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The financier Nathan Mayer Rothschild is reputed to have remarked that “the time to buy is when there is blood in the streets”. That suggests there is an opportunity to invest in office buildings, many of which remain half-empty as employers struggle to persuade employees to return.
There are plenty of signs of financial distress, with one Canary Wharf building selling for a 60 per cent discount on its previous price, and shares in New York Community Bancorp dropping on fears over its property loans. “The office market has an existential crisis right now,” said Barry Sternlicht, chief executive of Starwood Capital, a property investment firm.
Sure enough, one incorrigible optimist has broken cover: Adam Neumann, co-founder of WeWork, the flexible office provider that went into Chapter 11 bankruptcy in the US last year. Neumann departed as its leader in 2019 amid ridicule after his botched attempt to take it public but he is now seeking another shot. His lawyers sent a letter to WeWork last week, saying he wants to acquire it or its assets.
It is hard to argue with his timing: having once been privately valued at $47bn, WeWork’s equity is worth close to zero. That sounds like a bargain, if someone can get it back in business with anything like the momentum it once enjoyed under Neumann. His personal charisma and SoftBank’s investment billions propelled it into a burst of global expansion.
Neumann, who received hundreds of millions from SoftBank in relation to WeWork, has a nerve. But being shameless is not a disqualification from US real estate development (see Donald Trump). The property market is so leveraged and cyclical that going bankrupt occasionally is par for the course; if you don’t, you’re not making enough effort.
This seems to be the view taken by Marc Andreessen, co-founder of the venture capital firm Andreessen Horowitz, which invested $350mn in 2022 in Neumann’s new property venture Flow. Flow is an apartment rental start-up in the US that intends to give renters “a sense of security, community and genuine ownership”, although exactly how is unclear.
Neumann predicted last year that Flow would “compete or partner” with WeWork, so last week’s approach may be part of that plan. Perhaps he envisages opening shared offices in apartment complexes for home workers, or some such wheeze. One thing is clear: he is not afraid to dream big, branded property dreams.
WeWork is clearing away some of the excesses he brought to the business. It has recently renegotiated about 60 of its costly long-term leases with landlords and rejected others. Despite some criticism from landlords, it plans to emerge from bankruptcy by June and to carry on operating with lower overheads and fewer offices, owned by SoftBank and other senior creditors.
So this could be an opportune time to acquire the company. Neumann’s lawyers’ letter predicted “a hybrid work world where demand for WeWork’s product should be greater than ever”. He is not alone in seeing future value in office space: one of New York’s biggest developers is launching a $1bn fund to invest in offices at distressed prices.
But it is implausible that the office market will recover as quickly as in the past. This is more than a financial crisis: it stems from a revolution in how and where people work that has no obvious resolution. The highest quality, newest towers in cities such as London and New York remain in strong demand, but a lot of older, lower-grade office buildings are becoming obsolete.
Some may be converted to apartments or demolished. Others will one day be renovated or rebuilt but that is unlikely to happen for a while, given the high vacancy rates in many cities. “It could be five or six years until we see the equilibrium return and they all get filled up again,” says Jeff Giller, head of real estate at StepStone, the investment firm. That will suit long-term investors, not those that require a quick profit.
In a sense, this is not WeWork’s problem: it signs leases on buildings rather than buying them itself, and will have more choice. But it ultimately relies on the same phenomenon: people physically coming to work. No matter how flexible the deal and how nicely its spaces are fitted out, companies and individuals must want to occupy them. That has become a harder sell than in Neumann’s heyday.
Perhaps he has learnt his lesson: he says he will “build a very solid foundation” at Flow. But WeWork’s creditors are sceptical and I wonder if his mystic energy is the right stuff to reinvent it. The world of work will take time to stabilise and patience never seemed to be one of his virtues.