This story has been updated to reflect information sent to Retail Dive by WeWork.
Co-working startup WeWork recently turned to the junk bond market in hopes of raising $500 million in new financing and ended up raising $702 million, according to a company release and press reports. The bonds, due in 2025, carry a 7.875% interest rate.
Since the bond offering, financial news outlets have highlighted aspects of the startup's operations that could rattle investors. While revenues doubled last year, for example, costs outpaced them, Bloomberg reported this week. Moreover, the company has a $18 billion rent bill due over the next two decades, with $5 billion due in the next five years, as Bloomberg Gadfly columnist Chris Bryant pointed out this week.
Analysts expressed concern about WeWork's ability to repay the bonds. Among the concerns, as Bloomberg's Bryant points out, tenants in the startup's coworking spaces can cancel their memberships with as little as one month's notice. "In an economic downturn, it's reasonable to assume some folks will decide it's cheaper to work from their bedroom," Bryant wrote.
WeWork has captured the attention of venture capitalists amid a rapid and massive expansion. In October, the co-working startup bought Lord & Taylor's iconic Fifth Avenue property for $850 million and is said to be mulling an expansion into retail, which could include short-term retail leases or incorporating shops into co-working spaces as an amenity for members.
But those leases carry a long-term liability that in less robust economic times could lead to a swift collapse, as entrepreneurs and gig workers find cheaper alternatives — including their own digs.
It's a bubble ready to burst, according to Scott Galloway, founder of digital marketing and research agency L2, who warned about WeWork's vulnerabilities a year ago. Wework "essentially rents space on a couch" and that its mega-valuation "makes no sense," he said last year.
The proximity of co-working spaces and retail makes some sense, considering the increasing availability of excess space left vacant by shuttering retail doors, as well as the benefits, particularly traffic, that each could get from the other. Along with Hudson's Bay sale last year of its Fifth Avenue Lord & Taylor New York flagship to Work for $850 million, other retailers and co-working companies have partnered up.
In 2016, Staples and office-sharing company Workbar launched a partnership that took advantage of extra space in three Boston-area Staples locations. And just this week, Brookfield Residential-owned real estate firm OliverMcMillan announced that luxury co-working company No. 18 will set up its first U.S. location at the upscale open-air shopping center The Shops Buckhead Atlanta in the fall of 2018.