WeWork’s Lessons for U.S. Real Estate

Writing recently at The Financial Times Online, Rana Foroohar noted that, “When it comes to cautionary global business tales, all roads seem to lead to WeWork. I have been thinking about the short-term office space company, and not only because of the lawsuit some of its board members issued last week against investor SoftBank over its decision to pull out of a share buyout.

What is striking is the broader lessons WeWork’s travails provide — especially for a post-Covid-19 world. Among them: debt matters; corporate valuations were unsustainable even before the crisis; nobody is going to be rushing to lease office space anytime soon; and real estate in many parts of both the residential and commercial sectors has far, far further to fall.

“The coronavirus pandemic has triggered a corporate debt crisis that has been long coming. WeWork epitomises the excess that led to this crash. Its troubles also offer a hint of what is still to come — namely a long period of falling property prices in prime global cities in North America and parts of Europe, as the second big global real estate bubble of this millennium deflates.”

The FT item stated that, “The value of global real estate is more than all the world’s stocks and bonds combined. It’s also a key growth driver. Construction in all areas of real estate in the US, for example, accounted for 18.1 per cent of gross domestic product in 2019. Unfortunately, what we are seeing in many parts of the global real estate market right now is an explosive combination of oversupply, under-demand, and the very worst aspects of financialisation.”

The FT column added that, “The deflation we are likely to see for the next few years as the result of this downturn will be yet another challenge for real estate, across the board. Deflation and low interest rates will allow some buyers to scoop up property on the cheap. But deflation means lower prices, lower incomes and less buying power. That may well translate into higher borrowing costs for many companies as markets realise the depth of the trouble they are in. Consider how the pandemic has already pushed ‘blue-chip’ companies, such as Ford and Kraft Heinz, into junk bond territory.”

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