WeWork is trying to renegotiate nearly all its leases in an attempt to turn the money-losing company around. Many landlords are expected to listen.
Commercial real estate professionals interviewed by CoStar News said it's in the best interest of property owners to discuss terms with the high-profile flexible office provider, which has warned "substantial doubt exists" about its ability to continue as a going concern. But there isn't a one-size-fits-all approach.
“It’s better to engage smartly with WeWork and see what’s available than not talking at all,” said Isaac Marcushamer, an attorney at Miami-based law firm DGIM. Meanwhile, WeWork should try to “renegotiate as many leases” as possible to get to the “economics that are acceptable.”
WeWork’s bid to restructure its lease terms comes as it has said those obligations are the “primary challenge and obstacle” to its profitability and free cash flow. The New York company's lease liabilities totaled over two-thirds of its operating expenses and 74% of its revenue in the second quarter, a percentage that’s much higher than that of rivals such as Industrious.
That means the company needs to restructure leases to slash expenses, especially as industry analysts have said occupancy in WeWork's home market of the United States isn't high enough to offset what it costs to take on space. The talks to do so now have a sense of urgency as WeWork and landlords in the United States and United Kingdom face reduced demand from hybrid work patterns and an uncertain economic outlook.
WeWork still has wide name recognition from its fast growth in the decade after its founding in 2010. It later had to scrap its first attempt at an initial public offering before ousting its co-founder and CEO, Adam Neumann, and embarking on cost cuts. That turnabout was so dramatic it was the topic of an AppleTV mini-series, "WeCrashed."
Now, the attention is on the company's attempts to become profitable. As of September, WeWork's largest U.S. landlords included Beacon Capital Partners; the William Kaufman Organization and Travelers; Boston Properties; the Chetrit Group and Moinian Group; and Walter & Samuels, according to CoStar data.
WeWork has about 200 landlords in the United States, with a total of about 14.9 million square feet leased, CoStar data shows.
Helping landlords in talks with WeWork are protections in their lease agreements. Some have a letter of credit issued from a bank that ensures they will be paid in the event WeWork is unable to do so.
Those without letters of credit would benefit from renegotiating, according to John Giampolo, a bankruptcy attorney at the law firm Rosenberg & Estis.
“For a landlord that’s well- secured with a substantial letter of credit [and other protections], you are not that nervous,” Giampolo said. “Landlords that aren’t in the secured positions may be more willing to renegotiate. I’d rather keep getting paid, even if I’m only getting paid half the rent for the coming months while I get potential replacement tenants.”
If WeWork ends up filing for bankruptcy, landlords are typically treated among the unsecured creditors who have a lower priority claim than secured creditors, Marcushamer said.
“Bankruptcy gives you tremendous leverage to deal with your landlords,” Marcushamer said, adding WeWork, in a bankruptcy, would have the option to reject or keep leases without landlords’ consent.
Bankruptcy itself comes with heavy costs, and WeWork should consider it only as a last resort, industry professionals said.
Landlords already have resorted to litigation to advance their interests.
A joint venture between Kennedy Wilson and Takenaka Corp. filed a lawsuit this month, for instance, alleging WeWork owes more than $250 million in unpaid rent, future rent and other fees for space in downtown San Francisco. WeWork disagreed with the allegations.
In September, DivcoWest sued WeWork, claiming at least $30 million in damages, after it said the coworking space provider defaulted on its rent payment and vacated its leased space near Manhattan’s Times Square; WeWork declined to comment to CoStar News on that case. WeWork also declined to comment in a Crain's Chicago Business report on the owner of a Chicago building suing WeWork for missing a payment on a lease termination.
Urgent Matter
WeWork’s strategy could force landlords that have been mindful of the company’s situation to take specific actions for the first time, industry professionals said.
“This certainly brings the issue to a head,” said Preston Young, the national head of office investor services at brokerage firm Stream Realty Partners. “Instead of it being a potential problem down the road, it brings the issue to the present.”
WeWork will succeed only if it gets widespread buy-in from landlords, said Bert Haboucha, a principal at California-based real estate services firm Atlas Capital Advisors.
“WeWork has got to renegotiate most of these leases, not just five or 10, and they’re burning through cash. They may not make it, or at least Moody’s and Fitch have said they may not make it. If you’re a landlord, you may feel like renegotiating a lease is all for nothing. The problem is that this has already been death by a thousand cuts. At some point, when do you just shoot this horse?”
WeWork’s lease renegotiations involve its consolidated locations, which totaled 610 across 33 countries and included about 715,000 workstations as of June 30. It already has exited or amended 590 leases since the fourth quarter of 2019 and cut $12.7 billion in future lease payments.
Fitch this month cut WeWork’s junk bond credit rating another notch lower after the company missed interest payments totaling about $95 million. WeWork said it had liquidity to make the payments and was skipping them as a deliberate ploy to start conversations with some lenders as it's already doing with landlords.
While WeWork’s moves to cut operating costs and exiting certain leases are “trending in the right direction,” Fitch said WeWork’s cash burn is expected to “persist through 2023, and it is uncertain if improvements will be soon enough to avoid default.”
In an October public online post, WeWork CEO David Tolley, who was made the permanent leader recently, said the company has been “making progress” in its lease talks to “find mutually beneficial and future-facing solutions” with landlords. “Having parallel conversations with its lenders will help shore up the company’s balance sheet,” he said. “A financially stronger WeWork is better for the entire WeWork ecosystem. … WeWork is here to stay.”
A WeWork spokesperson told CoStar News its individual lease negotiations with landlords are expected to be completed in 45 days and could be longer in some situations.
The spokesperson said the company is "in active discussions" with almost all its landlords.
"There’s still more to be done and we believe we are on the right path to reaching our goal," the spokesperson said. "This is our top priority. We are addressing everything we can to get our business to a stronger place."
Some landlords have partnered with the company to "find mutually beneficial solutions," the spokesperson said.
“I would encourage [landlords] to restructure [leases] to find common value with WeWork,” Brandon Medeiros, chief executive of Rekalibrate, a behavioral analytics data firm for office landlords, operators and tenants. “We shouldn’t be living in a world where if you win, I lose. … Owners need to determine, ‘Do I want to get into a fight with WeWork?’ There’s no one answer. You have to figure out for your market and if you are going to do [flexible space] or pay WeWork to do it and not in an adversarial position.”
Medeiros is speaking from experience. A former WeWork employee between 2017 and 2020 who worked on developing WeWork’s opportunities with large enterprise accounts, or companies with at least 500 employees, he said it’s not as easy for landlords to simply sign on with a WeWork rival or turn WeWork space to flexible workspace on their own.
“WeWork’s footprint tends to be much bigger than” rivals such as Industrious and Spaces, Medeiros said, adding many WeWork competitors cater to individual members, small businesses or just some small satellite offices of major companies.
“WeWork changed the industry. It changed the narrative from flex is only for small teams to flex can be for big business. Flex can be for 30 or 90 people but also for large groups. They are catering to Fortune 500 companies. … WeWork’s model was right in a lot of ways. Large organizations will desire more flexible components. [Some owners] have to ask themselves, 'Is this the site that can do well without [WeWork]? The cost of switching from WeWork to another provider is really high.”
WeWork counts corporate giants, including Amazon, as its enterprise members. Amazon, for instance, recently took a total of about 300,000 square feet in office space, including both new and renewal leases, at two WeWork locations in midtown Manhattan. They include 90,000 square feet inside RXR Realty-owned 75 Rockefeller Plaza at Rockefeller Center.
WeWork has leased a total of more than 240,000 square feet from RXR, making it one of the 10 largest WeWork landlords, CoStar data shows.
RXR is in talks with WeWork and could offer to take on WeWork’s enterprise customers and sign direct leases with them should WeWork cease operations at RXR's buildings, RXR CEO Scott Rechler recently told CoStar News.
‘Tough Position’
But not all landlords may have the same kind of luxury and could be motivated to push hard to keep the coworking firm, even at lower rent or a smaller footprint, industry experts said.
“Many owners are in a tough position because they ‘need’ WeWork right now,” Jordan Menashe, CEO of Portland, Oregon-based Menashe Properties, which doesn’t count WeWork as an office tenant, said in an email to CoStar News.
Menashe said he would want to keep WeWork in place with a "very aggressive" landlord termination option. “Try to keep the lights on and then have the right to boot them,” he said.
Landlords also will need to weigh rising interest rates and the low volume of property sales in their decision, said Stream Realty Partners’ Young.
“Most office owners are focused more on cash flow than trying to sell their building in the next 12 months,” he said. “The further they can put off vacancy, the better it is for them. They’d much rather deal with vacancy several years from now than vacancy now.”
Owners of well-leased buildings in the country’s top-demand areas or that are strategic to WeWork could feel more emboldened, and there could be reasons to remove a tenant with an uncertain future sooner rather than later, Young said.
“You might have a great building in Chicago’s Fulton Market or Uptown Dallas or along Camelback in Phoenix, but maybe you’ve got specific issues to your building that you’ve got to deal with,” Young said. “Say you’ve got a loan coming due and you’ve got WeWork hanging over your head. If you can replace WeWork with a credit tenant, that removes a major worry, even if you think you could garner a better rent two or three years from now.”
Losing the tenant may be the best outcome for a building that is fully leased, with WeWork leasing a small portion of the building, industry watchers said.
“I’d rather negotiate an exit and find a new tenant,” Atlas' Haboucha said. “But not everybody is that lucky. In most cases, if they leave, the landlord is screwed.”
Downsizing Option
For properties where WeWork leases more than half the total space, landlords could be better off trying to downsize the company’s footprint, Haboucha said.
“If I’m sitting down to renegotiate with WeWork, I’d rather talk about getting them out of half the space than cutting the rent in half for the entire space,” he said. “It’s better to have that space back now, especially if they’re going to wind up in bankruptcy anyway.”
Because of loan covenants, many landlords where WeWork is the largest tenant may require the approval of their lender to change the tenant’s lease terms. That could involve a lender signing off on the building’s debt coverage ratio falling below the previously agreed-upon level, Haboucha said.
“That’s going to be tough,” he said. “Thankfully, most lenders are in the same position. Hopefully, the first one or two lenders that get involved have a game plan that makes sense, and everybody else copies it.”
While WeWork’s planned downsizing could be another major disruption to a national office market that can hardly afford one, NAI Hiffman office tenant and leasing broker Jim Adler said it’s better than alternatives.
“The good news is, they didn’t say they’re filing for bankruptcy, which would mean they could just reject leases,” said Adler, who is focused on the Chicago suburbs.
He said coworking space still is likely to play an important role as corporations try to determine how many aspects of remote work trends are here to stay.
“The reality is, many companies just don’t know what to do about their office space for the next five years,” Adler said. “The idea of coworking should be more appealing as some of those companies’ long-term leases expire. … You might be better off downsizing WeWork and keeping them in your assets. They’re good for buildings. They bring in foot traffic and amenities. They’re a positive addition to a portfolio overall, but if they’re too big, it can become a challenge to renegotiate that lease.”