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How WeWork’s Bankruptcy Would Ripple Through Commercial Real Estate

Building values could drop and vacancies spike; meanwhile, competitors would have a major opening

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Is WeWork (WE) in danger of becoming WeWorked?

The drama surrounding the coworking pioneer and New York City’s onetime largest private office tenant has already played out in business journals, mainstream newspapers, books, a documentary and even an Apple TV series. Tales abound of damage to investors (such as SoftBank), revolving leadership (CEO Sandeep Mathrani left in May), and more.

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Now, as the company confronts self-confessed existential challenges, what happens next after the latest cliffhangers could cause a lot of collateral damage to landlords who were once eager to rent to WeWork and the clients who have in turn rented from it.

Some landlords who reported that WeWork was among their largest tenants owe about $2.6 billion in CMBS debt, with about half of those loans reaching maturity within the next 12 months. Eighty percent of those landlords are either on a special servicing watchlist, delinquent on their loans or in default, according to data from Trepp, a CMBS data firm

Buildings vacated by WeWork aren’t performing all that well either, with big vacancies left behind when the coworking giant moves out. These impacts can come in the form of valuations on the building’s debt.

For example, Walter & Samuels’ 315 West 36th Street saw the value of the collateral behind its $77 million loan cut by two-thirds after WeWork, a tenant that rented 93 percent of the 143,000-square-foot Garment District building, vacated in late 2022. Now the collateral is worth less than the loan amount, with it being appraised at $127 million in 2018 and at $42.4 million this month, according to Trepp.

“The minute they file for bankruptcy, normally what that means is you can reject leases and there’s no obligation whatsoever,” Manus Clancy, leader of applied data, research and pricing at Trepp, told Commercial Observer. “That being said, it has seemed for a while like they’ve been treating these leases as though they’re not obligations anyway. They’ve walked away from them. They’ve stopped paying as they’ve tried to conserve cash. … I think the borrowers — the property owners — are already feeling the impact.”

Property owners are not free of blame, either. Many signing leases without looking at where other coworking companies have failed, according to Clancy. He referenced the late billionaire Sam Zell’s mercilessly critical stance on the success rate of coworking. Zell told CNBC in 2019, “Every single company in this space has gone broke.”

Anthony Malkin, CEO of Empire State Realty Trust (ESRT), has long been wary of WeWork and shared a view similar to Zell’s, reiterating that a long-term obligation with short-term rentals is problematic.

“It’s the subject and source of a lot of failure in business,” Malkin said in an interview.

Landlords and banks were among those who directly invested in WeWork, with the building owners attracting the coworking company with tenant allowances, and lenders giving out lines of credit to landlords based on WeWork being or becoming a tenant.

“They’re all going to lose most if not all their money. In the case of landlords, there are going to be a lot of heads that go through the windshield as that business comes to a screeching stop,” Malkin added.

For those buildings without the capital structure to recover from a WeWork collapse, Malkin said there may be opportunities for new buyers to come in with a fresh financial slate after a foreclosure, but a major repositioning would likely be a must for the building to be successful.

CIM Group, according to Trepp, is another landlord that’s dealing with financial difficulties at 1440 Broadway, where WeWork still has a lease. The landlord was able to close on a $400 million refinancing from JPMorgan and Oaktree Capital in March 2021, but is now looking at giving the building back to its lenders.

Other locations where WeWork has split include a 56,000-square-foot space at 83 Maiden Lane, 86,000 square feet at 25 Broadway, and 81,000 square feet at 35 East 21st Street.

In February, Columbia Property Trust offloaded 149 Madison Avenue at a $10.7 million loss after losing WeWork as its main tenant, selling the 12-story, 127,000-square-foot office building for $77 million to Enchanté Accessories. Columbia paid $87.7 million for the property in 2017. WeWork exited 149 Madison in June 2020, only two years after signing a deal for 115,000 square feet.

To make matters worse for the landlords, many of the buildings targeted by WeWork during their growth phase were Class B — not exactly the most sought-after properties in the post-pandemic environment.

“These buildings aren’t going to make it in this market as commercial real estate and the banks are going to have to take them over,” Ruth Colp-Haber, CEO of Wharton Property Advisors, said in an interview.

“WeWork’s biggest expense was the installation, so if some new coworking operator can go in there and pick up a WeWork space where the installation is in place and only requires minor tweaking, and they get a lower rent than WeWork had, then we’re looking at a whole different business model that could be profitable,” Colp-Haber said.

In most cases, Colp-Haber said, landlords and subtenants of WeWork will have to work out new deals with each other directly. In other cases, landlords are going to have to go into the coworking business just to keep their buildings occupied. Tishman Speyer did just that at 300 Park Avenue when WeWork vacated, having created Studio by Tishman Speyer as a direct competitor, according to Colp-Haber.

Direct deals may also be the case for buildings that have major enterprise tenants such as Santander Bank, which leased 160,000 square feet at 437 Madison Avenue in February 2022.

A sudden extinction of WeWork could have serious implications for new businesses and companies that are entering the New York City market for the first time, according to Gabe Marans, a vice chairman at Savills.

“I had a client that had to scramble. They were given 30 days’ notice to exit out of their WeWork [space], and that had the potential to really destabilize their business. Fortunately, we have been proactive, and had a program lined up and were able to get them into a different space in that time frame,” Marans told CO. “So there are ways that you could impact tenants, and the smaller ones who are most at risk are often the ones who have the least sophisticated understanding of real estate and need the most guidance.”

Christelle Rohaut, the founder and CEO of coworking firm Codi, says that watching WeWork rise in the 2010s and essentially fall from grace after a calamitous initial public offering in 2020 taught a lesson in how the concept could evolve to better serve landlords, tenants and the firms who are managing office space.

“We’re based on a viable business model which maybe wasn’t available back in 2010. But now, post-pandemic, landlords are much more open to flexible arrangements and capturing the current demand — and the current demand does not want long-term leases,” Rohaut told CO. “I still think that WeWork innovated on the customer side, the product was good, but the business model … did not innovate on the landlord’s side, which ultimately makes it fail.”

Instead of signing a long-term lease themselves and in turn subleasing that space out, Codi works out a revenue-sharing program with landlords and provides a lot of the perks that draw businesses to coworking, such as office amenities that are not managed by the tenant, as well as flexible terms for the tenant.

Rohaut said many tenants find themselves almost graduating from WeWork-style coworking space into a steadier relationship with the office.

“When I saw [WeWork’s] Q2 earnings report back in early August, financially it’s pretty clear that WeWork only has like two quarters of cash left,” Rohaut said. “At that moment in time, we started to hear from prospects that they were given a notice from WeWork that the location was shutting down. … Since then, we’ve begun an effort to raise brand awareness to make sure that people who are impacted by the WeWork shutdowns know about us.”

Codi employees could be seen outside 85 Broad Street in Manhattan over the summer handing out flyers with messages like “Office shutting down? #WeWont.” While it may sound like a harsh jab at WeWork, Rohaut believes it comes down to giving businesses a place to turn to.

“Ultimately, we want to provide support to all the founders and the companies that will be left without an office,” she said.

WeWork was not amused by Codi’s actions. In a cease-and-desist letter dated Oct. 13, WeWork said Codi was infringing on the brand by using #WeWont in what the company called “false and/or misleading advertising” as well as unlawful solicitation of clients by offering a 25 percent discount to “the first 50 WeWork members moving into a Codi space.”

“As far as other coworking opportunities, I think the shared revenue structure is an interesting one on paper, but why would you do that?” Malkin said. “[ESRT] would rather rent to long-term tenants at great rates where we are at the top of the tier of our property type. We don’t really see the need to joint venture with some intermediary or middleman.”

Whether WeWork will gain any altitude under a new CEO, after Sandeep Mathrani hit the eject switch in May, is unclear.

David Tolley has held down the fort since Mathrani’s departure as an interim and was appointed permanent CEO in mid-October, during which time WeWork announced it would renegotiate nearly all of its leases, resulting in a 9 percent increase in WeWork’s stock price that day.

“By addressing this reality now, we will be able to continue investing in and innovating our business on behalf of our members,” Tolley said in a September open letter discussing why its lease portfolio would need to undergo dramatic changes.

The company plans to spend the coming months not only phasing out under-performing locations, but also investing what money it has in the spaces that do well, as well as forging revenue-sharing and management agreements with some of their landlords, according to a WeWork spokesperson.

Since 2020, WeWork has worked out 590 lease amendments and 270 lease terminations, according to the company.

The first week of October, however, saw WeWork skip out on paying up to $95.2 million in interest payments to lenders — even though the company said it had “sufficient liquidity” to make the payments “and may in the future decide to do so” — as it continued its attempts to renegotiate debt to improve its capital structure. The result? A 24 percent drop in the value of its shares.

WeWork’s stock price hit a 2023 peak of $88.80 per share in February but as of Oct. 16 was just over $2, a price that was virtually unaffected by the announcement of Tolley’s permanent appointment as CEO.

At one point in April, the firm was in danger of being delisted from the New York Stock Exchange because its stock price dipped below $1 per share for more than a month.

WeWork had been attempting to raise additional funds, possibly from Yardi, according to The New York Times, and restructure up to $3 billion in debt with at least one of its lenders, Japanese conglomerate SoftBank, since at least March. The efforts do not seem to have been very fruitful.

The company wasn’t exactly poised for success in 2023 to begin with. In fact, it hasn’t been poised for success since well before the pandemic.

But 2022 ended on a low note with WeWork cutting its own headquarters from six to four floors at Rudin Management and Boston Properties (BXP)-owned Dock 72 on the Brooklyn waterfront in November of that year. It announced at the same time that it planned to shutter 40 locations.

By January, WeWork said it would be cutting loose 300 employees globally in an effort to hang on to dwindling cash reserves and stave off the aforementioned loan defaults.

Despite the dire circumstances, Tolley’s message in the open letter from September was clear: “WeWork is here to stay.”

Mark Hallum can be reached at mhallum@commercialobserver.com