WeWork in CMBS is a Hot Investor Topic
WeWork has emerged as the clear front runner in coworking and is also a top tenant in some of the largest loans securitized in CMBS deals, according to Kroll Bond Rating Agency.
SEATTLE—Coworking continues to experience dramatic growth in tier 1 markets such as Seattle. Between 2010 and 2017, US coworking spaces have grown from 8.1 million to 51.2 million square feet. According to JLL, this growth accounted for more than a quarter of all US office absorption during the 24-month period ending December 2017.
Specifically, WeWork has emerged as the clear front runner in coworking and is also a top tenant in some of the largest loans securitized in CMBS deals, according to Kroll Bond Rating Agency. KBRA has identified 41 transactions where WeWork is a tenant with 30 office and mixed-use whole loans across 46 pari-passu notes (those where two or more assets, securities, creditors or obligations are equally managed without any display of preference).
Coworking space is also becoming more mainstream. In fact, corporate tenants accounted for 23% of WeWork’s coworking client base at year-end 2017, more than double 2016’s rate.
“Small business owners and startups are not the only ones using this sharing arrangement,” Larry Kay, senior analyst at Kroll Bond Rating Agency, tells GlobeSt.com. “Major companies such as GE Capital, KMPG and Microsoft are reportedly using coworking space as an alternative to traditional office space.”
WeWork is projected to account for approximately 30% of the total office market by 2030, according to CBRE. As of December 2017, WeWork had more than 200 locations in 31 countries and was used by more than 175,000 members. It also employs more than 4,000 people. In 2017, it raised $4.4 billion from SoftBank’s Vision Fund which may be in discussions to contribute more capital, resulting in WeWork’s valuation to $40 billion.
KBRA has identified 2.5 million square feet of office space that is leased by WeWork that serves as CMBS collateral. Of this amount, 1.45 million square feet is in Manhattan, accounting for 58% of the total CMBS WeWork square footage. Additionally, CBRE indicates that as of first quarter 2018, 4.1 million square feet of space is leased by WeWork in Manhattan. Based on this amount, CMBS has exposure to more than a third of the company’s footprint in this borough. The Manhattan CMBS WeWork square footage exposure is spread across 22 transactions with 13 whole loans split into 23 pari-passu notes.
After Manhattan, CMBS WeWork exposure falls somewhat, with Boston and Los Angeles at 268,091 square feet and 140,074 square feet, respectively. Overall, based on KBRA’s analysis, WeWork is primarily located in tier 1A markets, which include Boston, Chicago, Los Angeles, New York, San Francisco, Seattle and Washington, DC.
These in-fill urban markets are viewed as having superior liquidity relative to the rest of the nation, according to KBRA. Tier 1A properties may be better able to survive an economic downturn, as capital seeking a home during stressful economic times typically gravitates towards safer havens.
“In addition, the tenant base may be more diversified and/or better capitalized relative to other markets,” Kay tells GlobeSt.com. “Based on our historical observations, CMBS loans secured by assets in tier 1A markets have experienced the lowest default rate amongst all market tiers. However, short-term leases, which can usually be terminated with a one-month notice, can lead to volatile income streams and pressure WeWork’s financial wherewithal.”
A case in point is Regus, which is now a division of International Workplace Group and has been a flexible space operator since 1989. Regus rapidly grew during the 1990s but fell into financial difficulties following the dot-com crash, filed for bankruptcy in 2003 and ultimately negotiated discounted leases with many of its landlords. The company is now the largest flexible office space operator with more than 3,000 locations worldwide and has launched a new business unit called Spaces to compete with WeWork.
“It’s fair to say that coworking is one of the secular trends facing the real estate industry, and in turn CMBS,” Kay tells GlobeSt.com. “It will inevitably take time to see where the dust settles. We often get asked about whether we treat buildings with WeWork differently from others. Given the non-homogenous nature of the asset class, there isn’t a one-size-fits all answer.”