New hope or last gasp for WeWork? (Or all CoWorking)

David Goldsmith

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And if Knotel craps out too? Then what happens to the market?

“Clamping down on any and all payments”: Knotel misses rent as financial issues mount
Pandemic intensified existing financial issues at flexible-office company

Flexible-office company Knotel has reportedly stopped paying rent at several of its New York locations as it struggles with mounting financial issues.

The company has recently taken drastic steps to cut costs, and last month laid off or furloughed half its 400-person staff. However according to Business Insider, the company has a backlog of payments that goes back many months before the pandemic, putting it in a precarious position as the economy falters.

Knotel is behind on payments to some of its key partners, according to Business Insider, including brokerage firms CBRE and Cushman & Wakefield. It has also reportedly failed to pay April’s rent for locations including 61 Broadway, 40 Exchange Place and 5-9 Union Square West.

Ivy Chiou, a spokeswoman for Knotel, said in a statement that the company was “focused on balancing the interests of customers, partners, and investors, in efforts to build a sustainable, long-term business,” and was “taking these steps to ensure we are well-positioned for both current times of great crisis, as well as when business returns to a new normal.”

The company is also planning to return about 20 percent of its portfolio to landlords, according to Commercial Observer. The company framed the arrangement — to shed about 1 million square feet of office space — as a “business deal.”

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Knotel says one-third of members want rent relief
CEO Amol Sarva claims flex-office company will achieve profitability this year

Roughly one-third of Knotel’s members are looking for a break on rent, the flex office space company disclosed Tuesday.

As Knotel grapples with its own financial woes, the figure sheds light on the dilemma facing co-working firms: a sudden loss of income from tenants, including many small businesses, as the coronavirus pandemic keeps people home across the world.

“We have been talking to every customer and having frank discussions with them about where they are,” CEO Amol Sarva said during a conference call Tuesday with reporters.

In recent weeks, Knotel has taken steps to reduce costs, including laying off or furloughing half of its 400-person staff. It is in talks to give back 20 percent of its office space, but in the meantime it has reportedly stopped paying rent at several locations.

Sarva on Tuesday characterized the workforce reduction and other actions as a “defensive posture.” Despite reports that the company is in dire financial straits, he said its liquidity “remains good.”

“It’s partly why we took some big steps — to make sure the company had the cash it needed,” the CEO said.

He said Knotel still expects to be profitable later this year. But instead of achieving that through growth, the company will operate lean.

“We went pencils down on new acquisitions,” he said. “In the future we will grow again, but now is not the time to be doing that.”

Despite many tenants seeking concessions, Sarva said “collections have been better than expected” so far in April. The company is still projecting to double its 2019 revenue this year.

Knotel finished the first quarter with $370 million of contracted annual revenue, up from $350 million at the start of the year. That compares to $100 million at the start of 2019.

Sarva said Knotel expects customers to return to work in mid-May and June, depending on their geography. One bright spot: Large customers in London, France, Tokyo and Toronto are moving away from signing traditional leases, which bodes well for flex-office providers. Knotel also has a backlog of customers ready to move in, Sarva said.

But he cautioned that the economic consequences of the pandemic are still unfolding, saying, “We are prepared for a more severe scenario.”

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WeWork plans “more disciplined business” (aka cuts)
Executives told staff more layoffs are coming by the end of May

WeWork says there’s still more fat to trim and, while holding another round of layoffs over employees, advised them to cut it themselves.

In a staff meeting Tuesday, the co-working firm’s CEO Sandeep Mathrani announced more staff reductions would be made by the end of May, according to a leaked recording reported by Bloomberg.

“I know there is much speculation about how deep the cuts will be,” Mathrani was recorded saying. “People are looking for a percentage or a number. The reality is, we’re looking at all of it.”

“I want to do it once and know we have a company we can all move forward with,” he continued.

The troubled firm’s chief financial officer, Kimberly Ross, also encouraged staff to proactively make cuts themselves.

“Do not wait to be asked to cut expenses. Be proactive. If you see waste, eliminate it. If you see unnecessary spending, stop it,” she said. “Let me be very clear: With or without Covid, we need to run a more disciplined business.”

WeWork has jettisoned hundreds of employees in recent months as part of broad cost-cutting following its botched initial public offering effort last summer. The first round of cuts began in November and two subsequent layoff announcements came in early and late March.

Mathrani joined WeWork in February and is tasked with righting the ship in the wake of the ouster of the firm’s co-founder and former chief executive Adam Neumann.

Marcelo Claure, the chief operating officer at Japanese conglomerate SoftBank Group and WeWork’s executive chairman, took part in the virtual meeting and said SoftBank was “100 percent behind us” in the cost-cutting. His comments come a week after WeWork sued SoftBank — its largest investor — for pulling out of its agreement to buy $3 billion worth of WeWork shares.

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A while back I was running around warning people WeWork could drag the entire office market down with it.

For Kushner Cos., WeWork could be a problem at Dumbo Heights
The Brooklyn office complex was already running tight margins for the developer before coronavirus struck and WeWork asked landlords for a break on rent, according to a report in Bloomberg

Most of the debt on the property is high-interest held by funds operated by South Korean insurance companies Shinhan Financial Group and DB Insurance Company, according to the Bloomberg report. Kushner Companies and Aby Rosen’s RFR Holdings took out $300 million in financing with the South Korean firms in 2018.

The coronavirus crisis has ratcheted up the heat on Kushner Companies as it tries to cover the debt payments on a Brooklyn office complex, where one of its biggest tenants is WeWork.
Before the pandemic struck, Kushner Companies was already running tight margins at Dumbo Heights, a four-building property it bought out with RFR Holdings in 2016 for $600 million, according to Bloomberg.

Last year, the ratio of cash flow to debt on Dumbo Heights was tight enough that banks put it on a list of potentially troubled properties, allowing its lenders to review new leases and lease changes.
Most of the debt on the property is high-interest held by funds operated by South Korean insurance companies Shinhan Financial Group and DB Insurance Company, according to the Bloomberg report. Kushner Companies and Aby Rosen’s RFR Holdings took out $300 million in financing with the South Korean firms in 2018.

A Kushner Companies spokesperson called the Dumbo Heights complex “a huge success, and any suggestions to the contrary are absolutely false. Of course, rent collections during the pandemic will likely be similar as with all other landlords at this time. The properties are essentially 100% leased at rents far exceeding the initial underwriting at acquisition.” The spokesperson provided the statement to The Real Deal, the same one the company gave Bloomberg.
A representative for the Shinhan subsidiary that provided the loan also said that interest payments are up to date.

But ratings company S&P Global estimated that the loan-to-value ratio for all the debt on the property — including another $180 million issued by other lenders — was around 140 percent, which means its analysts consider the debt on Dumbo Heights to be more than what the property is worth.
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David Goldsmith

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Co-working firms are still open. For some tenants, it’s a deal breaker.
Industry split on pandemic protocols
Mark Macias took space at a WeWork office on Fifth Avenue “before anyone knew what WeWork was” — growing his eponymous public-relations firm from two employees to four, then six.

But with the co-working giant keeping its U.S. locations open during the pandemic, Macias wants out.

He’s one of many customers angry that WeWork is charging fees even though most of them can’t go to work under Gov. Andrew Cuomo’s late-March order. He thinks the company decided to stay open for financial reasons.

WeWork has disputed this, saying its spaces are open to accommodate essential businesses, and because WeWork runs a mail service. It declined to say how many businesses exempt from Cuomo’s ban are using the locations.

As companies across the world wrestle with the financial and public-relations challenges of the pandemic, co-working firms have an especially difficult dilemma: balancing tumbling revenues against the individual needs of members, whose support is crucial to their survival.
One member of co-working company Bond Collective said the firm refused to cancel her contract, which had a few months left, despite her protests that she couldn’t legally use Bond’s space or services because of the governor’s order. Bond offered her a pause on the membership, which she declined, viewing it as an extension.
In emails viewed by The Real Deal, a representative for Bond told her the company’s monthly revenues had fallen between 50 percent and 75 percent because of discounts and cancellations. Still, she rejected the idea that Bond and its customers were all in the same boat.

“They already have the funds to survive, whereas the businesses they’re housing are basically crumbling because they’re being forced to pay for things that they’re not receiving,” said the customer, speaking on condition of anonymity.

Bond’s CEO, Shlomo Silber, said the characterization was false.

“We are a small business. We’re not like a big, venture-backed company,” he said. “We’re just trying to figure out a way that everybody can stay alive.”

“It’s really hard to keep everyone happy in a global pandemic”
— Bond Collective CEO Shlomo Silber
He said Bond is offering to pause memberships for customers who cannot use their space and a 25 percent discount to those who do need to use it.

“We’d be out of business if we just said, ‘Hey, no problem, all contracts can be broken and everybody can just pick up their stuff,’” Silber said. “That essentially kills our business.”
“It’s really hard to keep everyone happy in a global pandemic,” the CEO added.
The member said when her business resumes, it won’t be in a co-working space.
“Our team will find another solution,” she said.
What co-working will look like in a post-pandemic world is uncertain. Not only does the model rely on people gathering in dense environments, but the core product is essentially the members themselves and the community they create — adding pressure to the decisions companies make in hard times.

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Empire State Building’s flex-office location shutting down
Virgo Business Centers’ lease expires at the end of May

One of the city’s largest flex-office providers is shuttering its location at the Empire State Building.

Virgo Business Centers will be closing its workplace at the iconic skyscraper at the end of May when its lease expires, sources told The Real Deal.

“Their term is up,” Empire State Realty Trust CEO Tony Malkin wrote to TRD via email. “Their business model cannot support the market rent.”

A representative for Virgo Business Centers could not be immediately reached for comment. The company occupies the entire 26,000-square-foot 59th floor in the landmarked building at 350 Fifth Avenue.

Founded in 1998 by CEO Joseph Scharf, Virgo Business Centers operates the traditional short-term office model, where members can rent private offices with shared amenities on a month-by-month basis, or even by the hour.
The company has four other locations in Midtown. While its footprint is dwarfed by flex-office giants like WeWork and Knotel that grew by exponential proportions in recent years, Virgo is one of the larger companies among a second-tier group of firms offering short term space in the city.
The meteoric rise and catastrophic fall of WeWork had many questioning whether co-working and short-term office companies could survive an economic downturn. But the Covid-19-induced shutdown of the city has put the flex-office model under strain — and has given members reason to demand concessions.
Some of the industry’s largest players are considering changes to their business models once the city finally reopens.

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These submarkets are the most exposed to co-working
Plaza District, Garment District and Chelsea top list

With the coronavirus pandemic putting health and sanitation in the spotlight, co-working companies are being squeezed by both tenants and landlords, while the very concept of dense, collaborative offices has come into question.

Co-working firms have begun seeking rent relief, pulling out of leases and laying off staff to cut costs. It seems likely that when the crisis is over, co-working firms will occupy less office space in New York City than they do now. And some neighborhoods will be more affected than others.

The 11 largest co-working firms in Manhattan — each of which occupies more than 100,000 square feet — have a total footprint of about 15 million square feet, according to a recent report from Colliers International. That’s about 3 percent of all office space on the island.

Midtown South, a hotbed of tech and media tenants, has the most co-working space among the three main submarkets, with 6.86 million square feet, followed by Midtown with 5.29 million and Downtown with 2.95 million. At a more granular level, the most co-working-laden submarket is Midtown’s Plaza District, followed by the Garment District/Penn Plaza and Chelsea, both in Midtown South.

SOURCE: Colliers International

SOURCE: Colliers International
“Covid-19 has called into question the future of coworking’s shared amenities, close working quarters and bench-style seating that is so strongly associated with the industry,” the report says. “Each coworking firm has its own business model and is facing the challenges brought on by the Covid-19 pandemic in its own unique way.”

But Colliers does not think co-working will go kaput.

“It is unlikely that demand for coworking space completely vanishes once this pandemic ends,” the report said.

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I've been saying for quite a while that WeWork seemed like a scam to me. Now someone has flat out said the real value is zero.

SoftBank anticipates $6.6B loss on WeWork investment
Analyst says writedown takes co-working firm closer to true value: “zero”

SoftBank’s bet on WeWork is causing more pain for the conglomerate.
The group said this week that it is expecting a $6.6 billion loss for the year ending March on a portion of its investment in WeWork held outside SoftBank’s Vision Fund.
The announcement comes two weeks after SoftBank told investors that its annual operating losses would reach a record 1.35 trillion yen ($12.6 billion), and at a time when WeWork is struggling to navigate the pandemic.
“Every writedown takes WeWork’s carrying value closer to reality. Clearly the value is zero,” Kirk Boodry, an analyst at Redex Holdings, told Reuters.
SoftBank has poured billions into WeWork over the years. In a recent interview with Forbes, CEO Masayoshi Son spoke about his tactical regrets, and the co-working company’s botched IPO.
“We paid too much valuation for WeWork, and we did too much believe in the entrepreneur,” he said.

Earlier this month, two WeWork directors filed a lawsuit against SoftBank over its termination of an agreement to buy $3 billion in WeWork shares — which would have been a windfall for WeWork co-founder and former CEO Adam Neumann.

SoftBank said it backed out of the tender offer because of “multiple, new and significant pending criminal and civil investigations.”

The men behind the lawsuit — a special committee of WeWork’s board comprised of Benchmark general partner Bruce Dunlevie and former Coach CEO Lewis Frankfort — told the Wall Street Journal that SoftBank’s decision amounted to a breach of contract, “as well as a breach of SoftBank’s fiduciary obligations to WeWork’s minority stockholders, including hundreds of current and former employees.”

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“Unlawful” and “hypocritical”: WeWork members threaten legal action over fees
Co-working giant has sparked controversy by staying open during the crisis, claiming some members run essential businesses

A group of WeWork members is threatening the co-working giant with legal action if it continues to collect fees even though the coronavirus has prevented them from using the space.

In a letter to WeWork’s general counsel on Thursday, an attorney for the members said WeWork’s collection of fees was “unlawful” because state and local authorities have directed nonessential personnel to stay home. It is also “hypocritical,” said the attorney, Jim Walden, since WeWork itself has reportedly failed to pay its own rent at some locations.

The members are from New York, Los Angeles, and Washington, D.C., where stay-at-home orders are still being enforced.

“Our clients have no legal obligation to pay their membership fees while the purpose of their membership agreements remains frustrated by the Covid-19 pandemic,” Walden wrote in the letter, first reported by The Hill.

A spokesperson for WeWork declined to comment.

According to Walden, WeWork members have complied with public health mandates because it is law, and not doing so in some locations carries a steep fine. In some cities, police have shown up at WeWork locations to “clear the premises of anyone disobeying the applicable stay-at-home orders.

Two members represented by Walden’s letter said WeWork’s decision to keep offices open has burdened them with health and economic concerns.

“The idea of bringing this virus home is not what I wanted to do,” said Ray Miller, owner of an L.A.-based management production company. Miller pays $2,000 a month for three two-person offices that his team is not using.

“It is a financial burden,” said Lisa Kaneff, a freelance copywriter in Washington. She pays $450 a month for a desk that’s situated within three feet of others. “As a freelancer, I’m my only source of income. WeWork is my overhead. I need every penny I can get.”

Although Miller said his team’s space is less dense than Kaneff’s, he is concerned about communal spaces like the kitchen, waiting areas, conference rooms and even elevators. “The whole concept of co-working is that you’re sharing certain spaces,” he said. “I don’t think the space should be open, quite frankly.”

WeWork has kept its U.S. locations open on the grounds that some members operate “essential businesses.” The company has also said its mail service spares it from executive orders such as New York Gov. Andrew Cuomo’s ban on going to work.

The co-working sector has faced unique pressure to balance low revenue with the need of members. As The Real Deal previously reported, Bond Collective has refused to refund membership, although it is pausing membership and discounting fees for members who need relief.

In the letter, Walden accused WeWork of garnishing fees from some members’ bank accounts without permission. It also called the policy “hypocritical,” citing reports that WeWork didn’t pay its full rent in April.

In recent weeks, angry WeWork members have organized petitions and created YouTube videos to compel the company to change its policy.

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94% drop in valuation from failed IPO numbers.

WeWork’s valuation drops to $2.9B
The office-space provider’s valuation fell to $7.8B from $47B after an IPO attempt last fall

WeWork’s valuation has dropped to $2.9 billion — a far cry from $47 billion at its peak.
The office-space provider was most recently valued at $7.8 billion in the fall, after it agreed to a takeover by SoftBank following a failed attempt to go public. SoftBank, WeWork’s biggest backer, disclosed the valuation in its earnings on Monday, Bloomberg reported.

WeWork’s business model has been under pressure because of the coronavirus pandemic, as stay-at-home orders across the country keep non-essential workers from offices. The company has paid rent at 80 percent of its locations, while collecting rent from 70 percent of its members, CEO Sandeep Mathrani said on CNBC’s Squawk Box last week.

SoftBank took control of WeWork and pushed out co-founder and former CEO Adam Neumann last year. Neumann is now suing SoftBank after the company abandoned a $3 billion deal to buy stock from him and others as part of the bailout, claiming the firm relied on faulty pretexts to back out of the deal.

The Japanese conglomerate’s Vision Fund lost $17.7 billion last year after writing down the value of investments such as WeWork and Uber. Its overall operating loss was 1.36 trillion yen, and its net loss was 961.6 billion yen — the worst ever in the company’s history.

“The situation is exceedingly difficult,” SoftBank founder Masayoshi Son said. “Our unicorns have fallen into this sudden coronavirus ravine. But some of them will use this crisis to grow wings.”

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Convene’s top design exec steps down
Joyce Bromberg worked at the firm since 2010

Convene’s top design executive is stepping down after more than 10 years with the firm, the company announced Thursday.
Joyce Bromberg, Convene’s chief design officer, is resigning, just as the flex-space company braces for a gradual reopening of its 30-plus locations.
The reason for her departure was not immediately clear, but according to a press release, she described her time at Convene as “the best part of my career and truly a privilege for me to help design great spaces, create strategies, and to allow work to be about love.”

According to Convene, Bromberg came out of retirement to join the firm in 2010, where she eventually led a team that designed Convene’s locations and created the company’s workplace strategy.

Convene, along with other flex-office companies, has grappled with a dramatic drop in business due to the coronavirus pandemic. In March, the firm laid off a fifth of its workforce, or about 150 employees.

Workplace design will likely play a large role in how businesses navigate a return to their offices. Earlier this month, the firm revealed plans to reduce office capacity by 50 percent and to reconfigure its spaces to allow workers to maintain social distancing.

Convene — backed by investors including RXR Realty, the Durst Organization and Brookfield Asset Management — has locations in New York, Los Angeles, Chicago, Boston, Philadelphia and Washington, D.C.

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Tensions brew on WeWork’s board with appointment of new members
A legal dispute between SoftBank and a special committee on the board is playing out in court

A brewing dispute at WeWork is set to intensify after a Delaware court approved the co-working company’s decision to appoint two new directors.
WeWork told the court Wednesday that the company’s board planned to meet Friday to vote on the new appointments, the Financial Times reported. The candidates for the vacant board seats are Alex Dimitrief, formerly of General Electric, and Frederick Arnold, formerly of Convergex.

The appointments are expected to ramp up tensions between SoftBank and a special committee of the board, which recently sued SoftBank over its decision to terminate a $3 billion tender offer.SoftBank, which has four of the eight filled board seats, questioned whether the committee had the authority to take such an action on the co-working company’s behalf. The new directors would be tasked with evaluating this question.

The special committee sought to block the appointments, however a court denied the request.
“We believe SoftBank has no basis to question the special committee’s authority to bring this action and we are pleased by the court’s recognition that any effort by SoftBank to challenge that authority must be presented to the court,” a spokesperson for the special committee said in a statement Wednesday.

In response, a spokesperson for the co-working company told the FT that “WeWork is pursuing best practices of corporate governance to determine what role if any WeWork should have in this contractual dispute among its shareholders. The court’s decision today allows that process to go forward.”

A trial date has been set for January 11

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IBM to leave WeWork’s 88 University Place
The Fortune 500 company’s departure is latest blow to the flex-office giant

IBM is pulling the plug on a large office space it leases from WeWork.
The technology giant will leave the 70,000-square-foot space it leases from WeWork at 88 University Place sometime around Labor Day, Business Insider reported. IBM will continue to lease office space from WeWork in Chicago and London.

When the two parties struck a deal in 2017, it marked a turning point for WeWork, which was trying to expand past the market for freelancers and into the market for corporate clients.
But in recent months, WeWork has faced tensions with its renters, who have called the company’s continued charging of fees during the pandemic “unlawful.” The company has said it must keep offices open for those of its users considered essential. Earlier this month, WeWork’s valuation fell to $2.9 billion, a far cry from $47 billion a year ago.

Now, as remote work grows in appeal, major companies are reevaluating their physical footprints — leading to growing concerns about the broader office sector. Mark Zuckerburg announced this week that Facebook estimates that half its workforce could transition to remote work over the next decade. Others, including Twitter and Shopify, have signalled they would move toward working from home permanently.

A shift toward remote working could also upend business models such as WeWork’s, which depended on the appeal of a reimagined in-person office culture.

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WeWork sued for backing out of San Francisco development deal
The 3,000-unit Parkmerced complex was to be the site of WeWork’s WeLive initiative

An investor in San Francisco’s largest residential complex is suing WeWork for abandoning its development plans and backing out of a pledge to invest $450 million.
The development at Parkmerced — which plaintiffs allege lost a year in closing additional investments, Bloomberg reported — was intended to showcase WeWork’s WeLive initiative, featuring amenities like media rooms, hot tubs, and offering happy hours and yoga classes. The plaintiff, Parkmerced Investors LLC, is seeking at least $100 million in damages.

The legal struggle is the second in as many months between the two parties. In March, WeWork sued Parkmerced’s developer, Maximus Real Estate Partners, for not returning a $20 million “exclusivity fee” as part of the botched development deal.
Adam Neumann, WeWork’s co-founder and former CEO, told Maximus Real Estate in 2015 that WeWork would one day “be bigger than Apple,” and he wanted in on the Parkmerced investment, according to Thursday’s court filings. In 2018, WeWork agreed to pay $275 million at closing and $175 millon six months later, but later backed out of the deal, Parkmerced Investors alleged.

The Parkmerced complex has also had its share of difficulty in recent months — the 3,000-unit apartment community, which is the largest multifamily property in San Francisco and the second largest multifamily property west of the Mississippi River, requested forbearance on its nearly $1 billion mortgage due to coronavirus-related financial hardship.

WeWork’s parent SoftBank has been in turmoil of late, but despite reporting record losses, doubled the compensation of its Vision Fund chief, Rajeev Misra. The conglomerate also moved two of the vision fund’s managing partners to senior advisory roles.

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WeWork’s head of US real estate is out
Aaron Ellison joined the co-working company in the high-flying (but still money-losing) days of 2018

One of the last executives to remain from Adam Neumann’s reign of WeWork is exiting the struggling co-working company.
After more than a decade at JLL, Aaron Ellison joined WeWork in July 2018 as head of real estate for the U.S. and Canada. At the time, WeWork was one of the fastest growing real estate companies on earth, gobbling up millions of square feet across hundreds of locations in North America (the company lost $1.9 billion on $1.8 billion in revenue that year). Ellison led a 50-person leasing team, and his territory eventually expanded into Israel.

But according to Business Insider, he’s out.
Ellison’s departure is the latest in a string of leadership-level departures at the company in the months since WeWork’s failed IPO last fall, CEO Adam Neumann was dramatically ousted and real estate vet Sandeep Mathrani eventually took over.

Since November, nearly 3,000 workers have been laid off, the company has explored whether it can break pricey leases, and the overall valuation has plummeted from $47 billion to $2.9 billion.
In that span, the real estate team alone has turned over. In the last year, other departures include Sarah Pontius, global head of real estate partnerships; Granit Gjonbalaj, chief development officer; and Wendy Silverstein, who co-led WeWork’s real estate investment fund. Four of WeWork’s board members have left the company since January and now the board’s special committee is battling it out in court with the company’s former biggest backer, SoftBank.

The Japanese investment giant pulled out of a $3 billion bailout deal earlier this year, prompting the committee to sue.
SoftBank has four of the eight board seats and the special committee recently told a judge it planned to appoint new members to the board.

In recent months, WeWork has attracted criticism for not closing its locations despite the coronavirus pandemic. It also elected not to pay 20 percent of its own leases in the U.S., executives said in May.

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WeWork rethinking one in five leases
SoftBank valued firm at $2.9M in May

WeWork may exit or rethink one in five of its leases as the troubled co-working firm slashes expenses and chases profitability.
In a call with Citigroup analysts last month, CEO Sandeep Mathrani detailed the steps WeWork is taking to review its global portfolio, which had 828 locations as of March. According to the Financial Times, the troubled co-working firm has tapped Knight Frank to help restructure its leases in the United Kingdom.

“If I look at the portfolio, like anyone’s portfolio, it’s 80:20. Eighty percent [of WeWork’s leases] are great, 20 percent need to be restructured,” Mathrani said on the call with analysts.

Until last year, WeWork grew at breakneck speed, guaranteeing leases to landlords to secure an ever-growing portfolio of office space. Since its botched IPO, the SoftBank-backed company’s valuation has plunged from $47 billion to just under $3 billion. Mathrani, who took over as CEO in February, is reviewing the entire portfolio.
In Hong Kong, WeWork reduced its footprint by 20 percent, sources told the FT.
Not all shared-space companies are retrenching. IWG recently scooped up a 30,000-square-foot lease that WeWork vacated in March. IWG, formerly known as Regus, recently raised £320 million, or $402.5 million, which it will use to expand, including investing in distressed properties.
In London, WeWork is in talks to reduce its commitment at an office development where it previously agreed to lease 190,000 square feet. In 2017, WeWork committed to leasing two buildings at Cain Hoy Enterprises’ Stage development. Now it may take just one building spanning 70,000 square feet, Bloomberg reported.

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WeWork, SoftBank hit with class action over failed IPO
A group of investors claims WeWork minimized losses ““strategic investment spending”

A group of investors have filed a class action lawsuit against WeWork — the latest of a series of disputes stemming from the company’s failed public offering.
In a complaint filed Wednesday in San Francisco’s federal court, the investors claimed WeWork executives overhyped the company’s business plan in order to sell stock, Bloomberg reports.

Further, they said the executives minimized losses as “strategic investment spending that would lay the foundation for profitability.”
“As would later be revealed, WeWork was engaged in profligate spending in a reckless bid for growth at all costs — not in a manner designed to sustainably grow its business, but rather to induce capital raises from investors at ever higher valuations,” the complaint said.
WeWork has reportedly not commented on the suit.

SoftBank, which is also named as a defendant, was recently hit with a lawsuit from WeWork’s founder, Adam Neumann, after SoftBank pulled out of a deal to buy $3 billion worth of WeWork shares from investors — a potential windfall for Neumann.
SoftBank said that it was scrapping the deal because of “multiple, new and significant pending criminal and civil investigations,” which changed conditions ahead of the deal’s April 1 closing date. But Neumann rejected that, claiming that Softbank CEO Masayoshi Son had been “secretly taking actions to undermine” the agreement for some time.
Neumann said in the suit that he “put his trust in [SoftBank and the Vision Fund] to be stewards of WeWork, which he — and thousands of others — had worked so hard to build.” Neumann alleged that he, unlike SoftBank, had “upheld [his] end of the bargain.”

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What would a WeWork bankruptcy look like?
Several scenarios could play out for co-working company that recently had close to $50B in lease obligations

In April, a Manhattan landlord who leases a large space to WeWork received an email from a broker who was working on behalf of the struggling co-working company to renegotiate its office leases.
“I told him politely it’s not happening, so don’t waste your time,” the landlord said, noting that because his lease with WeWork is below market-rent, he’s comfortable taking the space back. “I’m going to play hardball.”
Brokers at Newmark Knight Frank and JLL have spent the last several weeks reaching out to WeWork’s landlords — trying to negotiate concessions on billions of dollars of leases that threaten the company’s cash flows.
WeWork had $47.2 billion worth of lease obligations on its books as of late last year, and is reportedly looking to reduce those rent liabilities by 30 percent.
Now as Covid-19 puts further pressure on the co-working company’s bottom line, critics are raising questions about whether its business model of packing a rotating cast of strangers into tight spaces can survive in a world of social distancing and contact tracing.
That raises the stakes for WeWork’s lease negotiations, according to those who believe this could be a make-or-break scenario for the Softbank-backed company once valued at as much as $47 billion before its failed IPO last year. WeWork was recently valued at just under $3 billion, Bloomberg reported in May.
WeWork’s critics have long speculated that the company could be forced to file for bankruptcy in a downturn. If that happened, WeWork would have several scenarios laid out in front of it, experts told The Real Deal.
“Landlords aren’t always willing to make concessions outside of bankruptcy,” said Timothy Duggan, an attorney at the Stark & Stark in New Jersey who represented office equipment provider Transamerica as a creditor when Regus — another large flex-office company — filed for bankruptcy in 2003.
But that dynamic often changes once under Chapter 11.
“If I’m a landlord and I know a bunch of other landlords are making concessions and I have a shot of coming out of bankruptcy, I might be more willing to make a deal,” Duggan noted.
Still, under the protection of bankruptcy the company’s core challenge would be the same: It still has to convince its creditors that it has a viable plan to turn things around.
“Even in bankruptcy, they still have to get people to believe they can come out of this,” Duggan added. “It’s all still one big negotiation.”
WeWork had $1.3 billion of long-term debt when it issued its prospectus last year, including credit agreements with JPMorgan and $669 million in corporate bonds. Those bonds were trading for as low as 28 cents on the dollar in May.
“Even in bankruptcy, they still have to get people to believe they can come out of this.” — Timothy Duggan, Stark & Stark
The task of convincing creditors that the company can turn itself around would fall largely on the management team headed by Sandeep Mathrani — the veteran retail executive who led mall landlord General Growth Properties through bankruptcy in 2010.

Mathrani joined WeWork earlier this year to help right the ship after its co-founder Adam Neumann was ousted following the IPO debacle.
“He is a proven leader with turnaround expertise in the real estate industry,” SoftBank’s Raul Marcelo Claure, the former interim chairman of WeWork, said about Mathrani in a February statement.
To be clear, WeWork has made no public plans to file for bankruptcy, and that option is by no means an inevitability.
A spokesperson for the company told TRD that WeWork has a strong financial position with $3.9 billion in cash and commitments that “provides us the liquidity to weather this current climate while also executing on our five-year plan and investing in our future.”
“We continue to rightsize our portfolio by exiting locations that are unprofitable, growing in markets where we see enterprise demand,” the spokesperson added, noting WeWork is planning to open more than 60 new locations through early 2021 and is investing $100 million in WeWork India.
But the company’s critics have long speculated that WeWork could end up in bankruptcy, particularly during an economic downturn.
The company has laid off thousands of employees since November. Softbank backed out of a financial bailout and IBM is reportedly ready to walk from its WeWork space at 88 University Place — one of the first locations in the co-working company’s pivot to an enterprise model.
Softbank last month took another writedown on its WeWork investment, saying it expects to take a $6.6 billion loss for the year on the portion of the firm’s stake held outside of its $100 billion Vision Fund.
“Every writedown takes Wework’s carrying value closer to reality,” Redex Holdings analyst Kirk Boodry opined in Reuters. “Clearly the value is zero.”
Softbank CEO Masayoshi Son said in April that he expects a significant portion of the 88 companies backed by more than $80 billion in venture capital from the first Vision Fund to end up in bankruptcy.
“I would say 15 of them will go bankrupt,” Son predicted, adding that he expects another 15 of the fund’s bets to prosper.
WeWork chairman Marcelo Claure, though, sought to distance his company from those remarks.
“Make no mistake: SoftBank’s Masayoshi Son and myself are huge believers in the new WeWork and its management team, we will continue to support the company,” he Tweeted in May. “We have no doubt that WeWork will emerge from COVID19 stronger than ever and are committed to profitability by 2021.”
Mathrani said WeWork paid rent at 80 percent of its locations in April and May and that it collected rent from 70 percent of its members. It’s difficult to gauge whether or not the Newmark and JLL brokers have been successful in negotiating the necessary concessions from building owners.
Representatives for Newmark and JLL did not respond to requests for comment.
WeWork may be able to avoid the bankruptcy route thanks to a number of leases that are reportedly held by subsidiaries with “limited parent guarantees.” That means WeWork could walk away from individual leases without triggering liability back to its parent company.
A new chapter?
But if it came to a bankruptcy situation, experts laid out several scenarios.
In Chapter 11 a tenant usually makes a binary decision on leases: It either accepts the lease or rejects each deal. Landlords who hold rejected leases get to file a claim as an unsecured creditor and divvy up whatever’s left over after the restructuring plan. They usually end up accepting pennies on the dollar for their agreements.
WeWork could have options other than up or down on leases, and the Regus case could provide a blueprint.
Duggan said that Regus got permission from the court to take a second shot at renegotiating its leases during bankruptcy, and the flex-office company was successful in reworking about 70 deals. The benefit of doing it that way, he added, is that landlords are more likely to see it as their last shot at coming away with a more favorable outcome.
“The problem outside bankruptcy is, sometimes the landlords don’t believe the company is going to file,” Duggan said.
If WeWork were to file, though, Duggan explained the company could then go to their landlords with more leverage. “Now [WeWork] can say, ‘Here’s proof; We’re in Chapter 11,’” he said.
Even if it were to play out that way, Mathrani and his team would still have to convince WeWork’s largest landlords that it could come out of restructuring with a successful plan, according to sources.
Bankruptcy experts say that in Chapter 11, a committee of unsecured creditors made up mostly of WeWork’s largest landlords would play a significant role in approving or shooting down a restructuring plan.
“The institutional landlords are really going to decide whether they believe in the plan or not,” said one attorney who spoke on the condition of anonymity because he represents one of WeWork’s landlords.
“It’s really hard to see WeWork coming out of this if they do file,” the attorney added. “In order for the company to be reorganized, its creditors have to be confident that management can execute.
WeWork’s five biggest landlords around the country, as of last summer, were Beacon Capital Partners, Nuveen Real Estate, the Moinian Group, Boston Properties and the Chetrit Group, according to data from Costar Group. A spokesperson for Beacon Capital declined to comment, and representatives for Moinian, Boston Properties and the Chetrit Group did not respond to requests for comment.
Chad Phillips, head of Nuveen’s Americas office portfolio, pointed out that the company only has 2 percent of its space exposed to WeWork. He added the investment manager believes demand for flexible office space will increase post-Covid as large office tenants move to a hub-and-spoke model.
“That said, flexible operators will need to evolve their business models and modify their formats with less density and more company control over their spaces,” he said, adding that stronger operators who can pivot in light of the pandemic stand to gain market share in the flex office space.
“A wonderful thing”
As observers watch closely, some are planning for a fallout from WeWork’s big push to reorganize.
“There’s not enough demand to support the scale of what they have. In some buildings they have 300,000 square feet when in reality they might want 60,000 square feet.” — Ryan Simonetti, Convene
Ryan Simonetti, co-founder and CEO of Convene, said he’s already been approached by office landlords who are trying to figure out what to do with their space if they take it back from WeWork.

He said Convene — which leases meeting rooms and other workspaces on a short-term basis — is considering signing its own lease deals for some of the spaces or partnering with landlords to manage them.
“We’re looking at what would it take to reconfigure a WeWork location to a Convene offering?” Simonetti noted. “There’s not enough demand to support the scale of what they have. In some buildings they have 300,000 square feet when in reality they might want 60,000 square feet.”
In the most extreme scenario, WeWork would fail to convince its creditors of a successful path forward. In that case, liquidation may be the only option.
“There’s no magic bullet here,” said attorney Hugh Ray, head of the bankruptcy practice at the trial firm McKool Smith.
“In some cases, Chapter 11 is a wonderful thing,” he added. “When it works, it’s wonderful to see. But it doesn’t work for everyone.”

David Goldsmith

All Powerful Moderator
Staff member
Miguel McKelvey out at WeWork
He co-founded WeWork with Adam and Rebekah Neumann in 2010

Miguel McKelvey is leaving WeWork, the embattled office-sharing company he helped found in 2010.
McKelvey was one of the few remaining executives at WeWork following its failed attempt to go public and bailout by SoftBank. His departure comes at a time when the company is wrestling with a painful turnaround.

“After 10 years, I’ve made one of the most difficult decisions of my life – one that I’m not even sure has sunk in just yet,” he said on Instagram Friday. “While it’s hard to leave, and I know there is a lot more work to be done, I could only make this decision knowing the company and our people are in good hands.
A former architect, McKelvey co-founded WeWork with Adam and Rebekah Neumann in Soho in 2010. Of WeWork’s original executives, only Jen Berrent, the company’s chief legal officer, is still at the company. In his letter, McKelvey, who served as chief culture officer, thanked WeWork staff for allowing him to turn his “daydream into my day job.”
In the post, he acknowledged the recent death of George Floyd, a black man in Minneapolis, whose killing sparked national protests over racism and police brutality. “The time is now to commit to changing ourselves, our systems, and our institutions,” he wrote.
Until last year, WeWork grew at an astounding pace, becoming New York City’s biggest tenant in 2018. Fueled by billions of dollars in venture capital, from investors including SoftBank, it was valued at $47 billion before a botched IPO revealed massive losses and questionable corporate governance. Its valuation has still fallen to an estimated $2.9 billion.

In recent months, the firm has slashed costs under Sandeep Mathrani, a real estate veteran who took over as chief executive in February. Mathrani, who has said WeWork could be profitable by 2021, recently said WeWork may exit one in five leases. As of March, the company had 828 locations. It recently downsized its footprint in Hong Kong by 20 percent.
In a statement, Mathrani praised McKelvey’s “indelible mark” on the company. Marcelo Claure, CEO of Softbank Group International and WeWork’s executive chairman, called McKelvey a colleague and “true friend.”
“The night before I took on the role of Executive Chairman of WeWork, Miguel and I stayed up past midnight talking about the culture of WeWork” Claure said in a statement. “Just looking at our thousands of employees and more than 600,000 members around the world is a testament to the true power and value of what Miguel has helped to build.”
WeWork and SoftBank were struck by a class action lawsuit this week after investors claimed the office company’s executives overhyped the business plan to sell stock. Neumann has also sued SoftBank for pulling out of a $3 billion tender offer.
Earlier this week, WeWork’s head of real estate for the U.S. and Canada left the company. Aaron Ellison, who joined the company after a decade at JLL, was a holdout from Neumann’s days.