The office real estate world has been in a bad way ever since the pandemic hit. The bankruptcy filing this week of onetime hotshot co-working marvel WeWork Inc. will make things worse.
Nationally, as of the September-ending quarter, office leasing had fallen 35% and rents were off 6% from their 2019 peak, according to JLL Inc., the global real estate management and investment firm. Over just 12 months ending in September, office building loan delinquencies had tripled to around 6%, JLL indicated in a report.
The damage from the bankruptcy move will be one more blow for office building owners and lenders, mostly of them privately owned, strategists say. The WeWork impact also will extend to public investors. Compared with 2015, the market value of offices in publicly traded real estate investment trusts has shrunk to 4% from 14%, Nareit data show.
“This is going to be a bloodbath” for the office sector, says George Schultze, founder of distressed asset investor Schultze Asset Management LLP. He points to news reports that WeWork’s Chapter 11 filing will allow it to terminate 40 or more leases in New York City buildings that were largely or entirely empty. The move will be a blow to the nation’s biggest office market, which has a 16.5% vacancy rate, per JLL.
Other cities are even worse off than New York. San Francisco’s vacancy rate is 34%, and San Jose’s is 31.5%, CBRE figures show. “The West Coast has struggled more than New York has,” observes Stephen Dye, global REIT analyst at investment firm Duff & Phelps.
WeWork has reported having 777 locations in 39 countries.
In general, offices, emptied out during the pandemic lockdown, have been slow to regain their workforces, with working from home a strong preference for many.
As recently as 2019, WeWork was the most valuable U.S. startup, with a valuation near $49 billion. Trouble was, even then, the company was over-extended, leasing office space and then renting it out to tenants, many of them short-term, for less money than WeWork was paying to building owners. (WeWork did not own any real estate itself.)
That mismatch doomed an initial public offering, and the firm ended up issuing its stock via a special purpose acquisition company, or SPAC, in October 2021. Co-founder Adam Neumann, who had built up WeWork’s global network of co-working space at a rapid clip, was ejected. Several CEOs have since come and gone before David Tolley, who was at the helm when the firm filed for bankruptcy protection. Rent and interest payments gobbled up almost all of the outfit’s revenue for the six months ending in June 2023.
As losses mounted, the stock price descended rapidly over the next two years, to around $5 per share in August from some $400 in late 2021. After the bankruptcy filing, it stands at less than $1. The debacle has been painful for WeWork’s prime financial backer, SoftBank.
To its detriment, WeWork amassed its rental holdings “at the top of the market,” Schultze says. “This is a big event.”
Tags: CBRE, interest payments, JLL, leasing, Nareit, New York, office market, rent, revenue, San Francisco, WeWork