Three Reasons Why WeWork Collapsed

The co-working giant WeWork once seemed poised to change the way we think about office spaces forever, found itself in the middle of a firestorm of challenges.

What went wrong?

Here's an exploration of three fundamental reasons behind the collapse of WeWork:

1. WeWork Grew Too Quickly

The mantra "grow fast, die slow" is popular among startups, but growth without direction or sound business fundamentals can be lethal. WeWork's aggressive global expansion led to a scenario where the company was opening more spaces than it could efficiently manage or fill.

With each new property, the company assumed long-term lease obligations. These obligations became a massive financial strain, especially in instances where the newly acquired spaces weren't immediately, or ever, profitable. The capital intensity of their model made profitability a distant dream, further strained by their relentless expansion.

2. Tech Valuations Aren't Appropriate for Real Estate

WeWork's valuation at its peak was likened to that of top-tier tech companies. However, this presented a fundamental misunderstanding. Unlike many tech companies, WeWork's model wasn't infinitely scalable. Each new location required capital for leasehold improvements, furniture, staff, and other overheads.

Traditional tech companies often experience exponential growth with relatively fixed costs, which just wasn't the case for WeWork. Every desk or seat in a WeWork space is a tangible asset that requires physical space, maintenance, and more. Attempting to slap a tech-style valuation onto what is essentially a real estate play posed inherent problems.

3. The Economics of Co-Working

At first glance, co-working seems like a win-win. For startups, it provides flexibility without the long-term commitment of a lease. For WeWork, it appeared to be a steady stream of revenue. However, in practice, the economics of co-working are trickier than they seem.

Firstly, the margins are slim. Offering amenities, services, and maintaining world-class spaces is expensive. These expenses, coupled with the high lease costs, often made profitability elusive.

Moreover, the value proposition of co-working spaces for landlords isn't merely the space. It's about the potential relationships fostered with growing tenants – startups that might one day become the next big thing. But if these startups can't transition or won't transition from co-working spaces to more traditional lease arrangements, the promise of mutual benefit evaporates.

Furthermore, the layered management model where WeWork acts as an intermediary between landlords and tenants added an extra layer of cost. A real estate brand has value but each layer requires its slice of the pie, further eroding profitability. Ultimately, WeWork , and a wide variety of co-working providers have yet to create a durable real estate brand.

In Conclusion, WeWork 's fall from grace serves as a cautionary tale about the dangers of unchecked growth, misguided valuations, and misunderstood market dynamics. While co-working remains a valuable solution for many businesses, time will tell if co-working management companies can create an economically durable co-working model and brand.