WeWork may have been pulled back from the edge of insolvency by its biggest investor, but many of its landlords are still preparing for a worst-case scenario.
SoftBank Group, which led the funding that valued WeWork at $47B in January, officially took over the company last week by providing a financial lifeline in the form of billions more in cash. In a $9.5B deal, the Japanese conglomerate now owns more than an 80% share and provided WeWork $5B in new financing, including a $1.5B wire transfer last week to ensure it has enough cash to maintain its operations.
But skepticism about WeWork’s future and its sizable portfolio remain, even as the company, the largest private occupier of office space in both New York City and London, scrambles to right the ship.
One national landlord that has been negotiating two office deals with WeWork said conversations with the company have gone from “business as usual,” even during the tumultuous initial public offering process, to being fully stalled.
“Now, the latest thing they told us after the SoftBank bailout was announced, [was] ‘we are still on hold, and we could be back to you in two days, two weeks — or never,’” the person said, who requested anonymity to discuss negotiations.
Landlords say events of the last two months have led to a heightened level of caution with the company. Multiple potential WeWork lease deals in New York City are said to be canceled or halted, and scores of possible deals in London are now in jeopardy as WeWork reviews its expansion there, Bloomberg reports.
For landlords with WeWork commitments already in place, there is a growing acknowledgement that they may need to consider a Plan B.
At Columbia Property Trust’s 149 Madison Ave. in New York City, for example, WeWork leased all the 115K SF of office space in the building in a 15-year deal last year, and is working alongside CXP to build out the space. On the company’s earnings call last month, CEO Nelson Mills said he remains confident about WeWork’s ability to fill the space, but is “keeping a close eye” on the location, which should be up and running in the next few months.
“We originally believed, and were told, that two subsidiaries of WeWork would likely occupy the space. With all the changes, that’s not entirely clear whether that will be the case,” he said.
“If [WeWork has] the ability and the desire to continue the space, then they’ll be a great tenant and great outcome. If that changes for any reason, we’re very confident that that building would be in high demand,” he said, pointing to its location in Manhattan’s Midtown South submarket. “We’re very confident that an alternative use would work out just fine,” Mills added.
Mills isn’t the only WeWork landlord openly discussing alternatives for its leased space. On SL Green’s earnings call last month, Director of Leasing Steven Durels said if WeWork were to fail — which he said he doesn’t believe would happen — enterprise tenants would shift easily into direct leases with landlords.
“What you’ve seen over in the coworking industry over the last couple of years, including with WeWork, they’ve migrated away from true coworking, and it’s been more of a focus on the enterprise model,” Durels said.
Durels pointed to 2 Herald Square, where Amazon takes all of the WeWork space in the building.
“So, if there were no WeWork, Amazon would simply be our tenant, they step into that lease next day, there would be interruption of services and no break in our income.”
Meanwhile, Kilroy Realty Corp. Chief Financial Officer Tyler Rose said that if WeWork starts handing back any locations, the space will be in hot demand.
“It’s total plug-and-play for most of the tech companies. So we’ll see what happens,” he said on his company’s earnings call last month. “It’s going to be different things in different cities.”
Through a spokesperson, WeWork affirmed that it is still the largest private tenant of office space in New York City, providing members with “economic workspace that supports their growth.”
“We expect to continue to grow our core business here, bringing members to newly opened buildings like Dock 72 and opening others in Q4 and the year ahead,” the spokesperson said. She did not address direct questions about whether WeWork plans to give back space it has already leased.
By and large, landlords are downplaying their WeWork exposure and its ability to move the market. Flexible office space makes up 3.6% of the office market share in New York City, according to the Real Estate Board of New York, and WeWork occupies about 1% of the city’s overall supply.
Still, there are some buildings that have a significant WeWork presence. Rudin and Boston Properties co-developed the 675K SF office building Dock 72 in the Brooklyn Navy Yard with WeWork, which just opened a 222K SF location there. During an earnings call last week, Boston Properties President Doug Linde said the lease-up of the building — no other tenants have committed — has been “slower than expected,” but that WeWork is “off to a good start.” Rudin had previously told Bisnow there were hundreds of workers moving into the space.
At 437 Madison Ave., landlords William Kaufman Organization and Travelers Cos. in September finalized a 362K SF lease with WeWork, one of the coworking firm’s biggest in Manhattan. WeWork won’t take over the space until the beginning of 2021, and the landlords said at the time the coworking firm will be seeking an enterprise tenant.
At RXR Realty’s 75 Rockefeller Plaza, WeWork will occupy 90K SF across four floors in a cost- and profit-sharing agreement. RXR and William Kaufman declined to comment.
“Notwithstanding a little hiccup at 437 Madison, I don’t expect to see a WeWork lease signed in this town for a while,” Colliers International Tri-State President Michael Cohen said at Bisnow’s New York State of the Market event last week.
Despite WeWork’s woes, real estate players stress the demand for flexible office won’t abate. WeWork’s competitors say they are gathering steam, and multiple landlords — including Durst Organization, Tishman Speyer and Boston Properties — have all beefed up their own flex offerings.
“While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years,” Vornado President Michael Franco said on the firm’s earnings call last month. Vornado plans to offer flex space to tenants at the company’s upcoming developments Penn 1 and Penn 2 in Midtown.
“We will brand this space under the Vornado name and, importantly, retain the bulk of the upside,” Franco said.
Some landlords who were negotiating for WeWork leases before the IPO attempt have since decided to go the other direction — Bisnow reported two Boston landlords pulled out of late-stage negotiations, and Mack-Cali Realty Corp. CEO Michael DeMarco said on his firm’s third-quarter earnings call Oct. 31 that they had ended negotiations with WeWork over a 100K SF space.
“No, thank God for that,” DeMarco said when an analyst asked if the 100K SF WeWork deal was still happening. “That was the best deal — that was a trick or treat, too, by the way.”
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