WeWork bankruptcy deals another blow to troubled NY office market

WeWork bankruptcy deals another blow to troubled NY office market

For years, landlords around the world struggled to bring WeWork to their office buildings, a love affair that made the co-working company the largest corporate tenant in New York and London.

Now, WeWork is probably just days away from filing bankruptcy — and its demise couldn’t come at a worse time for office landlords.

With fewer employees heading to the office since the pandemic, companies have cut the amount of space they can lease, leading to the worst crisis 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 huge blow. The pain will be concentrated on landlords who have leased a large portion of their space to the company, particularly in New York, and are struggling to pay off the debt associated with their buildings. Some landlords may immediately accept lower rents from WeWork as part of the bankruptcy reorganization and continue doing business with any new entities that emerge, but others may have to fight in court to get anything back. .

“If you look at a lot of the vacant lots in New York City, you’ll find that a lot of that space was leased to WeWork — and even more space will be left vacant after the bankruptcy,” said Anthony E. Malkin, Empire State The chief executive of the company that owns the building and an early WeWork skeptic.

Despite cost-cutting efforts, WeWork had an empire of 777 locations in 39 countries as of the end of June, compared with 764 locations in 38 countries about two years ago. On Friday, its website listed 47 locations in New York, where it leased 6.9 million square feet of office space in late March, more than 60 percent of all co-working space, according to Savills, a real estate services firm. is equal to more. , In London, WeWork listed 38 locations.

Speculation of a possible bankruptcy filing intensified in August when WeWork warned that it might not stay in business much longer. Since then its shares have fallen 90 percent.

Last month, WeWork said it would miss interest payments totaling $95 million. After a 30-day grace period, the company reached an agreement with creditors for a seven-day grace period, which ends on Tuesday.

In New York, where one-fifth of office space is not leased or is being offered for sub-rent, the highest amount in decades, the fallout of the WeWork bankruptcy was felt most in older office buildings in Midtown and Downtown Manhattan. Will go. According to real estate advisory firm Avison Young, about two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings.

“We believe the value of Class B and Class C buildings will probably be 55 percent lower than before the pandemic,” said Stijn Van Nieuwerberg, a real estate professor at Columbia Business School who specializes in office building valuations. Keeping an eye on the decline. , “These are the buildings that are struggling the most and will have a tough time because of the WeWork bankruptcy.”

Owners of these older buildings were thrilled to lease entire floors — or even entire buildings — to WeWork a few years ago, but now they find themselves in limbo. In cases where WeWork has stopped paying rent on leases, landlords are unable to pay loans on buildings that are worth significantly less than they were a few years ago.

That’s the dilemma facing Walter & Samuels, a real estate company that has WeWork as a tenant in five office buildings in New York. At 315 West 36th Street, a small building built in 1926 in Manhattan’s garment district, WeWork leased about 90 percent of the space and stopped paying rent earlier this year, according to Morningstar Credit. Morningstar said Walter & Samuels has stopped making payments on a $77 million loan on the building.

According to Morningstar, the loan’s special servicer said the building’s appraised value has fallen to $42 million, down from $127 million when the loan was made five years ago, and the servicer is moving toward foreclosure.

Walter & Samuels officials did not respond to an email seeking comment.

WeWork occupies almost all of the office space at 980 Avenue of the Americas, a mixed-use development owned by VanBarton Group. Company managing director Joey Chilli said that if WeWork becomes vacant the company could consider a number of options for the space, including converting it into residences.

“We tried everything we could at the beginning of this year when they went to every landlord and asked for rent reductions and concessions,” Mr Chilli said. “If they are able to reduce their footprint, it 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 walked away from a potential deal with WeWork in Toronto in 2015 because of the drawbacks for Allied. But he said he has seen other developers, particularly in New York, leasing space to the company, believing the co-working provider will occupy a large percentage of office space for years.

Additionally, Mr. Emory said, WeWork focused on landlords eager to fill their office buildings and then sell them based on new occupancy and rental income.

“The 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 wildly excited about the company and the vision of its eccentric co-founder Adam Neumann, WeWork was valued at $47 billion. Its model was to rent office space, furnish it, and charge its customers – established companies, start-ups and individuals – a fee to use the space for as long as they needed it.

The flexibility of using WeWork space — and its sense of community: “Our mission is to raise the consciousness of the world,” the company announced — was to attract businesses away from cluttered offices that tied tenants to years-long leases.

But the economics of WeWork’s business were always counterproductive: What the company charged customers was never enough to cover the costs of renting and operating its locations. It kept growing anyway and lost a whopping $15 billion since the end of 2017. After WeWork withdrew its 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 enthusiastic 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, chief executive of Vornado Realty Trust, one of New York’s largest office landlords, said in 2017. “We think what they’re doing is incredibly impressive.”

Mr. Roth declined to comment for this article. Vornado leased space to WeWork in a building in Manhattan and a building in Washington, and together they started WeLive Residences outside Washington, one of WeWork’s much-hyped but unsuccessful subsidiaries, including private for-profits. School WeGrow is also involved.

Vornado no longer has WeWork as a tenant. In 2019, after questions arose in the industry about WeWork’s financial health, Vornado’s chief financial officer said the company had limited its exposure to WeWork.

JLL, a real estate services firm, once predicted that co-working firms 30 percent of all office space will be leased In the United States by the end of this decade. Such predictions wouldn’t have seemed outlandish just before the pandemic, when WeWork and other co-working providers accounted for 15 percent of both new and renewed leases signed in New York, according to JLL, up from 2 percent in 2010. That accounted for less than 1 percent of all leases signed in New York last year, JLL said.

And some landlords believed they would be spared some of WeWork’s problems.

Raymond A., an executive of BXP, formerly known as Boston Properties, “WeWork is taking these start-ups en masse, realizing that some will stay, some will go,” Ritchie said in 2014. “This risk is being taken directly against the landlord.”

BXP is a part owner of a ship-like office development at the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since opening in 2019 but was struggling to fill its space. Late last year, BXP was leasing about 500,000 square feet of space in its portfolio to WeWork.

BXP President Douglas T. Linde said on an investor call Thursday that WeWork has stopped paying rent at 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 at their current footprint.

Some landlords may enable other co-working companies to take over WeWork’s spaces, or operate their own version, avoiding a situation in which their buildings appear desolate. But they are unlikely to take the revenue they were initially getting from WeWork, which went public in 2021 after merging with a special purpose acquisition company.

Mr. Malkin, the Empire State Building landlord, said he had always been skeptical of WeWork’s business model. Additionally, he never wanted WeWork in his company’s buildings because, he said, it crammed too many people into its space, leading to overuse of elevators and restrooms.

“Why would you want to do business with these people?” Mr. Malkin said.

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