The WeWork Bankruptcy — is this the start of the downturn?
One quick glance at WeWork’s busy StockTwits reveals that when the stock pumpers pump they still manage to catch needy retail investors despite much of the asset management community seeing this business tumbling as early as March this year. But what almost no one is reporting on is just how deep the formally long arms of WeWork actually go into major commercial real estate hubs like the West End and City of London. So just what could happen?
For those of you who need a refresh here’s the lowdown. A guy called Masayoshi San got a bit blindsided by a young padawan called Adam Neumann, whom you might remember from pretty much any business news paper across the whole of 2019, as a charismatic sales guy with a swoosh of shoulder length black hair, a penchant for non-core assets, and a big dream. But was otherwise the arch-nemisis of functional business operations.
After the Neumann fiasco, WeWork briefly flourished in the pre-pandemic period but petered out once managers realised that free beer wasn’t conducive to actual work (outside of sedating yourself if you were trying to get ‘into’ cyrpto) and that everyone who went to a WeWork thought the week started and ended on a single day — Thursday.
In short, the stock plunged because there is no point paying for an expensive office when you only need it one day a week and that bombshell basically shattered the myth that $47b valuations mean a lot when you get off the Street.
Office Space
Dimensional’s global Real Estate ETF reveals that office REITs (Real Estate Investment Trusts) barely make it to the midpoint allocations and in some of the other products it’s even worse and when those guys aren’t keen it probably means the data and research doesn’t shape up. Office, alongside much of commercial real estate is suffering a few setbacks lately due to a well publicised debt wall that it is facing alongside the higher interest rates which are currently sufficient to put off even family offices from entering the market when the cost of financing remains higher than forecasted returns.
This is a situation Inconomics will cover in more detail in future reports.
In short, office is a space for the lower risk investor in it for the long term or the quality driven opportunistic outfits like IPUT and even well managed diversification needs less uncertainty not a ton more.
Now imagine a world where there is a major league tenant and this tenant has a global presence and consumes core grade A office space like it’s really hungry for apples and has a swagger about it that causes procurement teams to have reoccurring nightmares. Then imagine that this tenant is everywhere one minute and then suddenly, blam, it’s not. What happens next?
Well things start to get a bit wobbly for a lot of people.
Leveraged Up For A Down Turn?
You’d probably be surprised just what is acquired with debt. It’s way more than you think and all those rich people with fancy cars mainly just leverage off assets already leveraged up to their windowsills.
Or then again maybe you wouldn’t be — it’s not like cheap debt hasn’t made the world go around for a while now but there is a rush on to refinance these huge loans on terms that don’t destroy everything. Well, this is the science part because in reality this debt wall is going to be a problem for many asset managers and many investors because so many of these assets are on the books because the search for yield took investors to places where they might not have gone without the availability of cheap debt from mainstream sources. High grade tenants are sought after because they are deemed likely to be able to survive uncertainty, terms are generous, changes to the fabric of buildings, that might never have been allowed to some average not for profit, happen without much concern for the wider asset. Pushing expensive and long term issues down the road, all in favour of a sexy tenant and that ‘look who’s moved into my building’ for use down some trashy premier cru wine bar.
In WeWork’s case this is something that could be happening globally impacting on entire portfolios that sat liquid in 2022 but are now breaching the risk strategies of most investors and their funders. WeWork liked to have the best spots, in the best areas, of the best cities and according to Bloomberg there are 777 spaces across 39 countries.
This isn’t Silicon Valley Bank with a limited scope just about salvaged by some FDIC tricks but a global issue which is likely to cause significant damage to an already uncertain office space market and it won’t just be rental that will suffer. How much demand will there be for core and core plus space when the market is flooded with primo ex WeWorks who were the only ones who could afford not to afford it and thus had inflated the market.
But at least the UK’s MEES Regulation work could take place without a sitting tenant. A green lining perhaps.
Takeaways:
- This goes deeper than the headlines folks and it’s our predication that WeWork may be the final straw that keeps rates higher for longer as the FOMC seek this soft landing.
- Greening/sustainability works could take place whilst the building is empty and could be pre-let to tenants seeking greater sustainability.
- Likely to deepen the impact of the impending debt wall crisis.
- Could bring down functioning businesses as well as reveal any zombies.
- Watch out for REITs, asset managers and holders of core plus assets as the market could completely fall away.
- Potentially avoid builders until this is over.
- Even if it goes private, the damage will already have been done.
“This new phase of the Wework saga is likely just the start of a deeper issue with global office space. Perhaps the final straw that sends us into that K shaped global recession.”
The opinion in this article isn’t necessarily the views of Inconomics and is not financial or legal advice in any way.
Originally published at https://inconomics.com on August 31, 2023.
