For years, landlords around the world clamored to install WeWork in their office buildings, a love story that turned the coworking company into the largest corporate tenant in New York and London.
Now, WeWork may be days away from filing for bankruptcy, and its demise couldn’t come at a worse time for office owners.
With fewer employees going to the office since the pandemic, companies have cut back on the amount of space they rent, causing one of the worst crises in commercial real estate in decades.
Many landlords have accepted lower rents from WeWork in recent years to keep it afloat, but its bankruptcy would be a blow. The problem would center on landlords who have leased a large proportion of their space to the company, particularly in New York, and are struggling to pay off debt tied to their buildings. Some landlords could quickly accept lower rents from WeWork as part of a bankruptcy reorganization and continue doing business with whatever new entity emerges, but others might have to fight in court to get anything.
“If you look at much of the vacancy in New York City, you’ll find that a good amount of it was space leased to WeWork, and there will be even more vacant after a bankruptcy,” said Anthony E. Malkin, the company’s chief executive. company that owns the Empire State Building and one of the first skeptics of WeWork.
WeWork, despite its efforts to cut costs, still had an empire of 777 locations in 39 countries as of the end of June, up from 764 locations in 38 countries nearly two years earlier. On Friday, its website listed 47 locations in New York, where it leased 6.9 million square feet of office space as of late March, equivalent to more than 60 percent of all coworking space, according to Savills, a firm of real estate services. . In London, WeWork listed 38 locations.
Speculation about a possible bankruptcy filing intensified in August when WeWork warned it might not be in business for much longer. Since then, its shares have fallen 90 percent.
Last month, WeWork said it would not pay interest on a total of $95 million. After a 30-day grace period, the company reached an agreement with creditors for a seven-day forbearance, which expires Tuesday.
In New York, where one-fifth of office space is unleased or offered for sublease, the highest amount in decades, the fallout from a WeWork bankruptcy would be felt most in older office buildings in Midtown and downtown from Manhattan. Nearly two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings, according to real estate advisory firm Avison Young.
“We think the value of Class B and Class C buildings will probably be 55 percent lower than before the pandemic,” said Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School who has been tracking the drop in prices. appraisals of office buildings. . “These are the buildings that are struggling the most and will have a hard time if WeWork goes bankrupt.”
The owners of these older buildings were happy a few years ago to rent entire floors, or even entire buildings, to WeWork, but now they find themselves under siege. In cases where WeWork stopped paying rent on leases, landlords have been unable to pay off debt on buildings that are being valued much lower than they were a few years ago.
That’s the dilemma facing Walter & Samuels, a real estate firm that has WeWork as a tenant in five of its office buildings in New York. At one of them, 315 West 36th Street, a small building built in 1926 in Manhattan’s textile district, WeWork rented about 90 percent of the space and stopped paying rent earlier this year, according to Morningstar Credit. Walter & Samuels stopped making payments on a $77 million loan on the building, Morningstar said.
The loan’s special servicer said the building’s appraised value had fallen to $42 million, down from $127 million when the loan was made five years ago, and the servicer is taking steps to foreclose, according to Morningstar.
Walter & Samuels executives did not respond to emails seeking comment.
WeWork occupies almost all of the office space at 980 Avenue of the Americas, a mixed-use development owned by Vanbarton Group. Joey Chilelli, the company’s CEO, said the company could consider a variety of options for the space if WeWork became vacant, including converting it into residences.
“We’ve tried to do everything we could earlier this year when they went to all the landlords and asked for rent reductions and concessions,” Chilelli said. “If they are able to reduce their footprint, they will hurt the office market again.”
Michael Emory, founder of Allied, a real estate investment trust that operates office buildings in Canada’s largest cities, said his company abandoned a potential deal with WeWork in Toronto in 2015 because there were drawbacks for Allied. But he said he had watched other developers, particularly in New York, lease space to the company, believing that coworking providers would take up a large percentage of the office space for years.
Additionally, Emory said, WeWork targeted landlords who were eager to fill their office buildings and then sell them based on new occupancy and rental income.
A bankruptcy filing “will be very important for the New York market,” he said.
WeWork declined to comment for this article.
At its peak, when investors were feverishly optimistic about the company and the vision of Adam Neumann, its eccentric co-founder, WeWork was valued at $47 billion. Their model was to rent office space, fix it up, and charge their clients (established companies, startups, and individuals) to use the space for as long as they needed it.
The flexibility of using a WeWork space – and its community atmosphere: “Our mission is to elevate the world’s consciousness,” the company declared – was supposed to steer companies away from boring offices that lock tenants into leases for years.
But the economics of WeWork’s business were always upside down: What the company received from customers was not enough to cover the cost of renting and operating its locations. Still, it continued to grow and, since the end of 2017, lost a staggering $15 billion. After WeWork withdrew an initial public offering in 2019, its largest outside investor, Japanese conglomerate SoftBank, provided a lifeline with a multibillion-dollar acquisition.
Before that debacle, WeWork had ardent fans in the commercial real estate world who believed the company was pioneering an exciting new service.
“We know these people, we know them well,” Steven Roth, CEO of Vornado Realty Trust, one of New York’s largest office landlords, said in 2017. “We think what they are doing is incredibly impressive.”
Roth declined to comment for this article. Vornado leased space to WeWork in a building in Manhattan and another in Washington, and they partnered outside Washington to introduce WeLive residences, one of WeWork’s most publicized but failed subsidiaries, including the for-profit private school WeGrow.
Vornado no longer has WeWork as a tenant. In 2019, after questions about WeWork’s financial health grew in the industry, Vornado’s chief financial officer said the company had limited its exposure to WeWork.
JLL, a real estate services company, once predicted that coworking companies would lease 30 percent of all office space in the United States at the end of this decade. Such predictions didn’t seem far-fetched just before the pandemic, when WeWork and other coworking providers accounted for 15 percent of new and renewed leases signed in New York, according to JLL, up from 2 percent in 2010. For less than 1 percent of all leases signed in New York last year, JLL said.
And some owners believed they would be somewhat insulated from the problems at WeWork.
“WeWork is taking on these new companies en masse and realizing that some will stay and some will go,” Raymond A. Ritchey, an executive at BXP, formerly known as Boston Properties, said in 2014. “But they tend to take that risk rather than the owner directly.”
BXP is a co-owner of a ship-like office development in the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since it opened in 2019, but was struggling to fill its space. As of late last year, BXP leased nearly 500,000 square feet of space to WeWork across its portfolio.
Douglas T. Linde, president of BXP, said Thursday on a call with investors that WeWork had stopped paying rent on two of its locations, including Dock 72. “We don’t expect WeWork to exit all assets,” he said, ” nor do we expect them to remain in their present location.”
Some owners could get other coworking companies to take over WeWork spaces or operate their own version, avoiding a situation where their buildings look desolate. But they are unlikely to get the revenue they initially earned from WeWork, which ended up going public in 2021, by merging with a special purpose acquisition company.
Malkin, the owner of the Empire State Building, said he had always doubted WeWork’s business model. Additionally, he never wanted WeWork in his company’s buildings because, he said, it packed too many people into its spaces, leading to overuse of elevators and bathrooms.
“Why would you want to do business with these people?” Mr. Malkin said.
