When the WeWork office space firm opens its new location soon in Detroit's Midtown district, it will offer the cool office digs that entrepreneurs and freelancers find so appealing.

Artisan coffee, fancy water and craft beers are on tap all day in WeWork's locations, where tenants can rent anything from a single desk to a larger office suite. Meet-up events encourage networking among like-minded tenants. The decor is all urban chic.

But beneath its "new economy" glam that has given the company a multibillion-dollar valuation, WeWork operates on a business model that strikes me and many others as pretty loony.

In a nutshell, WeWork is loaded with debt and long-term obligations but relies almost entirely on very short-term rental revenue — the kind of revenue that dries up in an economic downturn. The next recession could prove very uncomfortable indeed for WeWork — just as it will for many other "new economy" firms with high valuations but shaky business models.

And that could punish downtown Detroit's office market, where WeWork has quickly become a major player. WeWork now leases several floors in two buildings owned by businessman Dan Gilbert's Bedrock real estate firm, at 1001 Woodward and 19 Clifford St., and it will soon open another 91,000 square feet of space in the 6001 Cass Ave. building in Midtown owned by The Platform development firm.

That translates into almost 200,000 square feet of office space leased by WeWork and subleased out to entrepreneurs, freelancers and consultants. That's the equivalent of a midsize skyscraper.

Out of the recession

Founded in 2010, WeWork (officially The We Company) offers shared office environments to tech firms, startups, freelancers and others who wish to rent space in a pleasant locale. It does this by leasing vast amounts of office space. It then redecorates that space on a co-working model, and subleases it to mostly small-scale tenants for periods as short as one month.

Let's remember what the office market was like back in 2010. Mired in the Great Recession, American cities had a vast inventory of office space that nobody wanted. WeWork co-founder and CEO Adam Neumann snatched up a lot of that space to sublease it out to tech startups and the like, sweetening his deals with all the fancy free coffee and shared services like conference rooms and printers.

WeWork expanded very rapidly. Today it operates out of hundreds of buildings in dozens of cities and controls more than 45 million square feet of office space.

Why it's fun

Former state Rep. Rudy Hobbs, now with the Michigan Legislative Consultants lobbying firm, uses his small office in WeWork's location at 1001 Woodward a couple days a week when he's not in Lansing. He echoes the positive vibe that has attracted so many WeWork tenants.

"While I don't do the beer, the coffee is pretty good," he quipped. "And it's kind of cool to have water, tea, coffee pretty much at your leisure. And I've run into some folks that I worked with in the past. It's a great place to reconnect."

It's also the kind of place that sparks informal meetings and new ideas.

"It's super cool," Hobbs told me. "You walk through and you see a lot of these startup companies that are grinding away, getting things off the ground, and young people being super innovative."

But that business model ...

As attractive as that sounds, it's WeWork's basic business model that worries many. To lease all the office space that it transforms into shared environments, WeWork signs long-term leases with landlords like Bedrock. Across WeWork's network, those leases average 15 years in length, according to the company's August 2019 filing with the U.S. Securities and Exchange Commission.

So WeWork is on the hook for long-term leases. But its revenue depends on very short-term deals with its tenants. That's the sort of revenue model that works during good times but dries up during a recession.

Put another way: WeWork's recent SEC filing shows the company's long-term obligations, the amount of money it owes on all that space it leases, totals some $47 billion. Its committed revenue, the amount it will collect based on the leases that its tenants have signed, amounts to just $4 billion.

That's a mismatch of epic proportions. If WeWork's tenants fail to renew their monthly leases, WeWork could be in big trouble.

And like many high-flying "new economy" firms, WeWork already shows the strain. The company lost more than $2 billion in 2018.

As one analyst wrote on the investment site Smartkarma: "We cannot even fathom the contortions that would be necessary to articulate a path to profitability here."

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CEO troubles

Wall Street is starting to catch on. WeWork was supposed to launch its initial public offering of stock in September, but canceled because of doubts about its inflated valuation.

Then, too, WeWork's founder and CEO Neumann got in trouble in more or less the same way that so many arrogant young "new economy" CEOs flame out. In September, when WeWork's IPO was withdrawn, Neumann stepped down.

Complaints about his leadership ranged from the company's 2018 purchase of a private jet to $60 million to lawsuits by three former executives alleging age discrimination, sexual harassment or similar matters.

Sounded good on paper

WeWork's troubles, and Wall Street's doubts, hold a lesson for entrepreneurs.

A lot of these "new economy" companies sound so good on paper but wither at the first touch of frost. Anybody remember pets.com? A high-flying dot.com-era firm offering pet supplies, it launched in late 1998, generated enormous publicity, ran a Super Bowl ad and appeared in the 1999 Macy's Thanksgiving Day Parade in New York, but evaporated after just two years when the bubble burst.

Today, ride-sharing firms Uber and Lyft want to reinvent mobility, but they rely on a fiction that their drivers are independent contractors and not employees. Now that California and other localities are requiring those drivers get more rights and benefits, the ride-sharing firms may need to rethink how they do business.

And WeWork, too, will face a crisis as soon as the next recession hits. An economic downturn all but certainly translates into less demand for office space. That means WeWork could see its revenue drying up even as its debt obligations continue to bear down on it.

Make no mistake, I'm all in favor of startups whose founders understand their markets, make smart business decisions and enjoy revenues that match their ambitions.

But a cool idea and fancy footwork cannot get around the laws of economics. Along with the fizzy water and artisan coffee, WeWork needs to offer a business model that makes sense.

Contact John Gallagher:313-222-5173 or gallagher@freepress.com.Follow him on Twitter@jgallagherfreep. Read more on business and sign up for our business newsletter.