Services

Can WeWork Start Closing Offices?

Douglas A. McIntyre

Published: October 11, 2019 10:15 am

Last Updated: January 6, 2020 2:05 am

WeWork is in the midst of negotiations to get new financing. Based on some reports, it will run low on money toward the end of the first quarter of next year. JPMorgan reportedly is leading the discussion. Softbank, which is already a large shareholder in WeWork, may invest again. Observers have said that WeWork will need to slow its growth and cut staff to move toward profitability. Management may want to close offices if it can.

WeWork says it has 845 offices either open or “coming soon.” The locations span 123 cities. Like companies in the retail industry, some locations perform much worse than the average. Firms like Gap and J.C. Penney have abandoned many stores to save money. The issue with shrinking WeWork is hidden in the leases it has for each location. They likely vary substantially from office to office and may vary most from country to country. WeWork had more leverage in lease negotiations in some places, as is the case with any multiple location tenant.

WeWork probably has two sets of locations likely to be pruned. Some cities have a large number of WeWork offices, perhaps too many. This will become a larger problem when a recession begins. For example, WeWork has 62 locations in the New York area. If there is a sharp economic downturn, it is almost certain that not all those locations will be fully occupied. Some of them are only a few blocks from others, which could be critical to consolidation.

The other hurdle WeWork probably has is the support of cities that only have one or two offices. These cannot share management who run several locations. This likely drives up cost per office. For example, WeWork only has two offices in Western Australia and only two in South Africa.

WeWork management has to be combing through locations for profit potential. Yet, can management break leases in underperforming areas or those with poor forecasts? That will be part of whether WeWork can improve overall margins.