Landlords Ponder Whether to Cave to WeWork's Demands for Better Lease Rates

Just last month, WeWork brought up a question of whether it could survive or if it might need to file for bankruptcy.

The company has been scrambling. It just completed the 1-for-40 reverse stock split it needed to remain listed on the NYSE exchange rather than falling into over-the-counter penny-stock trading. But that’s not enough. Now, in a public letter, CEO David Tolley said that it plans to negotiate heavily with landlords to get lease concessions.

And that presents a conundrum for those landlords, who face a difficult decision.

WeWork’s initial decision to present itself as a tech company, to bring in high-multiple technology type investment, started a trip down a road that led to where it is today. “The firm had scooped up long-term leases in prime office space around the world, expecting to make money by subletting the space on a short-term basis to firms and individuals looking for flexibility and trendy digs,” the BBC recently wrote. 

It didn’t work as planned and now Tolley is informing its landlords that its current lease liabilities – which were over two-thirds of total operating expenses in the second quarter – are too high and “dramatically out of step with current market conditions.

 “We are taking immediate action to permanently fix our inflexible and high-cost lease portfolio to achieve the sustainable operating model that we need to serve our members for many years to come.”

That means “a process of global engagement with our landlords to renegotiate nearly all our leases,” he wrote. 

Tolley added that the company intends to remain in the majority of its buildings and markets. 

In today’s market, this presents a number of conflicting problems for landlords:

• Tolley has essentially said that WeWork won’t keep all its locations — and might possibly pull entirely out of some markets. It’s an abrupt preemptive negotiation tactic to wave a flag of dispensability at property owners. “Agree to our terms or we’ll drop you,” to put it more bluntly.
• WeWork’s overly (and, in retrospect, foolishly) generous use of money to lock down locations early on means there is likely a very large gap between where rents are and where the company wants them to be.
• In many areas, office landlords already face serious challenges in keeping space leased, battling vacancy rates, and needing to maintain rents for the leased parts of buildings that can sustain the business of the whole.
• Giving in to serious demands for rent reductions from one tenant opens the door to others demanding equal consideration.
• As the Wall Street Journal pointed out, if WeWork were to end up filing for bankruptcy, the legal proceedings “allow for the rejection of undesirable contracts and would give WeWork legal power to reject undesirable leases while extinguishing its liability for any resulting damages claim.” And any leases rejected turn into unsecured debt, meaning the landlords would line up behind bondholders and any other secured creditors.

The next few weeks are going to be interesting for the entire office market.