Real estate crash, WeWork Bankruptcy, Bankman-Fried's Trial
By Terrence Hooi
Chief Investment Strategist
This Substack Post does not take into account nor does it provide any tax, legal or
investment advice or opinion regarding the specific investment objectives or
financial situation of any person.
1.) WeWork to Seek Bankruptcy Next Week
Next week, formerly a highly valued venture capital-backed success, the flexible office space provider is now getting ready for Chapter 11 bankruptcy. As of the end of June, WeWork had a presence in 777 locations across 39 countries worldwide.
The New York-based company has faced significant challenges since its first attempt to go public in 2019, which failed due to concerns about its debts, losses, and leadership. A week before officially scrapping the share sale, the company's founder, Adam Neumann, stepped down as CEO, citing the distracting scrutiny of his leadership.
In August, WeWork expressed "substantial doubt" about its ability to sustain its operations, citing challenges like reduced demand and a challenging operating environment. The company also witnessed the departure of several top executives this year, including CEO and chairman Sandeep Mathrani.
Singular’s Insight: Shortly after the failed listing, the COVID-19 pandemic struck, leading to a surge in remote work and subjecting WeWork to harsh public criticism from tenants seeking lease modifications. Despite these difficulties, the company continued its operations by selling off subsidiary businesses, reducing its workforce, and altering or canceling numerous leases to stem its losses and avoid running out of funds.
Singular’s Take: WeWork went public on the New York Stock Exchange in 2021 but at a significantly lower valuation. SoftBank, the Japanese conglomerate, injected billions of dollars into WeWork as it continued to incur losses. The company, which had reached a peak valuation of approximately $47 billion in early 2019, saw its stock market value plummet by nearly 98% over the past year.
2.) Commercial Real Estate Collapse will lead to Chaos
“What's emerging as a notable trend is that these spaces can no longer function effectively as offices due to shifts in the economy . This development has caught many by surprise.” Kevin O’Leary
Experts suggest that these properties might be repurposed as storage facilities or residential units, but this presents significant challenges, such as the need for zoning and policy adjustments. As a result, it may be more practical in the long term to demolish these buildings and construct new ones for alternative uses, such as data centers or climate-controlled storage. However, the question of funding this transformation looms large, with estimates reaching a trillion-dollar scale. This poses substantial challenges, especially for regional banks in the coming 36 months.
Singular’s Insight: It's expected that up to 40% of small business employees won't return to traditional office spaces. This necessitates a reevaluation of their use.It's also worth noting that many of these buildings are no longer financially viable. The majority of these structures were constructed in the last 30 years, with mortgages carrying interest rates of less than 4%. Now, as the Federal Reserve raises rates to a terminal rate of 5.5%, these mortgages will need to be refinanced at significantly higher rates, often between 9% and 11%, nearly tripling the cost. Consequently, many of these buildings face economic impracticality.
3.) Sam Bankman Fried 7 Counts of Fraud
The downfall of the FTX empire began in November 2022, when a Coindesk article, published precisely one year before the jury's decision, exposed the covert mingling of funds. Around the same time, Binance CEO Changpeng "CZ" Zhao announced his withdrawal from the exchange. As a result, Sam Bankman-Fried, the head of FTX, resigned, and the company filed for bankruptcy. However, he faced both civil and criminal charges related to fraud and money laundering.
In the lead-up to his trial, Bankman-Fried engaged in confrontations with prosecutors and the court. Initially placed under house arrest, he was later incarcerated in August for violating his bail conditions. These violations included using a VPN to watch a football game and disclosing the diary entries of his ex-girlfriend, Caroline Ellison, former CEO of Alameda Research, who had pleaded guilty to federal charges and testified against him during the trial.
Here are the seven counts of fraud:
- Using customer funds from FTX and lying to investors about financial codependence.
- Producing fake financial documents to deceive lenders about Alameda's borrowing from FTX.
- Orchestrating a conspiracy to engage business partners in a fraud scheme.
- Misleading investors by presenting false financial information.
- Concealing the true nature of the two firms' financial relationship.
- Deceiving lenders by presenting phony financial documents.
- Engaging in a yearslong fraud scheme and conspiracy.
Singular’s Action: Centralized exchanges pose security risks and regulatory challenges; The collapse of FTX and hacks of Mt. Fox have demonstrated these types of systemic risks. Decentralized exchanges offer enhanced security by eliminating central control. We are building something massive and decentralized. Stay tuned!
Meme of the Week
"We gotta stop guys, we are drunk. We are digging this deep hole. What are we doing here?" Stanley Druckenmiller
Important Disclaimers