Flexible workplace provider WeWork, seeking to cut leasing costs to stem a drain on cash, gave back a high-profile New York coworking location that's one of its largest in the United States to landlord RXR.
WeWork agreed to return to the real estate owner and investor the space it was leasing at 620 Avenue of the Americas between West 18th and 19th streets in Manhattan’s Chelsea neighborhood, WeWork and RXR told CoStar News separately. Two large WeWork customers that occupied the space signed direct office leases with RXR, the companies said. The location housed only the two clients and wasn't a typical WeWork coworking space, a WeWork spokesperson said.
The two parties reached an agreement before WeWork filed for Chapter 11 bankruptcy protection Nov. 6, RXR spokesperson David Garten told CoStar News. The parties are so-called enterprise members of WeWork, meaning they were businesses large enough to employ at least 500 people.
“RXR has been a great partner in swiftly reaching a solution that prioritizes our members, ensuring no disruption for them and their business as they continue to occupy their space,” Peter Greenspan, WeWork’s global head of real estate, said in an emailed statement to CoStar News. He added that the transition is part of “WeWork’s efforts to achieve a sustainable capital structure and profitable business.”
In its bankruptcy filing last week, WeWork said it’s in active talks “with over 400 landlords” worldwide to restructure lease terms. Attorneys have said landlords such as RXR that have struck deals with WeWork ahead of its bankruptcy filing could be at an advantage. WeWork has the ability to reject leases with landlords, who often fall behind in the bankruptcy pecking order as unsecured creditors.
WeWork and RXR each declined to specify the names of the two companies, but a WeWork spokesperson said they remain WeWork members elsewhere and will continue to use WeWork’s all-access memberships allowing them into any of the coworking company's coworking spaces wherever available.
With the transition, RXR still has one leased location with WeWork at 75 Rockefeller Plaza in the high-profile Rockefeller Center, where WeWork customer Amazon in recent months has taken 90,000 square feet with WeWork. Both WeWork and RXR declined to comment on what the plan is for that location.
WeWork moved into 620 Avenue of the Americas in July 2019 with nearly 124,000 square feet near the end of the CEO tenure of the coworking company's co-founder, Adam Neumann, before the company later expanded its footprint in a lease expiring in August 2027, according to CoStar data. Garten said WeWork's former footprint at the property totaled 212,000 square feet, ranking the location as one of WeWork’s 10 largest in the United States, CoStar data shows. WeWork's website, as of Tuesday, listed 231 locations in the United States, including 47 in New York.
“We look forward to supporting a smooth transition that ensures WeWork’s members have a consistent quality of workspace and access to WeWork’s flexible workplace offerings,” RXR Chief Executive Scott Rechler told CoStar News in an emailed statement. “We are grateful for WeWork’s partnership and efforts to craft solutions that benefit all parties involved.”
Rechler previously told CoStar News that RXR could offer to take on WeWork’s large customers and sign direct leases with them should WeWork cease operations at RXR's buildings.
Historic Building
The seven-story, beaux-arts-style 620 Avenue of the Americas, constructed in 1896, is billed as the symbol of the cast-iron era and “an architecturally significant landmark,” according to the property website. Its 700,000 square feet in office space, with ceiling heights of up to 17 feet, is said to have included among its former tenants Spotify before the music-streaming service moved downtown.
The property page describes the building as having been “home to leaders in fashion, design, media and technology.” The building also houses major retail tenants T.J. Maxx and Marshalls.
Its office tenants include software firm Palantir, according to CoStar data. WeWork had been the building's largest tenant.
WeWork giving back 620 Avenue of the Americas comes as the company also has struck a deal to hand over its 217,000-square-foot space at the Jacx in Long Island City across the East River from Manhattan to developer Tishman Speyer. Unlike what it's doing at 620 Avenue of the Americas, Tishman Speyer is turning WeWork’s space at the Jacx into its own fast-expanding flexible workplace offering called Studio.
Meanwhile, WeWork has sought to reject 69 leases, including 65 unprofitable direct office leases, in the United States and Canada, the two markets where its bankruptcy filings apply. Its home market of New York alone accounts for 40 of those leases it rejected.
Despite New York bearing the brunt of the downsizing, the WeWork spokesperson said New York “is, and always will be, one of WeWork's most important markets,” adding it has “thousands of members” in the city.
Under Neumann, WeWork gained fast growth in the years following its 2010 founding. Its expansion at the cost of profit even led to the company in 2018 claiming it had become the largest private occupier of office space in Manhattan, with over 5.3 million square feet. WeWork boasted at the time its footprint was larger than even the four banking giants, including JPMorgan Chase, which WeWork said had dominated the city’s commercial real estate market for years.
But that growth without profit in mind also was what eventually led to its seeking protection from creditors.
Short on Occupancy
Weighed down by lease liabilities that totaled over two-thirds of its operating expenses and 74% of its revenue in the second quarter, the last time it reported results, WeWork had an occupancy rate that didn’t rise to the level needed to help offset leasing costs, analysts have said.
WeWork Chief Executive David Tolley has said its lease obligations posed the “primary challenge and obstacle” to the money-losing company’s profitability and free cash flow.
The company in September began renegotiating leases, even after it already exited or amended 590 leases since the fourth quarter of 2019 and cut $12.7 billion in future lease payments.
While WeWork’s lease rejections are a sliver of the office market, they threaten to hurt some individual office landlords and add to inventory in markets such as New York that are already hurting from record-high office vacancies. WeWork’s lease rejections and renegotiations further threaten to hurt landlords with loans backed by some of those buildings housing WeWork.
With its New York footprint, a number of the city’s landlords, including Brookfield Properties and Westfield Fulton Center, count among WeWork's creditors with the 30 largest unsecured claims that are not insiders.