by Simon Black
We poke a lot of fun at the MANY absurdities we see in this current bubble.
As we’ve discussed countless times over the past few years, there are consequences from the fact that central bankers have conjured trillions of dollars out of thin air and pushed down interest rates to zero.
Stock, bonds and real estate are at or near record highs. Bankrupt countries are issuing trillions of dollars of debt with negative yields (not to mention, serial defaulter Argentina was able to issue 100-year bonds…).
Netflix is one of the most expensive and popular companies in the world even though it burns through billions and billions of dollars with no end in sight.
And, of course there’s Tesla, which we won’t get into here.
But perhaps nothing better captures the absurdity of the times more than WeWork.
I’ve talked a bit about WeWork in Notes, but not nearly as much as some of the other offending companies.
The company is the poster boy for the hot co-working trend. And it’s worth around $40 billion today. Of course, it’s also losing billions of dollars.
Of course, WeWork’s value is far more than any other company of its size because WeWork is a “cool, tech” company. But, at its core, it’s just another real estate play…
WeWork signs long-term leases for office space around the world, then turns around and provides very short-term leases to companies.
The companies pay more for the space, but they have more flexibility because they’re not locked into a traditional, long-term lease.
And this business model exposes WeWork to a HUGE amount of risk.
It’s great for the customers though. WeWork loses tons of money providing this service, which means investors are ultimately footing the bill.
If there’s an economic downturn (and there is a 100% chance of that happening), WeWork is stock with huge obligations and no way to generate revenue on its office space.
When the downturn comes, not only will WeWork’s tenants leave… the company will also be cut off from funding as investors tighten their purse strings.
And to give you an idea of the size of the obligations we’re talking about…
According to the Wall Street Journal, WeWork just surpassed JPMorgan Chase to become the largest leaser of office space in New York City with 5.3 million square feet.
But you don’t have to take my word on how risky this business model is.
The WSJ article also mentions a company called Regus, a European company that did the exact same thing as WeWork during the dot-com boom. It was growing as fast as it could in the late 90s, snatching up office leases all over the place.
And guess what happened…
When the bust hit, occupancy levels plummeted. And the company went bankrupt.
No, Regus wasn’t as cool as WeWork. They didn’t have fair-trade, organic coffee and kombucha on tap. And they didn’t give away free tequila.
But Regus was in the EXACT same business.
And the company still operates today, after it was purchased out of bankruptcy. But it’s been growing at a much slower pace after the lessons it learned in the 2000s.
To give you an idea of the value the market places on conservative growth today…
IWG, Regus’ parent company, manages five-times the square footage of WeWork. But it has about one-eighth the market value.
History has shown this business model is not only excessively risky, but it ultimately failed.
This might be the biggest example of how unbelievably absurd the markets have gotten today.
WeWork is losing money leasing office space and hoping to make it up on volume. Basically, every lease WeWork signs adds more risk and more losses.
It’s the SAME thing that happened to Regus 20 years ago. But people are crazy enough to think this time is different because there’s free tequila…