WeWork’s bankruptcy would deal another blow to New York’s ailing office market

For years, landlords around the world clamored to get WeWork into their office buildings, a love affair that made the co-working 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 workers heading to the office since the pandemic, companies have shrunk the amount of space they rent, creating one of the worst commercial real estate crises in decades.

Many landlords have accepted lower rents from WeWork in recent years to stay afloat, but bankruptcy would be a huge blow. The pain would center on landlords who have leased much of their space to the company, especially in New York, and are struggling to pay off debt tied to their buildings. Some landlords may quickly accept lower rents from WeWork as part of a bankruptcy reorganization and continue doing business with any new entity that emerges, but others may have to fight in court to get anything.

“If you look at a lot of the vacancy in New York City, you’ll notice that a fair amount of it was space leased to WeWork — and even more will be vacant after a bankruptcy,” says Anthony E. Malkin, the CEO of the company that owns the Empire State Building and an early skeptic of WeWork.

WeWork, despite its efforts to cut costs, still had an empire of 777 locations in 39 countries at the end of June, up from 764 locations in 38 countries almost two years earlier. On Friday, the website listed 47 locations in New York, where it leased 6.9 million square feet of office space at the end of March, representing more than 60 percent of all co-working space, according to Savills, a real estate services firm. . In London, WeWork listed 38 locations.

Speculation about a possible bankruptcy filing increased in August when WeWork warned that the company might not be in business for much longer. Since then, shares have fallen 90 percent.

Last month, WeWork said it would miss interest payments totaling $95 million. After a 30-day grace period, the company reached an agreement with creditors on a seven-day grace period, which expires on Tuesday.

In New York, where a fifth of office space is vacant or subleased, the most in decades, the impact of a WeWork bankruptcy would be most felt in older office buildings in Midtown and downtown Manhattan. Nearly two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings, according to real estate consultancy Avison Young.

“We believe that the value of Class B and Class C buildings will likely be 55 percent less than before the pandemic,” said Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School who has been tracking the decline in office building valuations. . “These are the buildings that are struggling the most and will suffer the most in a WeWork bankruptcy.”

Owners of these older buildings were eager to lease entire floors — or even entire buildings — to WeWork a few years ago, but now they’re under siege. In cases where WeWork has stopped paying rent on its leases, landlords are unable to pay off debts on buildings that are valued sharply 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 office buildings in New York. 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. Walter & Samuels stopped making payments on a $77 million loan for the building, Morningstar reported.

The loan’s special servicer said the assessed value of the building had fallen to $42 million, down from $127 million when the loan was made five years ago.

Executives at Walter & Samuels 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 the Vanbarton Group. Joey Chilelli, the company’s chief executive, said the company could consider a range of options for the space if WeWork were to leave, including converting homes into the space.

“We tried to do everything we could earlier this year when they went to every landlord asking for rent reductions and concessions,” Mr. Chilelli said. “If they can reduce their footprint, it will again hurt the office market.”

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 there were downsides for Allied. But he said he had seen other developers, especially in New York, rent space to the company, believing that co-working providers would occupy a large percentage of the office space for years to come.

Moreover, Mr. Emory said, WeWork targeted landlords eager to fill their office buildings and then sell them based on new occupancy and rental income.

A bankruptcy filing “will have very significant 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 valued at $47 billion. The model was to rent office space, refurbish it and ask its clients – established companies, start-ups and individuals – to use the space for as long as they needed it.

The flexibility of using a WeWork space — and its community atmosphere: “Our mission is to raise the consciousness of the world,” the company declared — was supposed to draw companies out of the cumbersome offices where tenants were locked into year-long leases.

But the economics of WeWork’s business were always upside down: What the company brought in from customers wasn’t enough to cover the costs of renting and operating the locations. It continued to grow anyway, and as of the end of 2017, it lost a whopping $15 billion. After WeWork withdrew from an initial public offering in 2019, its largest outside investor – Japanese conglomerate SoftBank – provided a lifeline with a multi-billion dollar acquisition.

Before that debacle, WeWork had fervent 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, the CEO of Vornado Realty Trust, one of the largest office landlords in New York, said in 2017. “We think what they are doing is incredibly impressive.”

Mr. Roth declined to comment for this article. Vornado leased space to WeWork in a building in Manhattan and another in Washington, and they teamed up outside Washington to launch WeLive Residences, one of WeWork’s much-hyped but failed subsidiaries, including the for-profit WeGrow private school.

Vornado no longer has WeWork as a tenant. In 2019, after questions about WeWork’s financial health increased in the industry, Vornado’s chief financial officer said the company had limited its exposure to WeWork.

JLL, a real estate services company, once predicted that co-working companies would rent 30 percent of all office space in the United States by the end of this decade. Such predictions didn’t seem outlandish just before the pandemic, when WeWork and other co-working providers were responsible for 15 percent of both new and renewed leases signed in New York, up from 2 percent in 2010, according to JLL. 1 percent of all leases signed in New York last year, JLL said.

And some landlords thought they would be somewhat insulated from the problems at WeWork.

“WeWork is going after these startups en masse, knowing that some will stay and some will disappear,” Raymond A. Ritchey, an executive at BXP, formerly known as Boston Properties, said in 2014. “But they tend to take that risk as opposed to the landlord on a direct basis.”

BXP co-owns a ship-like office project in the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since opening in 2019 but has struggled to fill the space. Late last year, BXP leased nearly 500,000 square feet of space to WeWork across its portfolio.

Douglas T. Linde, BXP’s president, said on an investor call Thursday that WeWork had stopped paying rent at two of its locations, including Dock 72. “We do not expect WeWork to exit any assets,” he said , “nor do we expect them to remain in place in the current footprint.”

Some landlords could persuade other co-working companies to take over WeWork’s spaces, or operate their own versions, avoiding a situation where their buildings appear abandoned. But they’re unlikely to bring in the revenue they initially got 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 had always doubted WeWork’s business model. Moreover, he never wanted WeWork in his company’s buildings because, he said, there were too many people in the spaces, causing overuse of elevators and restrooms.

“Why would you want to do business with these people?” said Mr. Malkin.