WeWork Signed 15-Year Leases to Rent Desks to Members Who Could Leave in Months. The Math Was in Its Own IPO Filing.

The quick take:

• Why it matters now: flexible office space is booming again. In India, flex operators now account for 27% of new commercial space, and WeWork India calls itself the country’s biggest flex operator, while WeWork’s U.S. parent is still rebuilding after bankruptcy.
• WeWork signed office leases that averaged about 15 years in the U.S. and rented the space to members who could commit for as little as a month. Its own 2019 IPO filing showed $47.2 billion in lease obligations against $4 billion in committed revenue.
• The lesson: match how long you’re on the hook with how long your customers are. When those two numbers are far apart, one bad year can sink you.

On Oct. 1, Daily Office News reported that WeWork India, which licenses the brand, has become India’s largest flexible workspace operator by revenue and profitability, according to its leadership. Flex operators now make up 27% of new commercial real estate space in India, and some companies have moved 20% to 30% of their offices into flexible space.

So flexible offices clearly work. Which makes the story of WeWork‘s U.S. parent, once valued at $47 billion, a useful one to get right. The problem wasn’t the idea. It was the math underneath it.

Long Leases, Short Customers

WeWork’s model was simple. It signed long leases on office buildings, built out the space, and rented desks and offices to members on much shorter agreements.

WeWork spelled out the risk itself in its 2019 IPO filing: “Substantially all of our leases with our landlords are for terms that are significantly longer than the terms of our membership agreements with our members.” The average initial term of its U.S. leases was about 15 years. The average commitment from members had grown to “more than 15 months.”

Read that again. Fifteen years on one side. About 15 months on the other.

The Numbers Were in the Filing

As of June 30, 2019, WeWork owed $47.2 billion in future lease payments, the filing said. Its committed revenue backlog, the money members had actually signed up to pay, was $4 billion. Members on month-to-month plans weren’t counted at all.

Investors noticed. On Sept. 30, 2019, WeWork said it would withdraw its IPO filing, the Associated Press reported. Co-founder Adam Neumann had stepped down as CEO under pressure from board members less than a week earlier. The company had reportedly hoped for a valuation of $10 billion to $12 billion in the offering, far below the $47 billion private investors had put on it.

Then Remote Work Showed Up

The pandemic and the shift to remote work hit exactly where the model was weakest. Landlords still had to be paid. Members could leave.

By the middle of 2023, lease costs made up more than two-thirds of WeWork’s operating expenses. CEO David Tolley called them “dramatically out of step with current market conditions,” AP reported. WeWork skipped $95.2 million in interest payments and filed for bankruptcy on Nov. 6, 2023, with about $13 billion in lease obligations, mostly due in 2028 or later, and about $15 billion in losses since 2017, Commercial Observer reported.

“Now is the time for us to pull the future forward by aggressively addressing our legacy leases,” Tolley said.

To be fair, WeWork had plenty of other problems, including how fast it grew. But the core mismatch was right there in black and white, before the pandemic ever started.

Before Your Next Meeting

Here’s what this means for your business:

• How long are you locked in compared with your customers? WeWork’s U.S. leases averaged about 15 years, and its members committed for about 15 months. Line up your longest commitments, like leases, loans and contracts, next to how long your customers are actually committed to you. How big is the gap?
• How much of your revenue is actually signed? WeWork had $4 billion in committed revenue against $47.2 billion in lease payments, and month-to-month members didn’t count. If every customer without a contract left next quarter, could you still pay your fixed bills?
• What would one bad year do to you? Remote work hit WeWork’s members much faster than it could get out of its leases. If demand dropped 30% for a year, which of your costs could you cut, and which would you be stuck with?

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