urban vistas today (the seven story MEx is now surrounded by huge residential towers). But there was a problem with these buildings: in their haste to gobble up cheap loans and attendant development fees, developers and investors weren’t entirely clear who’d be the tenants of these buildings. This is where WeWork came in.
By 2010, cloud-based storage and video conferencing were already eliminating many of the core functions of offices. In 2015, consultant Gunnar Branson claimed law firms were using one third less space than they were a decade before because they no longer needed to house volumes of legal books. These trends notwithstanding, office demand remained relatively high from 2012 to 2019 since low-interest rates also resulted in the growth of finance, tech, and other commercial sectors, most of whom still saw offices as necessary tools for work. This demand later proved temporary, since it depended on access to historically low rates rather than functional needs.
In WeWork, landlords and other real estate stakeholders saw a path forward for offices. Rather than fretting about leasing out their buildings, they could master lease them to WeWork, who would take those buildings, slap some reclaimed wood on their walls, and fill them with Richard Florida’s creative class startup workers — a demographic that was the theoretic heir to the corporate desk jockey.
WeWork was not entirely wrong about the future of work. Digital tools were permitting the proliferation of more, smaller, nimbler organizations. Membership spiffs like beer-on-tap were a fit for the growing cultural zeitgeist for having a life outside of offices and working. What WeWork was horribly wrong about was market size and demand. Rather than building enough spaces to satisfy market demand for the actual number of nimble, digitally-enhanced workers, WeWork created as many spaces as building inventory permitted. As the debt kept flowing and building inventory increased, so too did WeWork’s leases. By 2018, WeWork was the largest office tenant in New York City and fourth largest in San Francisco.
Hastening WeWork’s expansion was a continual infusion of investment capital, particularly from Softbank’s Vision Fund. By 2019, Softbank had already dumped $18.5 billion into WeWork, according to TechCrunch. Billions more were raised from institutional investors like Goldman Sachs, JP Morgan, and real estate giants like Brookfield and Cushman & Wakefield. WeWork’s copious coffers allowed them to sign more leases, which gave the impression of legitimate market demand and revenue growth. Adam played into this impression, using the personal money he siphoned from investment rounds to invest in buildings that he leased to WeWork.
WeWork’s overcapitalization also permitted ambitious side businesses. WeLive was an attempt at translating their office strategy to residential living. They’d master lease residential buildings, fit them out, and rent spaces back with flexible terms at a cost-premium over standard rentals. Leaked investor documents projected WeLive would comprise 21 percent of WeWork’s revenue by 2018. But because residential space conversions are more expensive and regulated than office spaces, WeWork’s formula did not translate to WeLive, and only two locations were built. The other side business, WeGrow, was a WeWork-style elementary school conceived by Adam’s wife, Rebekah Paltrow Neumann.
WeWork’s precipitous decline started in 2019. In January, WeWork renamed itself “The We Company” to include its sub-brands and, presumably, instill investor confidence before a planned IPO in August at a $47 billion valuation. For reasons explained above — hubristic and dishonest leadership, dubious market demand, massive operating costs, expensive side-businesses — that IPO failed. In September, Adam stepped down as CEO (an ousting made easier with a $445 million exit package). In October, Softbank took over ownership at a $10 billion valuation.
The four years since the failed IPO have been spent trying to finish what Miguel and Adam began. In order to reduce operating costs and become fiscally sustainable, the company had several rounds of layoffs and started a musical chairs of executive leadership. WeLive and WeGrow were scrapped, and The We Company went back to WeWork. Rather than signifying growth, WeWork’s volume of leases became massive liabilities. With lagging membership — accelerated by the lockdown — many WeWork buildings couldn’t make rent. Without rental income, WeWork landlords — which include the biggest names in commercial real estate like Brookfield, Cushman, Blackstone, SL Green, RXR, and others — have been defaulting on their building loans, thus increasing fears about a mortgage-induced, global financial meltdown.
WeWork’s one ostensible bright spot was their IPO in October, 2021 — one of 610 special purpose acquisition company (SPAC) IPOs that year. SPACs were an effective way to convert cheap, stimulus debt into equity, but they couldn’t — and didn’t — fix dysfunctional business models like WeWork’s. By March 2022, WeWork’s $9.82 initial stock price dropped to $4.77. A year later, WeWork stock went below a dollar, and it is currently trading around $.20. A recent second quarter earnings report suggests a WeWork collapse is imminent.
So what was WeWork’s ultimate undoing? Was it their co-opting an authentic, grassroots coworking and maker space movement to serve institutional developer and investor interests? Was it the glut of post-2008 debt looking for any semi-plausible investment vehicle? Was it the deceit and hubris of Adam, Miguel, and Softbank CEO Masayoshi Son and their fantastically overstated market demand for flexible office spaces? Was it the trend away from office-based work and living? Yes, yes, yes, yes, yes, and….
The Secret Reason Andreessen Horowitz Invested in Adam Neumann’s Latest Venture, Flow
Does Neumann and a16z know something we don’t?
It’s not yet clear if the powers-that-be have learned their lesson with WeWork. While Masayoshi Son has expressed remorse about his faith in Adam et al, investors like Marc Andreesson have given Adam the keys of another car to crash with his new venture, Flow. But committing $350 million of investment capital is not the same as issuing it. This is not 2010. With continually growing interest rates and startups failing en masse, it’s hard to imagine Flow will ever achieve WeWork growth without imploding first. As for WeWork, it’s hard to imagine it’ll continue unless it’s relieved of all its leases (which could happen if they declare bankruptcy) and reboots itself at a dramatically smaller scale.
The Co-Living Apocalypse
The other day, Brad Hargreaves stepped down as CEO of the co-living company he founded, Common. While I don’t know the…
Why My New Real Estate Development Company, The Change Order Group, Is the Anti-Katerra
A pre-death post mortem on Softbank’s other major venture heist, Katerra.
As an intimate observer and contributor to the coworking and coliving industries, as well as playing a bit part in WeWork’s evolution (I had several connections to WeLive’s development), WeWork’s rise and collapse is a major bummer. So much money and attention was diverted from worthwhile people and projects to Adam and Miguel’s boondoggle. And WeWork’s and other high-profile real estate startup failures like Katerra have effectively closed the investment channels for property-based (versus software-based) startups. All this said, I’m an inveterate optimist, and I’ve developed startup concepts that right what WeWork got wrong. If you’re an investor interested in learning more — or who wants to avoid WeWork’s missteps — drop me a line.