WeWork’s Bankruptcy Complicates Office Outlook

There’s been a lot of speculation about the office sector and where it might end up. Betting on extremes, no matter which, is potentially dangerous even when the dynamics are well understood.

In the case of WeWork’s bankruptcy filing, sitting atop a significant shift in the use of traditional office space, pointing to the most likely outcome is even more difficult.

“WeWork’s Chapter 11 bankruptcy filing pressures an already precariously positioned office sector undergoing structural change,” Moody’s Analytics CRE recently noted. “At the national level, 2023 Q3 vacancy stood at 19.2%, perilously close to the 19.3% record high vacancy rate observed in 1986 and 1991 – Moody’s Analytics CRE forecasts that by the end of this year, office vacancies will once again reach that 19.3%.”

In the past, office did recover with vacancy rates receding to a previous norm. But previously there wasn’t a massive reconsideration and restructuring of the property type. With work-at-home and hybrid having driven out-of-office work to heights never seen before the pandemic, what had been taken for granted is no longer guaranteed.

Here are some of the forces at play that make the entire situation complicated and confusing:

• WeWork had already indicated that it expected property owners to renegotiate leases, and that it would withdraw from buildings or even entire markets if didn’t get deals that helped bring down expenses that it had negotiated and agreed to in the first place. The addition of bankruptcy adds more pressure. The legal process will let WeWork cancel leases and cap the damages landlords can get. • As Moody’s indicated, WeWork typically leased A and A+ Class office space. In theory, there could be great demand for the space that opens. However, that would likely come from tenants that move from Class B or C spaces, which could have a heavier impact on those property owners. There is also the possibility that many tenants might want to stay in place. Taking WeWork out of the middle might mean better deals for occupiers and owners, at least for bigger companies that looked at space as a longer-term consideration. However, what happens with smaller companies that used flex space as a way to jumpstart themselves but were at the stage where their futures were not certain. If so, what would landlords do? Try to join the marketing cacophony of flex space vendors? What would they have to do to reach the market effectively? • Bloomberg reported that office workspace provider IWG has been in talks to pick up some of WeWork’s locations. While the giant has been far more financially stable, it would be unlikely to pick up that many of the released spaces, so they seem an unlikely cavalry. • And the major metros where WeWork has the largest presence also have significant current levels of office vacancy. The owners of each metro collectively face greater general dangers.

The collection of contradictory forces is why estimating the full impact of WeWork’s bankruptcy is so difficult.