Remoteness

Remoteness

Today I am sitting at my desk in San Diego. We are on a hilltop that looks in every direction. My office faces north, east and west. It is in an alcove and it literally has windows on three sides that gives me the feeling of being suspended over the mountain-top. This is the view from which and the likely time of day during which I will be doing my work from starting in February. This will be my office and my view of the world in the foreseeable future for the foreseeable future. Get used to it. There are moments when it is as expansive as the western sky, with oceans and mountain vistas that soar in every direction. And then there are mornings when the fog has set in and I can only see ten feet in any direction. Today is one of those mornings and I am trying to decide how I feel about it all.

I also read about a problems the market is having with the concept of WeWork and its upcoming IPO. It seems someone has started to realize that WeWork is one big mismatch arbitrage on the timing of office leases. Fundamentally, it has executed long-term leases and then used their building clout in the office market to make the landlords take those long-tern leases on an unsecured basis with only the WeWork credit as the Counterparty risk. The play is for WeWork to intermediate this risk for both small and large companies that do not want office lease exposure. Those clients of WeWork execute short-term leases with them and presumably play the low-risk game while WeWork plays the office lease term-structure play that has short-term leases paying much more than long-term leases with WeWork pocketing the difference while the landlords take the unsecured risk of WeWork and its vastly diversified network of leases to bear the risk of default. The thing is, will it all be WeWork central risk/diversification or will WeWork be chopping itself up as best it will be allowed to give landlords only exposure from a subsidiary of itself. This is apparently what happened with WeWork’s older brother Regus on several projects and hence the market is worried about getting twice burned by the new global office leasing behemoth.

For financial professionals, this underlying mismatch concept will be recognized for the simple brilliance that it is. Banks have played this game with lending mismatch for years and years. In fact, many would say that the fundamental basis for banking is the intermediated timing mismatch of borrowing long and lending short. That’s called playing the yield curve (not to be confused with riding the yield curve, which is a much slicker cousin on this concept). Funny thing, as you may have heard, once and a while the yield curve inverts. Oh yeah, that’s happening right now and getting lots of press accordingly. It’s generally taken as a signal that the economy is on its last legs before a recession and hence it signals bad times ahead with investors pulling in their horns and running for the safety of Momma’s skirt (known in the biz as a flight to quality or buying a bunch of Treasuries no matter what the return…or not…that represents). Do you think investors should be rethinking the WeWork miracle in light of this new yield curve development? My guess is that is exactly what is happening. The concerns, as expressed in the office property market (the closest thing to a bond market that is less full faith and credit and more project-specific that exists…hence the large involvement of insurance and pension companies) have the added confusion of reminding everyone of WeWork’s term-structure arbitrage game for what it is…a brilliant way to make money right up until its not.

WeWork has the problem any bank in the world has. My old Chief Credit Officer said it best. You only have to take your dick out in church once. Then the whole congregation knows who you are and they never forget it. There is another favorite old joke about Luigi the road-builder and it ends with the eponymous tagline, “Fuck one donkey….”. The point is, WeWork has one chance and one chance only to NOT default on its leasing mismatch. This is the greatest comfort landlords have going for themselves. WeWorks cannot take its dick out in church and it cannot fuck one donkey. That makes me worry about WeWork investors more than WeWork landlords. As a banker who watched his fortunes suffer under two bank life cycles (Bankers Trust $170/share falling to $93/share, and Bear Stearns $179/share falling like a rock to $2/share and getting the dead cat bounce back to $10/share), you might say (I REALLY love this pun), I gave at the office, thank you.

So what does that all have to do with the foggy view out my window? Well, I will be starting to work remotely in February (that is assuming the hydrogen and ammonia creek don’t rise). Others who work remotely in my office are doing so from New Jersey, Columbia County and the Hamptons. That is more common and different, but I’m not so sure that being 2-4 hours away by train is all that different from being 5-6 hours away by plane these days. I can be in New York tomorrow for one day or a week as needed. So long as I am prepared for some very early morning work (which happens to suit me well), I think it will be all good. The question I ask is whether remote working will become the norm and not the exception and what that bodes for the WeWork model.

Back in 2009 when I ran AFI and controlled a few New York office buildings in the remaking (Times Square Building, Clock Tower at Madison Square, 20 Pine, 23 Wall Street) I had to take a view on the future of office space. I took the view that it was dead or dying and that conversion to condos, apartments or hotels was the way to go. Hell, I currently live in an apartment that is a conversion of an office building. Since then, some more office space (even in some of those buildings) has come on line. My favorite is the Times Square Building, which was sold to Jared Kushner, but don’t get me started down that path. The point is that WeWork represents the conundrum the world has about contiguous gathered work environments called offices. Some say its irrelevant. Some insist we are less productive without it. WeWork bridges the gap and gives people time to decide while their investors and landlords bear the risk.

The world is changing at an accelerated pace thanks to the internet and lots of other things. Is it spinning out of control or just evolving to a new stability with its spinning giving us all gyroscopic balancing capabilities (remember how those things balance on a string)? Meanwhile, the fog has not lifted (another great metaphor) and I will wander in my underwear towards the kitchen to further ponder the future in the hot tub with a morning muffin to keep me company. Lucky for me and my neighbors, my hot tub is also pretty remote.