Co-working company could terminate existing leases in some buildings
SAN JOSE, Calif. — The bankruptcy filing of WeWork, the co-working company with locations throughout the Bay Area that was once valued at $47 billion, could jolt parts of the region’s office market, especially if it terminates leases as it seeks to reorganize its feeble finances.
The pandemic and the shift to remote work took a heavy toll on the New York-based company, which provided swank and hip office spaces to tech companies, startups, and individuals. WeWork stated in its Chapter 11 bankruptcy filing this week that its debts were nearly $18.7 billion, while its assets were approximately $15.1 billion. The company intends to stay open while working to renegotiate its leases and debt obligations.
An ominous declaration tucked away in the filings and pronouncements arising from the federal bankruptcy is poised to further rock an already shaky office market in the Bay Area and other major metro regions nationwide.
“WeWork is requesting the ability to reject the leases of certain locations, which are largely nonoperational, and all affected members have received advanced notice,” according to a press release issued by the business.
Lease terminations would add another layer of complexity for Bay Area office building owners who are already dealing with a rising tide of vacancies, subleases, and widespread retrenchment by the tech industry.
“But the bankruptcy isn’t that surprising,” said Phil Mahoney, executive vice chairman of Newmark, a San Jose-based commercial real estate firm.”WeWork has been bleeding red ink for a while.”
As a result, commercial property owners in the Bay Area with WeWork exposure are thought to have taken defensive measures in preparation for the current calamity associated with the co-working pioneer.
“WeWork has been over its skis for some time,” said Dave Sandlin, executive vice president at Colliers, a commercial real estate firm based in San Jose. “Property owners have been getting ready for these problems.”
WeWork stated in a document filed with the United States Bankruptcy Court in New Jersey that leases must be terminated in order to reduce the strain on the company’s shattered finances.
“For the landlords that have been getting rent from WeWork, it’s not a good outcome,” Mahoney said in an interview.
According to court documents, WeWork asked the bankruptcy court to terminate 69 leases in the United States and Canada. The majority of the current wave of terminations affects New York City buildings.
Some of the company’s landlords in the Bay Area are major commercial real estate players. One of WeWork’s San Francisco locations, for example, is owned by a subsidiary of Hudson Pacific Properties, a major Silicon Valley office building landlord. Harvest Properties, a veteran Bay Area real estate firm, owns an affiliate of the downtown Oakland building it leases.
“A key component of WeWork’s go-forward business plan is the continuation and completion of its ongoing effort to rationalize its lease portfolio,” WeWork said in bankruptcy court documents. “This effort entails, among other things, the closure of certain underperforming locations.”
The bankruptcy filing named 14 California office buildings where WeWork wants to end leases with property owners. Seven of the locations are in the San Francisco Bay Area, and seven are in the Los Angeles metropolitan area.
Six office buildings in San Francisco and a lease at 1814 Franklin Street in downtown Oakland are among the Bay Area locations.
WeWork may also seek to rewrite existing lease agreements in order to reduce costs. The company has hired Hilco Real Estate as an advisor to help it restructure potentially hundreds of leases.
“Hilco is in active negotiations with over 400 landlords in an effort to consummate lease amendment agreements to help maximize the value of the company’s go-forward business,” according to a court filing by WeWork.
According to its website, WeWork still has 17 locations in the Bay Area. There are seven in San Francisco, two in downtown San Jose, two in downtown Oakland, two in San Mateo, and singles in Berkeley, Palo Alto, San Ramon, and Mill Valley.
WeWork was founded in 2010 and quickly established itself as a leader in the fledgling co-working industry.
“We defined a new category of working,” WeWork CEO David Tolley explained. “These steps will enable us to remain the global leader in flexible work.”
However, commercial real estate experts say WeWork’s business model does not appear to be able to withstand a slumping office market, because the company leases space from a property owner and then effectively subleases the offices to another tenant or several users on shorter-term deals.
“This business model works in a steady office market or one that is improving,” said Sandlin. “It just doesn’t work when you have a declining office market.”