WeWork Bankruptcy Would Aggravate New York Office Market

USA – WeWork’s looming bankruptcy would worsen the state of New York’s office sector, where a significant number of landlords have leased entire floors or even entire office buildings to the company, reported The New York Times on Sunday (5 November, SGT).

Notably, the coworking space operator is the biggest corporate tenant in New York and London.

The expected bankruptcy comes at a bad time for the New York office market. Over the past years, many commercial property owners there have accepted lower rents from WeWork to keep it afloat. The impact would mainly be felt by landlords that have leased out a large proportion of their office space to the coworking space operator, and are facing difficulties making payments on the loans collateralized by their office buildings. Some owners might quickly accept lower rents from WeWork as part of a bankruptcy reorganisation and keep doing business with any new entity that is created, but others might have to fight in court to recover anything.

“If you look at a lot of the vacancy in New York City, you will find that a fair amount of that was space that was leased to WeWork – and there will be even more abandoned after a bankruptcy,” commented Anthony E Malkin, the CEO of the firm that owns the Empire State Building.

Despite the company’s efforts to slash costs, WeWork still had an empire of 777 locations across 39 countries at the end of June 2023 versus 764 locations in 38 countries almost two years earlier. Last Friday, its website listed 47 locations in New York, where it took up 6.9 million sq ft of office space at the end of March. Savills said this figure accounts for over 60 percent of all coworking spaces in the city. In London, WeWork has 38 locations.

In New York, where 20 percent of the office space is vacant or being offered for sublease – the highest amount in decades, the impact of WeWork’s bankruptcy would be felt mainly by older office properties in midtown and downtown Manhattan. Advisory company Avison Young disclosed that almost two-thirds of WeWork’s office leases in Manhattan are located in Class B and Class C office buildings.

“We believe the value of Class B and Class C buildings will probably be 55 percent less than they were prior to the pandemic,” said Stijn Van Nieuwerburgh, a property professor at Columbia Business School who has been monitoring the fall in office building valuations. “These are the buildings that are struggling the most and will have a tough time with a WeWork bankruptcy.”

That’s the problem being faced by Walter & Samuels, a real estate company that has leased workspace at five office buildings in New York to WeWork. Among them is a small structure at 315 W 36th Street that was constructed in 1926. WeWork occupied around 90 percent of the building’s space and stopped paying rent earlier in 2023.

The loan’s special servicer also disclosed that the appraised value of 315 W 36th Street had plunged to US$42 million from US$127 million when the loan was obtained five years ago.

Consequently, the landlord stopped making payments on a US$77 million debt backed by the office building, and Morningstar revealed that the servicer is moving to foreclose the commercial property.