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Comment by gdgtfiend | Hacker News Reader

WeWork has $33.9 Billion in Non-canceable lease commitments, and it's lease payments are increasing 100% YoY. I think that is the true ticking time bomb for this company. In a world where billion dollar losses (Uber) seems somewhat normal, those lease obligations are still outrageous, and those payments will come due eventually, whether they have the money or not. In 2019 they attributed over $800 Million to operating lease costs. Every year, based on static growth that will double, and my bet is that it may even more than double in some cases. This isn't so much a company as it is a race to light cash on fire and run away.

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Seems like they are pretty much levered to the hilt. What happens when the current bubble bursts (or even just deflates) and their occupancy rate declines?

Their business model seems to be selling short term leases and buying long term leases. This is all fine and dandy as long as they can find enough buyers for the short term commitments, but the distribution of almost all such strategies tends to be heavily tailed. You basically collect a small but consistent margin and occasionally suffer heavy and unavoidable losses.

That's a perfectly fine strategy if the company can stay solvent during the loss, but this seems far from certain in case of WeWork.

in a recession, is short term, flexible office space more or less desirable?

It's important to distinguish between the general form of leased small office space and the WeWork model. In a recession, I feel it's pretty likely companies would look at their expense numbers and decide that WeWork is way too expensive in comparison to options like Regis, work from home, or just eliminating workers outside the main office.

Less. Small businesses die like flies in a recession

Wouldn't anyone spending money on that just cheap out and go with a library or cafe or home-office to save money? Sure, not working at home is great for productivity for some people, but when push comes to shove, their customers can largely move elsewhere, right?

Maybe if you work alone. But there are plenty of corporate customers of WeWork who will never, ever tell their employees to "work out of a cafe".

The problem of course is that not all customers are big corporates - some are small firms that will scale back spending, or even close, if a recession hits.

> short term, flexible office space more

This is more appealing to businesses who don't want large capital expenditures, which could or could not be related to a recession. It's more related to market trends and access to a lot of cheap capital.

> Seems like they are pretty much levered to the hilt. What happens when the current bubble bursts (or even just deflates) and their occupancy rate declines?

Convert the We Work spaces into homeless shelters = profit from Government contracts.

Extremely levered indeed. I imagine that they will reduce the lease terms from the current average of 15 years when occupancy rates tighten. At that point they have a different problem, their margin difference between their lease payments and their lease revenue (minus the perks, furnishing office spaces) will come down. All said and done, had they been valued at say ~$10B, this would have been still a high risk play but at least the multiple is not so exorbitant. I don't get what Masa saw in this to value them at $47B, there must be something. Isn't he super smart???

Even worse, WeWork doesn't generate that much more revenue from tenants than it spends servicing its enormous lease obligations. They admit in the risks section that a significant portion of their members are small and medium sized businesses/freelancers who may be negatively affected by economic downturn. Their average lease duration is 15(!) years, and most do not have early termination provisions.

Oof.

They don't have early termination provisions!?? That better have come at a steep discount for WeWork to take such a risk.

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