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WeWork May Be Hurtling Towards Default

Now for a bit of an update on one of my favorite real estate saga’s, WeWork. With the demand for more flexible work arrangements the co-working giant was poised for a great comeback. It finally seemed like it had put the mishaps of their former CEO, Adam Neumann behind them (it is amazing what a docudrama series will do for closure) and they were racing towards profitability. But now it looks like their comeback might be canceled before it was even aired. 

Fears of default are now looming for WeWork. Earlier this month, Fitch Ratings, a credit rating agency that assigns ratings to assets based on how likely it is that they would default, pulled WeWork’s rating from a CCC+ (where the issuer is exposed and thusly dependent on a more favorable market) down to CCC, where a high level of risk is evident. Fitch also downgraded WeWork’s senior unsecured bonds from CCC- to CC. 

What’s worse, WeWork’s cash reserves are withering away at an alarming pace. The company has stated that it intends to conclude 2022 with $300 million in cash, which is less than one-third of what it had at the end of 2021, and that it has $500 million in undrawn debt commitments from SoftBank. It is allowed to borrow an additional $500 million by its loan contracts. 

Macroeconomic conditions are painting an even bleaker outlook for the company. The wave of tech industry layoffs, the Fed’s insistence to raise interest rates (which make debt harder to acquire), and a recession expected any second now are all posing significant headwinds. However, there is still hope for the embattled protagonist. Organizations reluctant to commit to long-term leases in an uncertain environment may find short-term co-working memberships more enticing. Tech companies still employ many more people than they did a few years ago, despite recent employment layoffs. Still, the recent credit downgrade isn’t going to make the company’s ability to write itself a happy ending.

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