Landlords who are already dealing with mounting debts and businesses reducing their office space face even greater challenges due to the consequences.
WeWork’s website shows 47 spots in New York, where it had rented 6.9 million square feet of office space by the end of March, which is over 60 percent of all co-working space in the area.
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For years, landlords worldwide eagerly sought WeWork as a tenant in their office buildings, making the co-working company the largest corporate occupant in New York and London.
Now, WeWork is on the brink of filing for bankruptcy, and this couldn’t happen at a more challenging time for office landlords.
Due to the pandemic, many companies have reduced the amount of office space they lease as fewer employees return to the workplace. This has led to one of the worst crises in commercial real estate in decades.
To keep WeWork afloat, many landlords have accepted reduced rents in recent years. However, a WeWork bankruptcy would deal a severe blow, especially to landlords with a significant portion of their space leased to the company, particularly in New York. These landlords are struggling to meet debt payments on their properties. Some may opt for lower rents as part of a bankruptcy reorganization and continue doing business with any new entity that emerges. Others might have to pursue legal action to secure their interests.
Anthony E. Malkin, CEO of the company that owns the Empire State Building, who was initially skeptical of WeWork, noted, “A considerable amount of vacant space in New York City was previously leased to WeWork, and even more might become vacant after a bankruptcy.”
As of June, WeWork maintained 777 locations in 39 countries, compared to 764 locations in 38 countries nearly two years prior. Speculation about bankruptcy grew in August when WeWork suggested it might not survive. Its shares have plummeted by 90% since then.
Last month, WeWork announced it would miss $95 million in interest payments, leading to a deal with creditors for a seven-day forbearance, set to expire on Tuesday.
In New York, where a fifth of office space remains unleased or available for sublet, particularly in older office buildings in Midtown and downtown Manhattan, a WeWork bankruptcy would have a pronounced impact. According to Avison Young, nearly two-thirds of WeWork’s leases in Manhattan were in these Class B and Class C buildings.
Owners of such older buildings initially celebrated leasing entire floors or buildings to WeWork, but they are now grappling with challenges. In cases where WeWork stopped paying rent, landlords are struggling to make debt payments on properties significantly devalued from just a few years ago.
Walter & Samuels, a real estate firm, exemplifies this dilemma. WeWork occupied about 90% of space in one of its buildings and ceased rent payments earlier this year. The appraised value of the building dropped from $127 million when the loan was made five years ago to $42 million, according to the loan’s special servicer, who is moving toward foreclosure.
WeWork occupies most of the space in 980 Avenue of the Americas, a development owned by the Vanbarton Group. If WeWork were to vacate, the company is considering various options for the space, including residential conversion.
Joey Chilelli, a managing director at the Vanbarton Group, said, “We tried to accommodate WeWork earlier this year when they requested rent reductions and concessions from every landlord. If they downsize, it will impact the office market again.”
Michael Emory, the founder of Allied, a real estate investment trust that manages office buildings in Canada’s largest cities, stated that Allied walked away from a potential deal with WeWork in Toronto back in 2015 due to drawbacks for Allied. However, Emory noted that other developers, particularly in New York, leased space to WeWork, believing that co-working providers would occupy a significant portion of office space for years.
Emory also mentioned that WeWork primarily targeted landlords eager to fill their office buildings and then sell them based on the new occupancy and rental income.
A bankruptcy filing by WeWork would have significant consequences for the New York market, according to Emory.
WeWork declined to provide a comment for this article.
At its peak, with investors highly optimistic about the company and the vision of its eccentric co-founder, Adam Neumann, WeWork was valued at $47 billion. Its business model involved renting office space, enhancing it, and charging established companies, startups, and individuals for using the space as needed.
The allure of WeWork’s flexible spaces and community atmosphere, with its mission to “elevate the world’s consciousness,” was designed to attract businesses away from traditional offices with long-term leases that tied tenants down.
However, the economics of WeWork’s business were always problematic: the revenue from customers did not cover the costs of renting and operating its locations. Despite this, WeWork continued to grow, accumulating a staggering $15 billion in losses by the end of 2017. After withdrawing its initial public offering in 2019, WeWork received a lifeline from its largest external investor, the Japanese conglomerate SoftBank.
Before the debacle, WeWork had enthusiastic supporters in the commercial real estate sector who saw the company as a pioneer in a promising new service.
“We know these folks, we know them well,” said Steven Roth, CEO of Vornado Realty Trust, one of New York’s largest office landlords, in 2017. “We think what they’re doing is unbelievably impressive.”
Vornado no longer has WeWork as a tenant. In 2019, amidst mounting concerns about WeWork’s financial health, Vornado’s CFO stated that the company had limited its exposure to WeWork.
JLL, a real estate services firm, once predicted that co-working firms would occupy 30 percent of all office space in the United States by the end of the decade. Such forecasts didn’t seem unrealistic just before the pandemic, when WeWork and other co-working providers accounted for 15 percent of new and renewed leases in New York, up from 2 percent in 2010. However, last year, co-working providers accounted for less than 1 percent of all leases in New York, according to JLL.
Some landlords believed they would be somewhat shielded from WeWork’s problems.
“WeWork is out there taking on these start-ups en masse, realizing that some will stay, some will go,” said Raymond A. Ritchey, an executive at BXP (formerly known as Boston Properties), in 2014. “But they tend to be taking that risk as opposed to the landlord on a direct basis.”
BXP is a part-owner of Dock 72, a ship-like office development in the Brooklyn Navy Yard where WeWork has been a major tenant since 2019 but has struggled to fill its space. At the end of last year, BXP was leasing nearly 500,000 square feet of space to WeWork across its portfolio.
Douglas T. Linde, the president of BXP, mentioned on an investor call that WeWork had ceased rent payments at two of its locations, including Dock 72. He stated that they didn’t expect WeWork to exit all the assets, nor did they expect WeWork to remain in place in its current footprint.
While some landlords may find other co-working companies to take over WeWork’s spaces or operate their versions, they are unlikely to generate the same revenue they initially received from WeWork, which did eventually go public in 2021 through a merger with a special-purpose acquisition company.
Mr. Malkin, the landlord of the Empire State Building, expressed his doubts about WeWork’s business model and explained that he didn’t want WeWork in his company’s buildings due to concerns about overcrowding elevators and toilets.
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