Turmoil at WeWork is causing the shared-office-space company to all but stop signing new leases, a fresh blow to New York City’s already softening commercial real-estate market.
Since We Co. Chief Executive Adam Neumann stepped down on Tuesday, the company has reversed its rapid growth strategy, looking to slow its expansion, shed head count and assets, and move closer to profitability.
That new approach initially included a decision to forgo signing any new leases, according to people familiar with the matter. These rental agreements usually require WeWork to spend money building out the space it will rent and then sublet.
We’s new management team decided on Thursday to resume leasing. “We expect the pace of entering new lease agreements to slow over the next several quarters as we pursue more strategic growth,” a We spokesman said Friday.
That decision may not make much of a difference. The vast majority of New York City landlords have little interest in taking on WeWork as a new tenant while the company is struggling to shore up its finances, brokers and landlords say.
“WeWork has got to rework its whole position in the marketplace,” said Scott Rechler, CEO of RXR Realty, a New York developer and investor that has WeWork as a tenant. “Because if they don’t, landlords aren’t going to be comfortable doing deals with them.”
The company recently completed one large deal in Manhattan. WeWork is taking 362,000 square feet at 437 Madison Ave., though it won’t be able to move in until January of 2021, the building’s landlord, the William Kaufman Organization, said in a Friday press release.
But some landlords have shelved potential deals with WeWork that were under negotiations, and some building owners are considering terminating agreements with WeWork in instances where spending on capital improvements hasn’t begun, brokers and building owners said.
Landlord sentiment souring on WeWork could further weigh down the New York City office market, which is the country’s largest. Office leases in Manhattan have come under pressure in recent years from an abundance of new supply, from the World Trade Center to the new Hudson Yards in Midtown, and new office designs that reduce the amount of space per worker.
Other big U.S. office markets could also suffer from the current aversion to WeWork. Building owners in cities including Chicago, Boston, Los Angeles and San Francisco have relied heavily on WeWork to fill excess space and to appeal to startup companies attracted to co-working’s layouts and ethos. Co-working tenants occupy 54.2 million square feet nationally and more than 16.5 % of office demand since the beginning of 2017 can be attributed to WeWork and other co-working firms in 54 major U.S. markets, according to data firm CoStar Group Inc.
Dallas-based developer Lincoln Property counts WeWork as a tenant in more than a dozen locations. But with We’s initial public offering plans on hold as the company weighs big layoffs and other cost cutting measures, Lincoln executives don’t anticipate doing another deal with WeWork soon.
“We know there are going to be repercussions,” said Eric Roseman, the firm’s vice president of innovation. “We just don’t know if the whole mountain is going to get wiped out.”
S&P Global Ratings on Thursday said it cut a We entity’s credit rating to the lower junk rating of single B-minus from single-B, reflecting “heightened uncertainty around The We Company’s ability to raise capital to support aggressive growth and the pressure this places on liquidity,” S&P said in a press release.
Manhattan, where WeWork became the biggest office lease holder last year and now occupies more than 7 million square feet, could be hit the hardest.
WeWork rivals like Industrious LLC and Convene have been growing. But they are much smaller than WeWork and haven’t been as aggressive in taking new space.
“Most of [WeWork’s] competitors emphasize their more deliberate pace of growth,” said Mary Ann Tighe, chief executive of the New York region for commercial real-estate firm CBRE Group Inc.
WeWork also became a favorite New York tenant in part because it was sometimes willing to pay above market rents to keep its growth firing. In one recent instance, WeWork made a verbal offer to lease up to 80,000 square feet in a Midtown Manhattan tower—paying a 20% premium to the market rate for space that wouldn’t be available for two years, said Craig Deitelzweig, chief executive of Marx Realty, the building’s owner.
But Mr. Deitelzweig said he turned the deal down because he was suspicious of WeWork’s business model.
“The numbers do not work,” he said.
WeWork remembers it differently. The company said it “never made an offer or provided terms” and its team “only toured the location,” a spokesman said.
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