Since WeWork said last summer that it was at risk for bankruptcy, and then actually filed for Chapter 11, a big question in CRE was what would happen to the landlords. Should they cave to the demands for lower leases/? Was there any real choice? And what would their lenders say?
Negotiations got notably tense. And then/? Things reached their current state, as described by the Wall Street Journal, which found that WeWork has managed to cut 16% of its long-term lease costs, or $3.7 billion, through lease rejections, which U.S. bankruptcy rules allow, or amendments.
“Our goal when we started this [lease restructuring] was to keep every building that we could, with de minimis exceptions, because we have great build-outs, we have great locations, and we have great members,” said Peter Greenspan, WeWork’s global head of real estate, told the Journal.
With about 500 landlords, that is a lot of negotiation and a great deal of value and money to potentially be lost. But with more to go, landlords face a difficult choice: the prospect of losing an important tenant on one hand or a lot of money on the other.
They can bite the bullet and accept that they’re on the losing side, agreeing to reduce rent rates. That may work for some. But there are a number of cascading implications. One is that if this tenant wants a special deal, other tenants might as well. Even if they don’t, granting a sizeable deduction to an entity occupying a lot of the building has a negative effect of reducing property values. Now there is a situation where the loan to value ratio no longer meets the requirements of the lenders, and they will have to agree to such modifications.
The alternative is to reject the changes and watch WeWork then walk away. That presents a different difficulty — the state of the office market. Presumably the building is in good shape, well maintained. But so are the other Class-A and trophy spaces, meaning competition while companies consider the ongoing challenge of hybrid work, and the decisions companies are making of how much space they actually need. Over the longer run there probably won’t be enough space to support the flight to quality, but that’s not an argument landlords want to hear when a building needs ongoing rental income.
Armada Hoffler Properties took the second route, with the WeWork lease at its building The Interlock having terminated at the end of 2023. The company “has been able to retain one of the largest single tenants in the space and has LOIs signed or pending on the majority of the remaining space,” it just announced and that’s all well and fine. But that may be the exception to an ugly rule leaving most landlords with few options.