Meet WeWork's Epic Cash Black Hole: 36% Of Shanghai Locations Are Vacant

The whole WeWork scheme is unraveling in realtime, and a new Financial Times (FT) report shows the epicenter of the implosion is in China.

The Chinese subsidiary of WeWork, valued at $5 billion in 2018, could be headed to zero in the quarters ahead. Why?

Well, sources have told FT that WeWork locations in China have been severely underperforming, to the extent that occupancy levels are absolutely disturbing.

"WeWork locations in Shanghai, where it has installed 43,600 desks, had a vacancy rate of 35.7% in October. In Shenzhen, where the company has 8,000 desks, 65.3% were vacant, while 22.1% of the group's 8,900 desks in Hong Kong sat unfilled. The company was also expanding in central China, with multiple offices in Xi'an. There, it suffered a vacancy rate of 78.5%."

Sources also said it's likely that WeWork will wind down operations in China in the coming quarters. 

Earlier this week, we documented how the company is planning to cut as many as 4,000 jobs as part of an aggressive turnaround plan put in place by Japan's SoftBank after it took control of the shared office space company this week. 

Figures reviewed by FT indicate WeWork's overall occupancy levels were quickly slipping into the late year. 

The SoftBank led turnaround is basically the bank throwing more good money into a black hole, in the attempt to raise occupancy rates above 90%.

As macroeconomic headwinds soar across the world, the ability for WeWork to survive in the next global recession is becoming unlikely. 

WeWork's explosive push into emerging markets is one of the reasons the company is suffering. Management, definitely not keen on business cycles, over expanded in regions that are getting absolutely clobbered in the global synchronized slowdown. Some of these areas aren't just in China, but also in other parts of Asia and South America. 

Several property groups in China told FT that WeWork operates out of 120 buildings in the country. 

"There has been a lot of speculative office development [in China] and there is a high vacancy rate compared to Hong Kong, Singapore or Tokyo," said Jonathan Wright, head of shared workspaces in Asia for Colliers, a real estate company.

Cushman & Wakefield, a global commercial real estate services firm, said many of the Chinese cities WeWork expanded into in the last several years are currently seeing collapsing occupancy levels.

"Overall office leasing demand has recently softened in mainland China . . . [with] a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown," said Catherine Chen, a researcher with Cushman.

So the problem with WeWork is that it overexpanded in emerging markets, like China, when central banks injected trillions of dollars into the global economy at around 2016. Explosive credit creation by central banks around the world led to a powerful upswing in the global economy where WeWork looked like geniuses in 2017/18. But it was only when the artificial cycle started to turn, the world caught a cold and entered a synchronized global downturn in late 2018, where emerging markets were slaughtered, and anything WeWork built was turned into a non-preforming asset overnight. 

WeWork has entered the restructuring stage, which means if it wants to survive the incoming global trade recession, it must cut its China subsidiary and the rest of its emerging markets portfolio or face bankruptcy. If WeWork folds in 2020, so could SoftBank...