For years, landlords around the world clamored to introduce WeWork in their office buildings, a love affair that made the coworking company the largest corporate tenant in New York and London.
Now WeWork may be just days away from filing for bankruptcy — and its demise couldn’t come at a worse time for office landlords.
With fewer employees going into the office since the pandemic, companies have drastically cut the amount of space they lease, creating one of the worst commercial real estate crises in decades.
Many landlords have accepted lower rents from WeWork in recent years to keep the company afloat, but bankruptcy would be a major blow. The pain would be concentrated among landlords who have leased much of their space to the company, particularly in New York, and are struggling to pay off the debts associated with their buildings. Some landlords may quickly accept lower rents from WeWork as part of a bankruptcy restructuring and continue doing business with any new company that emerges, but others may have to fight in court to get something.
“If you look at a lot of vacant space in New York City, you’ll see that much of it has been leased to WeWork — and after a bankruptcy, there will be even more abandoned space,” said Anthony E. Malkin. the CEO of the company that owns the Empire State Building and an early skeptic of WeWork.
Despite its efforts to cut costs, WeWork still had an empire of 777 locations in 39 countries at the end of June, compared to 764 locations in 38 countries nearly two years earlier. According to Savills, a real estate services firm, the company’s website on Friday listed 47 locations in New York where the company had leased 6.9 million square feet of office space at the end of March, representing more than 60 percent of all co-working space. In London, WeWork listed 38 locations.
Speculation about a possible bankruptcy filing intensified in August when WeWork warned that the company might not be in business much longer. Its shares have since fallen 90 percent.
Last month, WeWork said it would miss a total of $95 million in interest payments. After a 30-day grace period, the company agreed with creditors on a seven-day deferment that expires on Tuesday.
In New York, where a fifth of office space is unleased or available for sublease, the highest in decades, the impact of a WeWork bankruptcy would be felt most acutely in older office buildings in midtown and downtown Manhattan. According to real estate consulting firm Avison Young, nearly two-thirds of WeWork’s Manhattan leases were in these so-called Class B and C buildings.
“We estimate that the value of Class B and Class C buildings will likely be 55 percent lower than before the pandemic,” said Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School who has tracked the decline in office building valuations . “These are the buildings that are struggling the most and will have a hard time if WeWork goes bankrupt.”
The owners of these older buildings were excited about leasing entire floors – or even entire buildings – to WeWork a few years ago, but now they are under siege. In cases where WeWork has stopped paying rent on its leases, landlords have been unable to pay off debts on buildings that are valued significantly lower 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 of its New York office buildings. In one, 315 West 36th Street, a small 1926 building in Manhattan’s garment district, WeWork leased about 90 percent of the space and stopped paying rent earlier this year, according to Morningstar Credit. According to Morningstar, Walter & Samuels has stopped making payments on a $77 million loan on the building.
The loan’s special servicer said the assessed value of the building has fallen to $42 million, compared to $127 million when the loan was made five years ago, and the servicer is seeking foreclosure, according to Morningstar.
Walter & Samuels executives did not respond to emails seeking comment.
WeWork occupies nearly all of the office space at 980 Avenue of the Americas, a mixed-use project owned by Vanbarton Group. Joey Chilelli, the company’s chief executive, said the company could consider a number of options for the space if WeWork vacates, including converting it into residential housing.
“We tried to do everything we could at the beginning of the year when they went to every landlord and asked for rent reductions and concessions,” Mr. Chilelli said. “If they manage to reduce their footprint, it will hurt the office market again.”
Michael Emory, the founder of Allied, a real estate investment trust that operates office buildings in Canada’s largest cities, said his company backed away from a potential deal with WeWork in Toronto in 2015 because of downsides for Allied. However, he said he has watched other developers, particularly in New York, lease space to the company, believing coworking providers would take up a large percentage of office space for years to come.
Additionally, Mr. Emory said, WeWork is focusing on landlords who are eager to fill their office buildings and then sell them based on new occupancy and rental income.
A bankruptcy filing “will have major consequences for the New York market,” he said.
WeWork declined to comment for this article.
At its peak, when investors were feverishly optimistic about the company and the vision of Adam Neumann, its eccentric co-founder, WeWork was worth $47 billion. His model was to rent office space, spruce it up, and charge his customers—established companies, startups, and individuals—to use the space for as long as they needed it.
The flexibility of using a WeWork space — and its communal atmosphere: “Our mission is to raise the world’s consciousness,” the company explained — should steer companies away from boring offices that lock in tenants with year-long leases.
But the economics of WeWork’s business have always been upside down: What the company collected from customers wasn’t enough to cover the costs of leasing and operating its locations. It continued to grow anyway, losing a staggering $15 billion as of the end of 2017. After WeWork withdrew from an IPO in 2019, its largest external investor – the Japanese conglomerate SoftBank – provided a lifeline with a multi-billion dollar takeover.
Before this debacle, WeWork had adoring 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 in a building in Manhattan and another in Washington to WeWork, and they joined forces outside Washington to launch WeLive Residencies, one of WeWork’s much-lauded but failed subsidiaries, including the for-profit private school WeGrow.
Vornado no longer has WeWork as a tenant. After questions arose in the industry about WeWork’s financial condition in 2019, 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 companies would lease 30 percent of all office space in the United States by the end of this decade. Such predictions didn’t seem far-fetched just before the pandemic, when, according to JLL, WeWork and other co-working providers accounted for 15 percent of new and renewed leases signed in New York, up from 2 percent in 2010. Co-working providers were responsible less than 1 percent of all leases signed in New York last year, JLL said.
And some landlords believed they would be somewhat spared from problems at WeWork.
“WeWork is taking on these startups en masse, recognizing that some stay, some go,” said Raymond A. Ritchey, an executive at BXP, formerly known as Boston Properties, in 2014. “But they tend to like them In contrast to the landlord, we have to take this risk directly.”
BXP co-owns a ship-like office complex in the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since it opened in 2019 but has struggled to fill its space. Late last year, BXP leased nearly 500,000 square feet of space across its portfolio to WeWork.
Douglas T. Linde, BXP’s president, said in an investor call Thursday that WeWork has stopped paying rent at two of its locations, including Dock 72. “We do not expect WeWork to divest all of its assets,” he said, “nor do we expect them to remain in their current form.”
Some landlords may be able to get other co-working companies to take over WeWork’s space or run their own version, avoiding a situation in which their buildings appear dilapidated. However, they are unlikely to reap the revenue they initially received from WeWork, which eventually went public in 2021 by merging with a special purpose acquisition company.
Mr. Malkin, the landlord of the Empire State Building, said he always doubted WeWork’s business model. He also never wanted WeWork in his company’s buildings because, he said, it crowded too many people into the spaces, leading to overuse of elevators and restrooms.
“Why would you want to do business with these people?” said Mr. Malkin.