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Advance warning on commercial properties

With so much big news this week (process of impeachment in the US, the Supreme Court ruling the U.K. government acted unlawfully, Thomas getting cooked...), I was very unsure what this weekly review should be about. Until I dug further... I'm sure you have heard about We Work (who has not?). Well, their IPO attempt failed. No big deal you may think. I thought this too. Until I dug under the carpet... Oh there's a potential time bomb here!

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I had never understood how We Work could make it "work". Unless you have a big backer with an ultra big pile of money and an even bigger pile of faith, it's hard to understand how they can make it... Well, that backer is called Softbank, one of the biggest pile of private money you can find on earth. With nearly $13b raised (the large majority from Softbank) and $700m of additional debt, We Work has built in less than a decade a little empire on the back of other people's money and other people's faith (or greed). Now, let's be clear. This is not a property empire that they built. Most of their assets are supported by leases.

Indeed, We Work rents long term some very large spaces (surely from very big landlords) and then refurbishes the spaces to millenial taste and sublets short-term, with beer and coffee, to a long list of small and medium size companies. As a result of this business model, We Work has $47b of long-term rental commitments. Again let's put this in perspective. If it was a country, We Work would rank around mid-table next to Serbia and Uzbekistan. And this was built in 10 years...

Oh, to get there, on top of requiring $13b of capital, they have sustained around $2b of losses so far. They apparently lost an equivalent of $200,000 per hour over the last year. If they were a country... the ECB would fund them in a week! Haha... but that's another money printing story.

So here is the risk. If a recession comes, let's say in the next 12 months (by now you must have understood that I am giving it over 50% chance) the ones who will get hurt the most are the small guys. Small guys and small companies that is. And We Work has gorged on small companies in its too-big-to-fail-millenial-approved-offices around the world. So if and when small companies start folding, they will stop paying rent to We Work. In turn, We Work will start having trouble paying its quarterly slices of $47b (and interest!) to its landlords all over the world. And the landlords may not find a fast way out of the We Work assigned leases, and repurpose the place quickly enough and profitably enough. Boom!

What could happen in 2-4 years (the time for the recession to hit, and then We Work to feel the pain and then the landlords to feel the pain) is a huge amount of commercial properties all very well renovated (by We Work and Softbank's money) coming on the market at a discount. It could happen... There is the too big to fail monster, acting as the biggest landlord (well subletting in fact!) of the planet, operating in nearly 100 largest mega-cities, to allow for this to happen.

When and if this happens, the global commercial property market will be ripe for bottom fishing. Not just We Work leased offices, but ALL of the market. Build your nest patiently...


To your journey!

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