Coworking giant WeWork is busy renegotiating with landlords its portfolio leases — moving urgently in an already disrupted U.S. office market to avoid filing for bankruptcy protection and the loss of control other flexible space providers faced when taking that route.
The New York-based company isn't the first real estate business to attempt a restructuring outside of filing for Chapter 11, but WeWork is among the largest with more than $2.2 billion in rent due next year. By not seeking protection from creditors, WeWork's stakeholders hope to be able to control the fate of the money-losing company that had to leave exchange trading in August, industry professionals say. Trying to stay out of court holds some advantage for WeWork, they add.
"I've never seen a company as big as WeWork rework so many of its leases outside of bankruptcy, but they have unusual leverage with the real estate industry never seeing challenges like this in the modern era of office space," said Eric Haber, counsel at brokerage Wharton Property Advisors, who is not directly involved with WeWork but is familiar with the business. "This situation is an extraordinarily unwelcome development for an industry already reeling from losses."
While WeWork said it’s making progress in its talks with landlords that it wants to wrap up in about 45 days for each situation — some negotiations could go longer. WeWork announced last month it was renegotiating nearly all its leases worldwide, totaling 777 locations in 39 countries as of June 30. WeWork Interim CEO David Tolley said the company has exited or amended 590 leases since the fourth quarter of 2019, slashing $12.7 billion in future lease payments. Its leases account for two-thirds of operating expenses, he said in August.
“We’ve set an aggressive timeline we think is appropriate and fair for landlord partners to engage with negotiations," a WeWork spokesperson told CoStar News in an emailed statement. “This process will continue at pace as we work to meaningfully address our rent and tenancy costs. We are currently engaged with almost all of our landlords and are moving with urgency as we make progress in these discussions.”
WeWork has few options as its losses outpace available cash on hand, Haber said, adding it will be "difficult to avoid bankruptcy." In the first half of 2023, WeWork reported a net loss of $696 million, according to a Securities and Exchange Commission filing, with $680 million of liquidity as of June 30.
A look at other coworking firms that have navigated their way through bankruptcy court provides a glimpse of how a possible WeWork bankruptcy filing could play out, should the company decide to pursue that option.
Reducing Obligations
More than 100 U.S. affiliates of Regus, part of the world's largest shared office provider IWG, exited their yearlong pandemic-fueled bankruptcy in August 2021. The process afforded them the ability to get out of at least eight office leases while retaining about 100 others and modifying 46 agreements subject to the bankruptcy case. By filing for bankruptcy protection, the Regus affiliates brought otherwise reluctant landlords to the table to discuss making those deals on rent.
However, bankruptcy isn't without risk — for companies and creditor landlords alike. The process is expensive, and stakeholders typically lose control of their business, according to Haber, a turn of events that could affect the possibility of an outright sale or the ability to take on new equity.
"There's a pecking order of creditors in a bankruptcy, and landlords would be at the end as unsecured creditors and they would receive pennies on the dollar," he said.
Also, bankruptcy rules cap claims for landlords at 15% of the remaining rent, not to exceed three years or one year's rent — whichever is the greater of the two, according to Haber.
"This is the leverage WeWork has. It's, 'make a deal with me now, or this is what you are going to get later,'" he said.
Another coworking provider, Knotel, filed for Chapter 11 in January 2021 after its business was hurt by the pandemic and a shift to employees working from home. The company eventually was sold through the bankruptcy court to an affiliate of real estate brokerage Newmark.
And flexible workspace provider Serendipity Labs, based in the New York City suburb of Rye, New York, used bankruptcy court to improve its bottom line. Serendipity Labs filed for Chapter 11 protection in 2020 after being unable to refinance or restructure senior debt tied to a location in Dallas that it closed during bankruptcy proceedings.
Another Alternative
U.S. cities are grappling with a sharp decline in demand for office space, and landlords are contending with reduced property valuations. The total impact on office values stemming from a WeWork bankruptcy could reach $7 billion, according to a CoStar Group analysis.
Yet, industry professionals say bankruptcy protection is a tool for WeWork to escape lease obligations it would prefer to have off its balance sheet.
"This could go lots of different directions," Jim Van Horn, a partner at Barnes & Thornburg and the global president of the Turnaround Management Association, told CoStar News of WeWork's financial circumstances. "There's obviously a great deal of vacancy space on the market, so the company has a significant amount of leverage as a tenant. Any bankruptcy decision will all depend on whether they can cut enough deals that will make sense for them with landlords out of court, and if they can accomplish those renegotiations and exiting unprofitable leases, that's likely what they'd prefer to do."
With WeWork's leases being its biggest asset, renegotiating those agreements is the only alternative to the company filing for bankruptcy protection, said Sidney Scheinberg, who chairs the bankruptcy and creditors rights unit of law firm Godwin Bowman.
The current process of renegotiating allows WeWork to "strike a new deal outside of the bankruptcy court to come up with a win-win between the landlord and the tenant," Scheinberg said.
WeWork got into this situation in the decade after its 2010 founding by trying to quickly expand its business by signing leases at the height of the office market and putting top-of-the-line finishes into its space, a move dramatized in the "WeCrashed" limited series on Apple+. Landlords had to underwrite those projects with the help of long-term leases, bankruptcy and real estate executives said, making it difficult for some owners to offer concessions to WeWork — a move further complicated by an office market that has weakened over the past several years.
"With what WeWork is attempting to do outside of court now, it would just be adding more vacant space to markets that are already dealing with a lot of it," Van Horn said. "It's fair to say WeWork is leveraging a potential bankruptcy so that it has the upper hand to further negotiate and work something out short of the company rejecting the leases entirely."
While there is still some room for WeWork to swerve and avoid a filing, it all comes down to two factors, Van Horn said: time, which is running out, and making the numbers work.
"There's a lot of finger-pointing over who did what and who caused what, but all companies find themselves in a situation where, when they're in distress, know they're on a short leash and have a limited amount of time to fix something. For WeWork, that means getting enough landlords to agree to renegotiate, because otherwise, it won't necessarily do a whole lot of good," he said.
Lender Scrutiny
Property owners across the country face a murky outlook for filling vacant office space. While that gives WeWork some weight in its ability to renegotiate the terms for some of its spaces, landlords have another force to answer to: lenders.
For some U.S. markets, such as New York and San Francisco, the already lower office demand could be roiled further by a potential lease exodus by WeWork at a time when landlords are banking on the firm amid scrutiny by lenders and pressures on commercial office valuations, Gregory Plotko, a partner at Barnes & Thornburg, told CoStar News.
"As valuations are trending down, it gets even harder for landlords to rework leases," Plotko said, adding landlords have to go to their lenders and see if they can rework their deals. For some property owners with commercial mortgage-backed security loans, it could be a near-impossible task, he said, adding, "They could pull it off, but there's a lot of different variables. There's a lot of players that need to align themselves for all of this to happen, which is a lot like herding cats."
WeWork is on the hook for nearly $25 million of future minimum lease obligations with a weighted average lease term of 11 years, according to the company's latest quarterly filing with the SEC. If WeWork files for bankruptcy protection, it could put that entire rent roll on the chopping block.
"The whole office sector is in question with what the future looks like and WeWork, even at a greatly reduced rent, could still be the best option for landlords," said Harold Bordwin, a principal in New York at Keen-Summit Capital Partners, who is not involved with WeWork, but specializes in renegotiating distressed real estate.
"Landlords are going to have to determine what their best option is going forward," Bordwin said, adding that this is a real estate decision. "If they have a replacement tenant in hand, they don't care about WeWork. Or they could be happy to take back space and rent it themselves, they also might not care. But if they don't want to rent it themselves and don't have a replacement tenant, they really need to think hard about how they can work with WeWork so they don't lose them as a tenant."