Virus-driven 'work-from-home' trend is WeWork's new crisis

New York

WEWORK executives used to obsess over the number of people they could pack into each of the company's shared workspaces.

They said that a more crowded office helped make the space feel active and spark collaboration when desk mates slid past each other in the hallways.

The technique had an added benefit of maximising revenue from each co-working office.

It took only a few weeks and a global pandemic for that strategy to become a deterrent for customers and a major liability for a company that cannot afford further setbacks.

The vast majority of WeWork offices remain open, although with far fewer people coming in than before.

A NEWSLETTER FOR YOU

Monday, 3.30 pm

Garage

The hottest news on all things startup and tech to kickstart your week.

Sign Up

Offices that have shuttered only did so when explicitly ordered by the authorities or after a confirmed case of a Covid-19 infection. Even then, locations are typically closed for an overnight cleaning and reopened the next day.

For WeWork, already weakened after last year's failed attempt to go public, complications from the novel coronavirus could deal a fatal blow.

It is refusing calls to refund customers stuck working from home or to release them from lease agreements without penalty, though it offered to waive planned rent increases in at least a couple of instances.

At the same time, it's trying to renegotiate terms with its own landlords to ease the financial burden.

Co-working companies are struggling to adapt while many of their customers - especially small businesses - consider cancelling contracts or are forced to default.

More than a quarter of WeWork's customers were on month-to-month leases as at last June, according to the company's prospectus for the initial public offering.

Knotel, a smaller WeWork rival that rents office space, is bracing for a work-from-home movement that could last as long as a year, said Amol Sarva, the chief executive officer.

Like WeWork, Knotel is keeping locations open and asking tenants to continue paying for now while the startup grapples with the long-term effects on office usage.

"I'm sure that workplaces will never be the same after this," Mr Sarva said. "I've been listening and talking to people, and this is 9/11. It's going to be on people's minds for a long time."

Even before the virus, WeWork was reeling from the drastic cuts it made last fall to stay afloat.

The company said in November that it was terminating about 2,400 employees.

The project's codename among management was Huxley, a reference to the author of Brave New World, according to a person familiar with the matter who asked not to be identified discussing personnel matters.

The dismissals continued with dozens of workers quietly losing their jobs last month, three people familiar with the move said. On Tuesday, WeWork filed paperwork with New York state for layoffs affecting 45 more workers.

Cash remains a concern. WeWork said last week that it has access to billions of dollars in debt, but as of September, the company was losing more than US$400 million a month.

WeWork's largest backer, SoftBank Group, is now threatening to unravel a deal to buy stock from other shareholders.

Although SoftBank insisted it's committed to WeWork, the move would block a much-needed US$1.1 billion credit line to the company. The deadline for SoftBank to complete the deal is in a week.

Finally, there's the virus. Tenants facing economic hardships or prolonged mandates to work from home could choose not to renew short-term leases, leaving WeWork on the hook for billions in long-term lease liabilities.

WeWork employees are questioning the company's handling of the health crisis. When WeWork learned that a tenant in New York City tested positive for Covid-19 last week, the location was closed on Thursday night for cleaning and open again on Friday, according to an e-mail to tenants.

The Washington Post reported on a similar practice at another New York location, which was closed, reopened the next day and then closed again after a different customer reported an infection.

Executives have said, over objections from staff, that WeWork offices must stay open because some customers provide essential services, such as health care, insurance or cleaning supplies.

"We have an obligation to keep our buildings open," Marcelo Claure, the executive chairman, and Sandeep Mathrani, the CEO, wrote in a joint e-mail to employees.

The company underscored the message with a full-page ad in The New York Times on Sunday thanking customers providing "services to tackle Covid-19 and all those helping the wider community".

Each co-working company is responding differently to the outbreak.

The Wing, a women-focused workspace provider that counted WeWork as a major backer until recently, closed all 11 locations, and Audrey Gelman, the CEO, said she contacted officials to offer the spaces "for relief efforts".

Another startup, called Convene, closed more than half its sites. Industrious, like WeWork and Knotel, is keeping offices available with limited staffing.

As lawmakers around the world pass various measures to protect vulnerable tenants, co-working companies may not be able to collect rent in some places.

In parts of Asia, WeWork instituted rent holidays for customers, according to a person familiar with the matter.

WeWork is, in turn, seeking its own relief. It approached at least one large landlord in London about receiving short-term concessions on rent, a person with knowledge of the talks said.

Adam Mutschler, an executive coach who rents a WeWork office for himself in Washington, said that the company is being irresponsible by staying open and charging him during a crisis when officials are asking him to stay home.

"Their messaging is about community," he said. "But this is not a community move. If you cared, you would close."

Mr Mutschler said he signed a two-year lease last fall to save about 10 per cent on his office space but that once the crisis is over, he wants to find a way to end his contract early. BLOOMBERG