Adam Neumann Wounded WeWork, an Office Market Bust Finished It Off

WeWork rode the wave of the venture-capital frenzy, building a global real-estate empire worth more than any other U.S. startup before buckling and laying off thousands when funding ran dry under its turbulent co-founder and former chief executive Adam Neumann.

Ultimately, though, it was a historic office market bust that doomed the desk-rental giant.

WeWork is expected to file for Chapter 11 bankruptcy, which could come as soon as next week, people briefed on the matter said.

That is barely four years after the company was valued at $47 billion and taking steps toward a highly anticipated initial public offering. That IPO was scrapped, and WeWork went public years later at a fraction of its former valuation.

The seeds of WeWork’s collapse could be traced back to its late-2010s heyday, when under the exuberant Neumann, WeWork indulged in pricey diversions such as investing in an artificial wave company and buying a $63 million jet as it sprinkled its glassy workspaces around the world. During Neumann’s stewardship, the company lost a dollar for every dollar it took in for years.

Following Neumann’s departure in 2019, WeWork hired a more buttoned-up, seasoned management team. It cut most of its side investments and was freed of its co-founder’s distracting antics.

But the company couldn’t escape weaknesses in its business model, which was always vulnerable to any softening in the office market.

The firm signed office leases for 10 to 20 years, freshened up the space and generated buzz with perks such as free beer on tap to attract younger workers.

WeWork then subleased the space to smaller tenants at higher rates for as little as a month at a time. That meant customers could quickly ditch their desks during a downturn while WeWork remained on the hook for rent payments.

The vast majority of WeWork’s leases were signed in 2018 and 2019, when rents peaked before the pandemic. Now, amid a work-from-home boom, tenant demand has plummeted in major U.S. cities such as New York and San Francisco, where WeWork is concentrated.

As of June, WeWork was paying over $2.7 billion a year in rent and interest—more than 80% of its entire revenue, according to company filings. That was nowhere near enough wiggle room to cover the company’s other expenses and turn a profit, and a worse profile than competitors.

Its total losses since founding topped $16 billion as of June, as it churned through all the money it raised from top investors and lenders over the past decade. Even after four years of cuts and reorganizations under new management that followed Neumann, the company was still burning through $300 million of cash a quarter.

WeWork’s failed attempts at a turnaround come as leadership at the company was consistently too optimistic about return-to-office trends in the U.S., former employees and investors said, leading its executives to repeatedly push back their forecasts for profitability. WeWork, eager to please its landlords so that they would continue to lease to the company in the future, also didn’t ditch or renegotiate leases as aggressively as it could.

Even a more than $5 billion rescue package from SoftBank, WeWork’s main financial backer, proved problematic when interest rates rose and WeWork owed more on floating-rate debt held by SoftBank and others. Neumann’s successor, Sandeep Mathrani, sparred at times with SoftBank, sinking his hopes for a tie up with a rival that he hoped would stabilize the firm, the people said.

Mathrani and other top executives left in the spring amid dwindling cash.

WeWork’s many business partners and the broader real-estate world began to expect a bankruptcy filing would soon follow.

A WeWork spokeswoman said the company “had to react and evolve to a rapidly changing environment and make decisions based on the best data we had access to at the time.” The company said it has cut over $2.3 billion in recurring costs since late 2019, has grown its revenue since 2021 and exited or amended 590 leases, including more than 90 in the first half of 2023.

People familiar with the matter said a near-term bankruptcy filing was the most likely next step. Plans, however, aren’t settled, and a filing could be delayed or a different outcome found.

WeWork is likely to use the leeway of bankruptcy court to cancel or amend leases in swaths of its vast portfolio in more than 750 buildings, a move that could ripple across the strained office sector.

Dominant force

The company was co-founded in 2010 by Neumann, a former baby clothes entrepreneur who marketed the Millennial-oriented desk-leasing company as a tech startup that would become a dominant force in the property sector.

Neumann was a gifted salesman who likened his company to Uber and Facebook when raising cash.

He won over top banks and venture-capital investors to make the company worth $47 billion by early 2019, the country’s most valuable startup. WeWork’s lowercase, serif-font logo sprang up on buildings in more than 100 cities from Beijing to São Paulo. It became the largest private tenant in both New York and London and built enough desks to fit the population of Baltimore.

Growing losses and revelations about Neumann’s erratic management style caused the company to abort a planned initial public offering in fall 2019. Neumann was ousted by WeWork’s board, and SoftBank stepped in to bail out the company, which was on track to lose more than $3.7 billion that year. SoftBank committed to providing $5 billion of debt, while management cut costs and dropped the company’s Neumann-era mission statement to “elevate the world’s consciousness.”

In February 2020, SoftBank brought in Mathrani, a veteran real-estate CEO, to run WeWork, hoping to score a quick recovery. A former chief executive at a top mall owner, Mathrani was measured and full of relationships in the industry.

But his strategy for a WeWork financial turnaround was immediately derailed when offices emptied around the globe in March 2020.

WeWork executives and board members quickly considered their options, people familiar with the discussions at the time said. It could shrink tremendously, breaking leases to get out of expensive, unprofitable spaces. Alternatively, the company could try to muddle through, renegotiating or ditching some leases while aiming to preserve relationships with landlords.

Mathrani favored the latter approach, which would maintain WeWork’s office empire. It turned out to be a massive bet on the office market—one he would double down on over the next three years.

“We’ve been paying our bills, and effectively we’re doing that because as we come out of this we want to be the tenant of choice,” Mathrani told the Journal in July 2020.

WeWork struggled to exit unprofitable locations in part because it was on the hook for billions of dollars in rent payments even if it walked away. In its rush to add as many locations as quickly as possible under Neumann, the company agreed to corporate guarantees that often amounted to years of rent.

It renegotiated or exited numerous leases, but overall rents were only cut by less than 5%, Mathrani said in July 2020.

As the country adapted to the pandemic and progress was made on a vaccine, Mathrani predicted that summer WeWork would become profitable in 2021.

Instead, work-from-home trends ossified, companies cut back on office space and vacancies rose. As late as the third quarter of 2022, just 72% of WeWork’s desks had tenants, down from 84% in 2018. The firm lost $4.4 billion in 2021, even larger than the $3.1 billion in 2020.

Needing more money, WeWork listed publicly through a merger with a special-purpose acquisition company in October 2021, raising $1.3 billion from new big-name backers including real-estate investor Barry Sternlicht’s Starwood Capital and top venture-capital firm Insight Partners.

At that point, WeWork could offer investors some glimmers of hope. Its losses were shrinking, and it projected occupancy would jump to a healthy 86% by late 2022. Many companies wanted more flexibility and shorter leases as they tried to figure out how much space to rent in the emerging hybrid era, WeWork told investors.

Mathrani again exuded optimism, predicting WeWork would become profitable in 2022. It missed that goal. WeWork had bet big on subletting entire floors and other larger offices to companies, rather than primarily to smaller firms and individuals that were its first customers. Bigger tenants would be a more stable source of demand than fickle startups and freelancers, the firm believed.

As the office-market downturn dragged on, landlords, desperate to fill their buildings, began listing office space under shorter-term leases, competing directly with WeWork. Office rents fell, suddenly making vacant workspace leased from landlords as cheap or even cheaper than WeWork’s more stylish offerings.

In early 2022, Michael Silver, chairman of real-estate services firm Vestian, moved his company’s New York office out of a WeWork into a space it leased directly from a landlord. At WeWork, Silver’s firm was paying $17,000 a month for a 1,500-square-foot space. Now it was only paying $16,000 for a new office more than twice as big at 3,300 square feet, he said.

Silver, who advises companies on their office space, said more landlords now offer furnished space under one- or two-year leases—virtually unheard of before the pandemic.

“There’s a lot of furniture around in this town,” he said.

Falling occupancy

In November 2022, WeWork announced it would close around 40 U.S. locations that it described as “underperforming.” Mathrani also set about a giant debt restructuring to cut another of WeWork’s big costs, which was rising with interest rates. SoftBank and other lenders canceled or converted around $1.5 billion of debt.

As new debt investors came in, Mathrani revealed more ambitious plans: He told them he had a handshake deal with WeWork’s competitor IWG, another serviced-office company previously known as Regus, that would outsource most of WeWork’s property management operations to the company, according to people who spoke with him.

WeWork’s headquarters costs would be slashed, and IWG would be in charge of running its desks in what would have effectively been a merger of the operations of the two biggest companies in the space. Mathrani believed that the deal, or another proposed management deal with real-estate services company JLL, would save WeWork between $150 million and $200 million.

But Mathrani’s bosses at SoftBank didn’t like the plan, which they felt could have faced regulatory scrutiny, among other complexities that meant the savings weren’t as large or certain as Mathrani believed, according to people familiar with the deliberations over the deal. The CEO had been sparring increasingly with executives at the Tokyo-based firm, which had put more than $13 billion into the company only to suffer repeated disappointment.

Mathrani told others that in 2022 he flew to Tokyo to meet SoftBank CEO Masayoshi Son. He had to wait three days to see him as a Covid precaution, and then had a short meeting, according to people who spoke with Mathrani.

Mathrani complained to others that SoftBank dragged its feet on the debt restructuring, leading to months of extra interest payments. SoftBank executives responded that they were moving as quickly as they could on a large and complicated deal.

In the first quarter of 2023, WeWork’s revenue fell for the first time since the second quarter of 2021, ending two years of gradual progress. Still, Mathrani remained upbeat. In early May, he said the company now expected to be profitable by late 2024 and had enough cash to last until then.

But the depressed office market kept vexing him. Many tenants on longer-term leases weren’t renewing, which meant WeWork was making less money while its own rent obligations stayed constant. WeWork occupancy fell to 72% in the second quarter of 2023, down from 75% at the end of 2022.

Cash dwindled further, down to just $205 million at the end of the quarter.

Mathrani departed in May, sparking a cascade of departures including three board members and several executives. In an email to board members announcing his departure, Mathrani proposed taking the company private and cutting rates to fill desks, according to a copy of the note reviewed by the Journal. He also said the company had listed its stake in the Japan business for sale and was in talks to sell the Southeast Asia business.

SoftBank quickly brought in David Tolley, a former Blackstone executive and Morgan Stanley investment banker who previously helped oversee the restructuring of bankrupt satellite communications company Intelsat, as the new CEO.

The company again engaged in landlord discussions to try to lower its rent. But it found that most were only willing to offer at best a temporary reduction, according to a person familiar with the talks.

WeWork had little leverage. If it walked away from its leases, it was still on the hook for around $5 billion in corporate guarantees, letters of credit and deposits tied to its leases. Rent and tenancy payments ate up around 74% of the company’s revenues in the second quarter, Tolley said in an earnings call.

There was only one formidable card WeWork could play: the threat of bankruptcy.

In early August, WeWork said in a public filing that “substantial doubt exists about the company’s ability to continue as a going concern.” A bankruptcy filing would likely mean that WeWork could get out of many leases without having to pay landlords.

Armed with that warning, WeWork went back to its landlords in a last-ditch effort to negotiate rent reductions.

Meanwhile, some WeWork customers started dropping space out of fear that they would be locked out of their offices if WeWork shut down, real-estate brokers say. The WeWork spokeswoman said the company isn’t seeing that trend. “We will continue to notify members in buildings we exit and do our best to offer alternative spaces and solutions,” she said. Cash continued to dwindle, putting the company on course to run out of money.

Alexander Snyder, a portfolio manager at CenterSquare Investment Management, said that even if WeWork files for bankruptcy, it’s unlikely that it will be shut down. Its brand still has value, and once debts and unprofitable leases are gone its future will look much brighter.

“WeWork is like a cat,” he said. “It has nine lives and we’ve only gone through two or three of them.”

Alexander Gladstone contributed to this article.

Write to Eliot Brown at Eliot.Brown@wsj.com and Konrad Putzier at konrad.putzier@wsj.com