The fall of WeWork shows the deepening cracks in real estate

Since it was founded in 2010, WeWork has not once turned a profit. For years its cash-torching ways went unchallenged, thanks to the reality-distorting powers of its flamboyant founder, Adam Neumann, who succeeded in convincing investors, most notably SoftBank, that it was not an office-rental business but a zippy tech firm on a mission to “elevate the world’s consciousness”. At the height of the silliness in early 2019, in the lead-up to an initial public offering (ipo), the company was valued at $47bn.

The unravelling began soon after, as outside investors balked at its frothy valuation and questioned an unorthodox governance arrangement that gave Mr Neumann an iron grip on the company. The ipo was shelved, and Mr Neumann was offered $1.7bn to leave. Sandeep Mathrani, a real-estate veteran brought in to run the company, did his best to right the ship by cutting costs and renegotiating leases. In 2021 he succeeded in listing the firm through a special-purpose acquisition company, at a valuation of $9bn. Yet his efforts were undone by the slump in the office market brought on by the pandemic and an enduring shift towards remote working. On November 6th WeWork, which leases office space in 777 locations across 39 countries, filed for bankruptcy.

It is not the only property business in turmoil. Days earlier, on the other side of the Atlantic, René Benko, a once celebrated Austrian property magnate, was ousted from Signa, the €23bn ($25bn) property empire he built. Its portfolio includes the Chrysler Building in New York; the kadewe, a posh department store in West Berlin; and a stake in Selfridges, another ritzy temple of consumption in London; as well as luxury hotels, high-end developments and a grab-bag of other retail businesses.

The two cases are not identical. Unlike WeWork, Signa has not declared bankruptcy, though it faces a liquidity crunch, and has brought in a prominent German insolvency expert, Arndt Geiwitz, to take the reins. And unlike Mr Neumann, Mr Benko, a self-made high-school dropout who started his career converting attics into penthouses in his hometown of Innsbruck, was involved with Signa right up until his weekend ousting. After a conviction for bribery in 2012, he stepped back from day-to-day operational duties, but continued to sit on the company’s advisory board. He gave his blessing to the appointment of Mr Geiwitz, who helped steer Lufthansa, Germany’s national airline, through an insolvency. (Mr Neumann, meanwhile, has been reduced to sniping at WeWork’s collapse from the sidelines, complaining that the company “failed to take advantage of a product that is more relevant today than ever before”.)

Yet the rise and fall of the two empires share similarities. For one, both relied on risky bets that went sour in a world of higher interest rates and slumping property markets. As he built his empire, Mr Benko accumulated a mountain of debt in order to purchase new assets while maintaining juicy dividends. That model worked only as long as interest rates were low and the value of prime property continued to rise. In WeWork’s case, the risk stemmed from a model of taking out lengthy leases on properties, sometimes for as long as 20 years, splashing out on snazzy refurbishments, then renting the space for periods as brief as a month at a time. When the office market turned, the company was stuck paying for leases that cost far in excess of what it could charge tenants, given the cheaper alternatives on offer.

Nonetheless, both empires could just come out the other side stronger. Leonhard Dobusch of Innsbruck University reckons Mr Geiwitz will break up the sprawling Signa portfolio, selling off assets to bring in cash and pay down debts. The privately held business, comprising hundreds of holding companies, could do with some simplification. WeWork, for its part, has already gained backing from most of its creditors to convert its debt pile of $3bn into equity, giving its balance-sheet something close to a fresh start. It will also use its bankruptcy to break more than 60 leases in America and renegotiate others. Mr Neumann and Mr Benko may be gone, but the companies they built may well endure.