The Continuing Travails of WeWork – November 6, 2023
According to reports in The Wall Street Journal and elsewhere, this could be the week that sees WeWork filing for Chapter 11 protection. Once privately valued at $47 billion, the flexible workspace provider is now a symbol for the headwinds buffeting the office sector.
“Backed by Japan’s SoftBank, WeWork aimed to revolutionize the office market by taking long leases on large properties and renting the space to multiple smaller businesses on more flexible, shorter arrangements,” Reuters reported last week.
“But like other landlords, it has struggled to persuade some customers since the pandemic to swap working from home for the office at its 650-plus locations worldwide – a trend that has shaken confidence in the sector.”
Industry executives, investors, lenders and analysts told Reuters that global office vacancies are expected to climb, hurting rental prospects in cities like New York and London. Some highly leveraged property investors could struggle to earn enough rental income to service rising debt costs.
“The loss of any tenant, especially during a time of relatively slow office leasing, will have a negative impact on office building cashflows and values,” said Moody’s Analytics’ Commercial Real Estate Industry Practice Lead, Jeffrey Havsy. “This will add to the negative sentiment in the marketplace and make financing harder, especially those buildings that need to refinance in the next 12-18 months.”
Several experts contacted by Reuters predicted a year of reckoning for property investors and lenders in 2024, with time running out on those who turn a blind eye to assets that would be in breach of key lending terms if they were revalued today.
As for WeWork in particular, the week may be marked by an announcement that it’s reached an agreement with its creditors, thus avoiding a trip to bankruptcy court. However, even if that outcome is reached, it won’t be business as usual.
“The flexible-workspace provider has been aiming to renegotiate leases with landlords after signaling that it has substantial doubt about its prospects for survival,” the WSJ reported last week. “Chief Executive David Tolley said during a September conference call with landlords that WeWork’s lease commitments must be ‘right-sized’ to accommodate its operations in the current market because the office real-estate market has fundamentally changed.”
Those leasing commitments represent a heavy burden under any circumstances, but especially so given the current climate for office. The WSJ reported that WeWork has an estimated $10 billion in lease obligations due starting from the second half of this year through the end of 2027 and an additional $15 billion starting in 2028. That’s a pretty deep hole to try climbing out of.