WeWork could fail as costs spiral and social distancing hits offices, real-estate boss predicts

• WeWork could collapse within years as its costs balloon and social-distancing measures sap demand for shared workspaces, real-estate investor Michael Franco said earlier this month.
• "In terms of their willingness to survive and to thrive, I personally view it as in doubt," the president of Vornado Realty Trust said on an earnings call.
• Franco made his comments before the publication of WeWork's first-quarter financials, which showed solid revenue growth, a smaller cash outflow, and $3.9 billion in cash and cash commitments.
• WeWork is also adapting its office spaces to enable social distancing and minimize virus transmission.

Troubled coworking giant WeWork could fail in the next few years as its costs spiral and the coronavirus pandemic upends its business model, Michael Franco, the president of Vornado Realty Trust, said on the real-estate investment group's earnings call this month.

"Their ability to survive is dependent on SoftBank's willingness to fund those deficits, which will probably be more significant near-term given this crisis," Franco replied to an analyst's question about how long WeWork will stay in business, according to a call transcript on Sentieo, a financial-research site.

WeWork's business model of signing long-term office leases, refurbishing and dividing up the spaces, then renting them out on a short-term, flexible basis is "driven by high density," Franco said.

"That's obviously a challenge now," he added, noting that more people are working from home and governments are enforcing social-distancing measures to combat the spread of coronavirus

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"In terms of their willingness to survive and to thrive, I personally view it as in doubt," Franco continued. "I don't know whether it's beyond a couple of years, which is sort of their runway."

WeWork declined to comment on Franco's assertions when contacted by Business Insider.

Franco cautioned on the call that he doesn't know the details of WeWork's finances, but he considers it to be a "highly challenged business."

The executive made his comments before WeWork's finance chief, Kim Ross, shared the company's first-quarter financials in a letter to employees last week.

WeWork's revenue rose by 45% year-on-year to $1.1 billion, its free-cash outflow shrunk by 60%, and it boasted $3.9 billion in cash and unfunded cash commitments, Kim said in the letter, according to a source familiar.

The company is also making numerous changes to its office spaces to enable social distancing and minimize the risk of virus transmission. They include staggered seating, frequent cleaning, installing signage to encourage hygiene and protect personal space, and providing easy access to hand-sanitizer gels and disinfecting wipes.

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"A load of hogwash"

Vornado CEO Steven Roth struck a somewhat more positive tone on the earnings call.

He argued that WeWork made some contributions to the office industry that could persist, such as flexible leases and its "culture of informality, beer kegs and ping-pong tables and what have you."

Another "very attractive thing" about WeWork's model is that its office spaces are ready to be used, sparing tenants the cost and hassle of hiring an architect and renovating for six months, Roth continued.

"The rest of it," he added, "is all a load of hogwash."

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