From the Italian Renaissance-style Lord & Taylor building on New York’s Fifth Avenue to the postmodernist landmark One Poultry in London, Wework has swept up office space at an unprecedented rate since opening its first location in Manhattan less than a decade ago.
But the shared office provider’s breakneck expansion is set for a sudden slowdown, cutting out a significant source of demand in the large urban property markets where it operates.
In the aftermath of the company’s failed IPO, which prompted the demotion of its chief executive Adam Neumann and triggered fears of a cash crunch, there are already signs of problems brewing.
Two landlords of large Wework sites in London, who asked not to be named, said they would not sign new leases for the foreseeable future and were making contingency plans for their existing Wework offices in the event of a restructuring.
“It would not be prudent for us to do anything [ new] with them until we see how the new management will operate,” one landlord said.
Peter Papadakos, a managing director at the research company Green Street Advisors, noted: “We have only seen the benefits from the growth in demand from flexible and co-working operators. What are still to come are the negative repercussions.”
Last week rating agency Fitch downgraded Wework’s credit rating to CCC+, a level at which “default is a real possibility”. It said “the risk that the company is unable to restructure itself successfully has increased materially”.
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The real estate industry has in recent years embraced Wework and its rivals. Wework has 7.7m sq ft of office space in New York City and 4.1m in London, according to data provider Costar, making it the largest private tenant in both cities. Other key locations include San Francisco, Bangalore and Shanghai.
Much is now at stake for its landlords. They have a total of $47bn in rent due from Wework across the life of its leases, according to the company’s filings. Some $2.3bn of lease and other cash obligations fall due in 2020, according to academics at Harvard Business School.
Two London building sales with Wework as a tenant have collapsed since its IPO was pulled, although people close to one — the £850m sale of Southbank Place — maintained the group’s problems were not the reason.
In the event of a restructuring that involved Wework ditching some of its sites, landlords would bring in other flexible office providers to fill vacancies or install their own brands, said agents and landlords.
Mark Dixon, chief executive of the UK- listed shared office group, IWG, said: “We are always in discussions with landlords and those discussions have picked up [since Wework’s problems] . . . it’s the flight to quality.”
Landlords’ priority would be to avoid flooding the market with space, said two agents working on contingency plans.
Alex Snyder, assistant portfolio manager at Centersquare Investment Management in Philadelphia, said: “Wework has structured many of its leases so that they can simply collapse the special purpose entity it’s trapped in and walk away. This vacancy pressure on the market [would] be painful.”
