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WeWork's Landlords Aren't 'Going To Play Bank Anymore'

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Global coworking giant WeWork quickly became one of Atlanta's largest office occupiers with a string of big leases inked with various landlords, but the company's recent upheaval — from the resignation of its CEO to the withdrawal of its IPO — will have landlords being more cautious when dealing with the former office darling in the future.

Dilweg Cos.
WeWork's signage atop 101 Marietta St. in Downtown Atlanta

“I think coworking is still a legitimate concept and platform,” Transwestern Managing Director Bradley Fulkerson said. "But just given [WeWork's] turmoil … I think it would give me some concern with them."

All of WeWork's signed leases in Atlanta remain on schedule to open as planned, a WeWork spokesperson said. WeWork also continues to sign new lease agreements, the spokesperson said, but more slowly than it has in recent years as it has racked up $47B in lease obligations, it said in its since-withdrawn initial public offering prospectus.

WeWork's coworking presence in Metro Atlanta now encompasses more than 760K SF, according to data compiled by Transwestern, including locations at Tower Place 100 and Terminus 100 in Buckhead, Coda and 725 Ponce in Midtown, The Interlock project off Howell Mill Road in West Midtown, 101 Marietta St. in Downtown Atlanta and the Halcyon mixed-use project in North Fulton.

There is a rising tide of skepticism among major office landlords as to WeWork's viability, with many proclaiming they wouldn't work with the coworking giant, Forbes reports.

Kirk Rich Avison Young
Kirk Rich of Avison Young

A handful of landlords interviewed by Bisnow say they would continue to consider WeWork as a tenant, despite its recent woes. But the attitude toward it will be much different, especially when it comes to the amount of money they will shell out for tenant improvement allowances.

“We would ask questions up front that we would not have asked six weeks ago,” Avison Young principal Kirk Rich said. “Up until today, I think landlords have been putting the majority of the money in and playing bank. I don't think they're going to play bank anymore.”

While it is unknown what the average tenant improvement package for WeWork is in Atlanta, coworking in general has been part of a reason that costs for developers have jumped in recent years. Coworking operators accounted for nearly half of all U.S. office absorption in 2018, so their impact on tenant improvement allowances has been seismic, according to Real Capital Markets' 2019 Office Investor Sentiment report.

WeWork has made a startup behemoth out of the concept of shared office space based on the atmosphere it creates, and its designs have become influential enough for WeWork's parent, The We Company, to start an entire office design and management arm for corporate headquarters.

Coworking requires more technological infrastructure because of how many users each space holds and their various individual needs, but many WeWork-style touches carry a hefty price tag, the kind that may be tougher to demand of landlords now.

“Some of the things they've been able to demand in the past, I don't see that going forward,” Selig Development Co. CEO Steve Baile said. "I don't think we'd put as much capital into their deals."

Jeff Shaw Bridge Investment Group Partners
Bridge Commercial Real Estate CEO Jeff Shaw

Bridge Commercial Real Estate CEO Jeff Shaw said a coworking operator needing flex space can require a landlord to pony up three times the startup and construction capital of a standard lease. Landlords are increasingly cautious about who they sign on with when it comes to flexible office providers.

“In this model, an owner's break-even point, best case, may not occur for several years,” Shaw wrote in an email. "They also need to be very comfortable with the local expertise and experience of the flex operator/manager they select to work with."

There may be landlords who simply will no longer deal with WeWork for now. One prominent landlord representative, who asked to remain anonymous to speak with candor, said his firm wouldn't consider leasing space to the coworking giant.

“I think everyone is taking a break at this moment," said the source, who had previously negotiated, but not executed a deal, with WeWork. "It's like a bloody street fight that just has taken place, and everyone needs to go back home and rest."

The source added that WeWork's travails may hurt its pursuit of big company contracts, known as its enterprise business. WeWork recently reported that 40% of its members work for companies with more than 500 employees, and it has been its largest source of growth.

“My guess is that their enterprise business is completely shot now,” the source said. "What happens when WeWork goes sideways with a landlord? It's just an added layer of risk that corporate America is not going to pony up for."

If there is an irony here, it is that WeWork's rampant growth may also benefit it in the long run.

“It doesn't change the fact [that] from city to city and market to market, they're a major player,” said a real estate investor who also asked to have their name withheld. “Companies are still struggling to find office space in urban markets.”

That factor, though, could be tested in the next downturn, as companies begin letting excess office space go and building vacancies rise. Plus, as flexible space demand increases, office landlords have increasingly launched their own operations — players like Hines, Tishman Speyer and CBRE have already done so — putting further pressure on coworking providers, Baile said.

“They've been getting out over their skis for a while, and corporate America hasn't shied away from them,” he said. “I won't say [coworking is] 100% the future of office, but it's got some strong merit for sure.”