In another blow to the office industry, co-working giant WeWork finally bowed to the inevitable after a total of $16 billion in losses and filed for Chapter 11 bankruptcy in Newark last night. This was a case that had its origins well before the pandemic, but the trend to remote work hastened WeWork’s fall. The company has now entered into a restructuring agreement with creditors representing roughly 92% of its secured notes.
WeWork said in court pleadings that it filed the bankruptcy to rationalize its lease portfolio, right-size its balance sheet (which includes approximately 7 million square feet of space in New York City representing just over 1% of city’s total office space (according to the NY Times), and position WeWork for sustainable, long-term growth. In a video statement, CEO David Tolley said he was “exceptionally confident” that We Work would exit bankruptcy no later than in the second quarter of 2024. This represents yet another opportunity for WeWork to develop a profitable business model for the first time by utilizing the potent medicine of the Bankruptcy Code to reject those leases which are not profitable by capping unsecured rejection damage claims and renegotiating other leases.
From the landlord-tenant standpoint, the most important current news about the bankruptcy is that according to a first day motion filed by WeWork with the court, they are seeking to reject 69 leases effective immediately. An exhibit attached to the motion shows that 40 of those leases are in New York City. Further, WeWork stated that it was in active negotiations with over 400 landlords in an effort to consummate lease amendment agreements to maximize the value of their go – forward business.
When it comes to leverage, WeWork has all of it. Having exited 69 locations, WeWork is now going to the other 400 landlords that it has identified for amendments and telling them that if changes are not made which significantly improve their lease terms, they may be on the list for closure as well.
Everyone knows that the office leasing industry is already reeling due to remote work and high interest rates. Accordingly, finding a replacement tenant for large blocks of space will be extremely difficult and will severely compromise the cash flow of many landlords, and consequently the ability to service their debt. Put in colloquial terms, impacted landlords needed this like a hole in the head. This has a very significant impact on the New York market, as WeWork is rejecting almost half of its NYC locations with just 47 remaining according to its website. The one potential saving grace is that due to prior closures, WeWork only represents 1.3% of the office space in New York as noted above.
What will the landlords do? Some will try to partner with other coworking operators and others will try to re-lease their space on their own. Some will default on their bank loans and others will return the keys. It remains to be seen if WeWork’s tenants in rejected spaces will be tossed out of their current spaces but they may need to make new arrangements. WeWork says that they will attempt to accommodate displaced tenants in another center in the same city, but it remains to be seen if that is possible in New York with so many centers being closed. Accordingly, we must take this opportunity to mention that Wharton Property Advisors is well suited to assist any tenants that are looking for new office space.
According to an affidavit filed by WeWork’s CEO Tolley under a restructuring support agreement with his creditors Softbank paid almost $1.5 billion on October 31 to buy up the debt of other secured parties and will receive the equity in the post-bankruptcy company. That agreement sets forth various milestones, including a March 5, 2024 deadline to emerge from chapter 11. Accordingly, in all likelihood the endgame is that WeWork lives and will once again escape with a well-funded backer covering $16 billion of collective historical losses. However, when this is over, WeWork’s bankruptcy will leave hundreds of struggling landlords in its wake. As for displaced tenants, WeWork says that it will attempt to accommodate them in similar centers in the same city but it remains to be seen if that is possible. Accordingly, we must mention that Wharton Property Advisors is well suited to assist any WeWork tenants that are looking for a new space.
Will WeWork ultimately survive? It has been handed a golden opportunity by virtue of the Bankruptcy Code to remake their business. This is probably the final chance for them to get it right.