The future of in-person work was imperiled by a white-collar workforce accustomed to working remotely since the onset of the COVID-19 pandemic. As leading New York-based workspace provider Wework Inc. struggles to restructure, what could bankruptcy mean for real estate in the city?
Manhattan’s office vacancy rate reached an all-time high of 22.4% in the second quarter. The current 103.3 million square feet of available space has seen a 39.5% drop below the pre-COVID average and 29.8% below this time last year.
According to financial filings, WeWork was operating 43.9 million rentable square feet around the world as of December 2022. That includes 18.3 million in the United States and Canada. The company occupies about 6.4 million square feet across 70 office buildings throughout Manhattan alone, according to Crain’s New York Business News.
Post-pandemic, the company struggled to stay afloat after losing a whopping $11.4 billion since 2020 — demand for office space continues to weaken as working from home remains increasingly popular.
WeWork — the leasing company that offers temporary and co-working office space for entrepreneurs, freelancers, small businesses and large enterprises — has seen low earnings, high expenses and increasing debt as a result.
A previous $47 billion valuation of the company by private investors dipped to $274 million on Aug. 9. Before the pandemic, the company was the largest leaseholder in New York City, primarily leasing older Class B and Class C offices.
The co-working company, along with a group of Wall Street firms including BlackRock Inc. and King Street Capital, lent hundreds of millions of dollars to the leasing company. They have since explored possibilities with consultants and advisors in an attempt to restructure and ward off filing for Chapter 7 or Chapter 11 bankruptcy.
“There’s also a big difference between liquidation bankruptcy and restructuring bankruptcy,” Samuel Rosen, assistant professor of finance at Temple University, said. “Depending on the type of filing, bankruptcy could help mitigate some challenges WeWork faces through reorganization and other efficiency efforts.”
In June, WeWork had 777 locations across 39 countries. Within that footprint, the company reported supporting 906,000 workstations and 653,000 physical memberships — equating to 72% physical occupancy.
If WeWork files for bankruptcy, it would allow the company to break its leases without penalty, causing vacancy rates to rise dramatically. This could impact building owners, landlords and their tenants, with some standouts being Boston Properties, Rudin Management, RXR Realty and Tishman Speyer.
Its 18 million square feet here in the states is “a small fraction” of the inventory but “would be a significant hit,” according to Sam Chandan, director of the Chao-Hon Chen Institute for Global Real Estate Finance at New York University’s Stern School of Business.
In November 2022, WeWork planned to start closing 40 U.S. underperforming locations to cut back on rent and other operating expenses. This swift shuttering of locations would inevitably add to the pandemic-induced plummet in value and revenue for the commercial real estate market.
Despite recent trends, the co-working space remains a significant segment of the market. But as an industry leader, WeWork’s decisions, ranging from potential liquidation to renegotiating leases, are likely to influence real estate in New York as well as the trajectory and success of the entire business model.
