What ‘Substantial Doubt’ Over WeWork’s Survival Could Mean for NYC’s Office Market

Millions more square feet might spill onto a market already struggling with high vacancy — or the company’s bombshell forces landlords to play ball

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Coworking giant WeWork (WE) has been no stranger to doom-and-gloom headlines since its very public near implosion in 2019, and this week has been no exception. The fallout from the last couple of days could not just decide the fate of the company’s stakeholders and thousands of employees, but also the immediate health of an already ailing office market where WeWork leases millions of square feet.

On Tuesday, WeWork said it has “substantial doubt” about its ability to stay afloat as part of its second-quarter earnings call that revealed it continued to lose money and members. The company posted $397 million in net losses and a 1 percent decrease in membership year-over-year.

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“As a result of the company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the company’s ability to continue as a going concern,” WeWork wrote in the Tuesday financial filing.

David Tolley, WeWork’s interim CEO, blamed the company’s declining membership on “excess supply in commercial real estate, increasing competition in flexible space and macroeconomic volatility,” but added he was “confident” about the company remaining alive for the “long term.”

“We are confident in our ability to meet the evolving workplace needs of businesses of all sizes across sectors and geographies, and our long-term company vision remains unchanged,” Tolley said in a statement.

WeWork disclosed doubts about continuing as a going concern — an accounting term that means a company is stable and healthy enough to continue and meet its obligations — after evaluating its cash needs for the next 12 months. A spokesperson for the company said that the review did not take into account the company’s plans to improve its balance sheet.

Those plans include restructuring leases to reduce the rent it pays; cutting down on membership churn and creating new sales; limiting the amount of capital it spends; and looking for more funding to come in either through new debt or asset sales.

But, while WeWork tried to downplay the announcement and project an image of a company on the right path, not everybody was quite so sure.

“I’m pretty sure you don’t confess you might fall off the edge of the cliff unless you’re teetering over the edge,” said Alexander Snyder, an analyst at CenterSquare Investment Management who follows the flex office market. “They needed to grow their way out of this problem, and that growth has stalled.”

After the announcement, WeWork reshuffled its board after several members resigned and swiftly replaced them with three people with experience working with companies going through bankruptcies and defaults, the Wall Street Journal reported.

The news sent WeWork’s stock plummeting, with its value dropping nearly 40 percent since the announcement to a price of 13 cents a share by late Wednesday afternoon.

While WeWork’s second-quarter results did show some hope — its net losses marked a $238 million annual improvement, and its $884 million in revenue was up 4 percent over that time — the announcement left many worrying about its survival. With growth stalled, it will likely need an infusion of capital, something that’s been hard to come by in the current market, Snyder said.

“I think perhaps the biggest thing that changed for them was the availability of credit,” he said. “They needed runway to get to the point of profitability, and the runway got a lot shorter this year.”

Barring more capital and WeWork fails, what happens to the millions of square feet it leases?

“WeWork dwarfs everybody else in scale,” said David Lipson, president of Savills North America. “Other [coworking operators] have failed but WeWork dwarfs them.”

As of the end of 2022, WeWork operated about 43.9 million square feet across the world, 18.3 million of which were in the United States and Canada, according to a Securities and Exchange Commission filing. And it has cornered more than half of the coworking market in Manhattan.

WeWork’s 6.9 million square feet in Manhattan represents 61.4 percent of all coworking space in the borough, according to a Savills report from the first quarter of the year. That’s far above the second biggest player, IWG, which has a 13.9 percent share.

Tuesday’s warning could send some tenants running for the door — Lipson said Savills’ phone has been ringing off the hook from WeWork members — but the 11.1 million-square-foot coworking market in Manhattan might not be able to absorb them. Some could instead move to traditional office leases.

For landlords, WeWork’s announced plans to restructure or exit more leases could impact those buildings’ cash flows, and that could be made worse if WeWork eventually files for bankruptcy; leases can be rejected during the proceedings, according to a Barclays report.

Barclays pointed out that the commercial mortgage-backed securities (CMBS) market has plenty of exposure to WeWork: $2.4 billion in CMBS loans backed by office properties have WeWork as a top-five tenant; $3.5 billion don’t list WeWork as a tenant, but the location is on WeWork’s website; and a further $1.6 billion of CMBS has WeWork listed as a tenant, but it’s not on WeWork’s site (which could mean it closed already).

New York City, where WeWork is headquartered, faces the brunt with 38 percent of the total CMBS exposure.

“Given the current weak market fundamentals of the office market in New York, we believe these locations might be at particular risk of closure due to over-concentration,” Barclays’ Lea Overby and Anuj Jain wrote in the report.

New York City’s office market has already been struggling with high vacancy rates and low office leasing, so 6.9 million square feet suddenly coming back online could be catastrophic. But Lipson said that that doomsday scenario is unlikely and the outcome of spaces will be on a case-by-case basis. Landlords in high-quality buildings with high-performing WeWork locations should have no problem filling former WeWorks.

“Getting a nice, big block in a high-end, desirable location may not be the worst thing in the world,” he said. “It’s a property-by-property, tenant-by-tenant issue.”

It could, however, flood the market with less desirable office blocks, since coworking companies like WeWork helped prop up the city’s office market for years by filling such spaces. Lipson said owners of those properties shouldn’t be shocked about the news and should have been baking the potential of WeWork going under into future projections, as the company’s struggles haven’t exactly been a secret.

WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey, and grew at a breakneck pace, reaching an eye-popping $47 billion valuation in 2019 with 485 locations in 28 countries.

However, that growth came as the result of a cash-burning business model, and it nearly ran out of money in 2019 in the middle of an initial public offering (IPO) process. It was able to survive, thanks to a multi-billion dollar bailout and takeover from majority investor SoftBank Group, but it came at the expense of canceling the IPO and ousting Neumann.

The coworking company eventually went public in 2021 through a merger with a special purpose acquisition company, but it hasn’t been smooth sailing since. At the end of 2022, worries about its dwindling cash flows and heavy debt load led to concerns over WeWork defaulting.

WeWork started 2023 by cutting 300 employees globally as part of a plan to close 40 underperforming U.S. outposts.

The coworking firm received a notice from the New York Stock Exchange in April that it was in danger of being delisted after its price dipped below $1 per share for more than a month

“That’s a huge red flag,” said Ashkán Zandieh, who previously worked for WeWork and is the founder of the Center for Real Estate Technology & Innovation. “Now you’re seeing the fallout.”

WeWork’s potential delisting, coupled with its move to restructure its heavy debt load, was seen by S&P Global Ratings as “tantamount to default,” leading the agency to downgrade WeWork’s rating in May.

And, while it was able to strike a deal to cut its debt by $1.5 billion in March, it has dealt with a shakeup in its C-suite since. Sandeep Mathrani left his post as CEO in May to join a private equity firm and, less than two weeks later, Chief Financial Officer Andre Fernandez resigned.

Mathrani was seen by many as the perfect choice to bring WeWork onto solid ground — a real estate legend who helped steer mall owner GGP out of one of the worst bankruptcies in history — and his sudden departure was a worrying sign to investors.

“Sandeep is very, extraordinarily competent,” Snyder said. “Him waving the white flag and not being willing to go down with the ship said a lot.”

A spokesperson for WeWork pointed to the improvements it’s already made dating to Mathrani’s tenure as signs that its current plan to shore up its balance sheet will be successful. Since the fourth quarter of 2019, the coworking firm cut more than $2.3 billion in costs and exited or restructured 590 leases to cut about $12.7 billion in future payments, according to the company.

Lipson pointed out that WeWork has likely reevaluated every one of its leases already, but the public threat of insolvency might actually make some landlords more amenable to working with them.

“This is trying a harder-ball strategy with landlords: ‘Hey, we put out this statement, we mean it,’” Lipson said. “Will some listen? Some might, some might not.”

But, even if all that doesn’t work and WeWork fails, most don’t expect them to go the way of the dodo. Zandieh predicted that WeWork will face a similar fate to its once-biggest rival Knotel, and be bought out by a commercial real estate brokerage or landlord once its value falls a bit more.

“The flex office industry should have never been created by third-party companies,” Zandieh said. “Commercial real estate brokerages and owners should have been the ones to create it. They had the operational experience. They had the infrastructure.”

Aside from Knotel, which was acquired during bankruptcy by Newmark, other firms have jumped into the flex market. CBRE invested $330 million in Industrious for a 40 percent stake, Cushman & Wakefield pumped $150 million into WeWork and landlords like Tishman Speyer have decided to launch their own coworking brands.

Lipson added that the flexible office model is a good idea and something tenants want, but no company has been able to make it work yet.

“You’re taking long-term fixed obligations and matching them with short-term commitment — that’s exactly what took down the banks,” he said. “Probably the model that works is a more landlord-based model.”

Snyder agreed that a buyout from a CRE firm will likely be the fate of WeWork, as the brand and its reach are still incredibly valuable — even with a Jared Leto-starring television show about its troubles.

“It’s as notorious as it is famous, but it’s still a very recognizable brand, where I think it becomes the Kleenex of the coworking space,” he said. “I think the brand has a lot of power if you can pick it up for pennies on the dollar … I think with the right capital structure the business model works.”

Nicholas Rizzi can be reached at nrizzi@commercialobserver.com.