Hacker News Reader

Comment by short_sells_poo | Hacker News Reader

It'll be interesting to know how will WeWork fare, because this is exactly their nightmare scenario. They are leveraged to the hilt. Their clients can now bail out of contracts on very short notice, which I'm sure they are doing already en mass. WeWork however is on the hook for the long term and they have to pay rental on any property they do not own. Meanwhile, the price of property they do own will be going down, depending on how long the crisis lasts. This can very quickly run into issues on servicing anything they bought on debt and spiral into a liquidity crisis.

View on HN

I've been saying for years that a company whose main "asset" is actually a bunch of liabilities (commercial leases) is a disaster waiting to happen in a recession. My concern is what happens when WeWork fails, not if. Best case, we see a temporary/short term downturn in commercial real estate in places like NYC and SF where they probably have a lot of presence. But, I don't see how a real estate downturn accompanied by a recession is going to be short term. It reminds me a lot of some of the companies in the dot com bust that were being kept afloat by either online ads or selling to other startups in that I expect the blast radius to be far, far larger than one single company.

https://www.bloomberg.com/opinion/articles/2020-03-18/wework...

I'm writing them off as dead. I'm now wondering what companies the Gov't will bail out / nationalize over the next 6 months.

If the airlines and hotel industries are bailed out, do all existing shareholders get hosed (value go to nil)?

They should get hosed. Company stocks are supposed to be a risky asset.

If those businesses get bailed out that should be for their value to the world, not for the purpose of rescuing shareholders.

Any bail out should involve the government diluting shareholder equity. We need airlines sure. But we also need to punish their shortsightedness and get reimbursed for the trouble. They operate razor thin margins, but somehow used all their cash on buybacks while increasing how levered they were. That doesn't deserve saving.

I'd go so far as to say that the government should take a 51% stake in return for their bailout money. I'm not saying nationalize the businesses or hold that controlling position indefinitely, but just for the time being to reorganize and guarantee the bailout money is used appropriately and executives fired for juicing their options with buybacks.

When GM declared bankruptcy and got bailed out the stocks went to 0. My family lost a lot from that!

Depends, bailed out or taken over? For take overs (like Fannie and Freddie) value went quite close to nil

Is WeWork still a going concern? What about all the other over-leveraged rent-collectors out there?

What if the amount of over-leveraging, interdependence and fragility in our financial system results in things never going back to "norms"?

> Meanwhile, the price of property they do own will be going down, depending on how long the crisis lasts.

Could you explain why you think this will happen?

Because demand for that type of property will fall and the increasing scarcity of cash will make it harder to get loans to buy property.

As less and less people will want to buy?

Mortgages too. Same thing as 2008, although it will take longer to achieve the same result. People are losing their jobs, no longer able to pay mortgages, housing prices fall.

And, to put it bluntly, there are going to be a lot of empty houses previously owned by elderly people.

Job loss etc is temporary and should even out in less than a year (uneducated guess).

But if 1% of the population dies, that's a permanent demand drop!

Demand is not the same everywhere. I expect the in demand areas of the US to continue to stay in demand. Prices in the areas without demand will go down further.

I generally have believed that as well, but wonder if there will be some flight away from cities after all the dust has settled, at least in the shortish term.

When demand drops for housing, that's often because people have moved in with relatives, moved in with partners, etc. After whatever triggered that, many might decide they like paying less rent/mortgage costs, so demand will never fully recover.

This inertia will probably apply also to those who die :)

With lots of companies struggling or going under, the demand for commercial real estate should be lower. Supply roughly constant, demand significantly down.

I would think/expect that long term demand for the services provided would continue to exist/grow, so probably just short term commercial real estate impact?

Probably, but the key issue is how levered WeWork is. It's the same really as taking out a mortgage you can barely pay. It only takes a short term shock to push you into default, and once foreclosed, it doesn't matter that you'll eventually recover because the losses will be locked in and you no longer participate in the recovery.

Companies might also realize that now that they've figured out how to work remote, they should keep doing that and save ten grand or so a month. I believe the smallest offices in the WeWork we're housed in are $6k/mo. Those are generally used by teams of 3-6 people.

Employees are not universally going to just eat the costs of working from home (or from shared spaces) on behalf of their employers, though. If this becomes a more regular situation, employer subsidies for remote essentials will be expected features of jobs even more than they are now, i.e., not just perks.

The monthly bills for 100 remote workers is easily 10K -- their internet connections alone would probably hit that. A single person renting a desk at a co-working space is going to spend a few hundred a year.

I see employers just requiring you to have a workspace at home.

> Your crappy internet keeps cutting out? Not our problem. Poor work performance. You're fired.

Would an employer with that kind of attitude even be trusting enough to let people to work from home in the first place?

Absolutely. Easy way to shift blame and then trim the fat.

Same thing happens today if you are a wage worker and your car breaks down and miss a shift with an unsympathetic boss.

Right, but the monthly bill for 100 non-remote workers at WeWork is 5-10 times that just for the space. As I said, their smallest offices (~6 person -- maybe 10 if you really crowd) are $6k/mo.

Just waiting for the firesale on the spiffy furniture.

Reply on news.ycombinator.com