Michael Hiltzik eviscerates WeWork's business model.

Hiltzik has always had a gift for seeing through bullshit narratives of transformation and disruption. Here he takes a hard look at WeWork and finds that it's even worse than we thought. 

The key point to keep in mind about WeWork, when the baroque deal-making and new age blather is backed out, is that its business model seems almost to be begging to blow itself into smithereens. Boiled down, it amounts to WeWork acquiring office space in bulk via leases with an average term of 15 years, and subleasing it out via tenant contracts (excuse me, “memberships”) with average terms of 15 months. WeWork acknowledges that “in many cases, our members may terminate their membership agreements ... upon as little notice as one calendar month.”

Aficionados of economic history will recognize that the mismatch of long-term liabilities and short-term assets underlies pretty much every financial crash ever, including the crash of 2008. In this case, a downturn could result in WeWork’s tenant base evaporating, leaving it on the hook for lease obligations it estimates at $47.2 billion. WeWork tries to put rouge on this ogre by stating that in a downturn, after all, the cost of leases and construction will be lower.

Real estate experts unsnowed by WeWork’s touchy-feelism don’t buy this. One is the Chicago-based entrepreneur Sam Zell, who told CNBC this month that he had invested in a similar subleasing company once and has the scars to prove it. “Every single company in this space has gone broke,” he said. “Why is this any different?” During the period he owned Tribune Co., then the parent of The Times, Zell may have shown himself to be singularly maladroit as a newspaper proprietor, but there’s no point pretending that he doesn’t know real estate.

Nor is WeWork’s model anything new. Back in the 1970s, for example, there was Los Angeles-based Attorneys Office Management, which provided small-time lawyers with offices equipped with receptionists, clerical staff and law libraries they couldn’t afford on their own. The spaces were known as “Fegen Suites” after the firm’s chairman, Paul Fegen (pronounced “fee-jun”), an attorney. But the company went bankrupt in 1983 during a real estate crash. Fegen was later disbarred for mishandling several client accounts and has since resurfaced as a professional magician.

It’s not entirely inconceivable that WeWork has broken a code that remained opaque to Fegen and the real estate types familiar to Zell. Neumann certainly wins plaudits as a salesman. As my colleague Roger Vincent reported in May, some big office space developers have taken a look at WeWork’s business model and done it the ultimate compliment of copying it — offering tenants more flexible leases and occupancy amenities.

That’s not great news for WeWork, because it underscores that in real estate, there’s nothing new under the sun, or at least nothing that can’t be replicated. Indeed, even without competition from old line real estate firms, WeWork faced competition from other venture-funded office rental firms.