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Market Malaise And Schadenfreude: NYC Office Market Digests WeWork's Broken IPO

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WeWork’s very public, extremely swift fall from grace will make its mark on New York City's office market. But its impact may wind up being more psychological than fundamental.

WeWork New York Headquarters
A photo of WeWork's New York headquarters

Over the last nine years, the coworking company has leapt from occupying one floor in SoHo to being the city’s biggest private tenant to pushing out its CEO amid a bombardment of criticism over a hyped public offering.

With the IPO now canceled and WeWork leasing at a much slower pace, uncertainty — and, for some, a sense of relief — is sweeping across the market.

Industry players told Bisnow the flexible space phenomenon WeWork jump-started is here to stay, but landlords will be taking a more cautious approach to its patient zero. Its competitors may stand to gain from company turmoil, sources said.

And while many pointed to a healthy office leasing climate, and the fact that WeWork’s footprint is just 1% of the market, the impacts go beyond the math.

“There is a malaise over the market, as tenants are waiting to see what happens,” said one New York City broker, speaking on the condition of anonymity. "Tenants are cautious and not making decisions."

If WeWork were to start handing back leases, the person said, other tenants could feel emboldened to hold out for lower rents, higher tenant improvement allowances and other concessions from landlords.

“It may not impact the numbers, but it will have a bigger impact on the psyche of the tenants, thinking that the market is falling and there are better deals to be had," the source said.

So far, WeWork has pushed forward with the deals it signed as it gobbled up space, and the company said it won't stop signing new leases, as had been reported last week.

“WeWork continues to sign new lease agreements with our landlord partners, and remains committed to New York City,” WeWork said through a spokesperson, adding that the pace of new lease agreements will slow as the company pursues "strategic expansion" and focuses on finding a path to profitability.

Market Malaise And Schadenfreude: NYC Office Market Digests WeWork's Broken IPO
A rendering of the lobby at Dock 72, where WeWork is the anchor tenant. Rudin says hundreds of members are moving into the location this week.

“People are saying that the sky is falling — it is not,” said Real Estate Board of New York Senior Economist Laura Tomana. “We don’t think this WeWork issue is going to negatively impact either the office market in general, or coworking or flex space.”

Flexible office space makes up 3.6% of the office market share in the city, she noted.

“The fact is there is continued job growth in New York City, our economy is strong, companies are still moving here,” Tomana said.

Still, property owners are definitely reconsidering their positions in light of WeWork’s public skewering. The Wall Street Journal reported this week that some landlords no longer want to take WeWork as a tenant.

RXR Realty CEO Scott Rechler told the WSJ that WeWork needs to “rework its whole position in the marketplace” or landlords “wouldn’t feel comfortable” doing deals with it. RXR’s 75 Rockefeller Plaza is set to feature a 95K SF WeWork space, in a cost- and profit-sharing agreement announced earlier this year. Rechler declined to comment for this story.

In its third quarter Manhattan office leasing report released Wednesday, Savills referred to the initial public offering meltdown as a “fiasco” that will “cast a shadow of skepticism” over leasing for the rest of the year.

WeWork signed 500K SF in new New York City leases in the last three months alone in Q3, according to Savills. That brings its leased footprint in the city to 8M SF — nearly 60% of the flexible office inventory in the city, according to Savills' research.

Overall, Manhattan’s average asking rents jumped to $82 per SF compared to $75 this time last year. Availability dropped 50 basis points to hit 11%.

Some believe that while a major WeWork contraction wouldn’t threaten the city’s office market, a new world order is now at play.

“The balance of leverage has shifted, there is going to be more sanity in dealing with them,” said one national landlord of WeWork, who did not want to be named, adding the company would still consider WeWork as a tenant, though it has always approached those leases with caution. “A lot of landlords who are actively negotiating will be asking for better terms — if not economically, then structurally.”

WeWork Adam Neumann
WeWork's former CEO, Adam Neumann, taking a tequila shot on stage with Creator Awards winners in 2017.

Sources said many landlords had already begun tempering their exposure to coworking companies, well before WeWork revealed its IPO prospectus. One landlord who leases to WeWork said most landlords in the city have been careful to protect themselves against the risks of WeWork.

“I don’t think there is a landlord that is overly exposed to WeWork, except WeWork themselves,” the person said, adding that WeWork had become not just a tenant, but a major competitor for traditional landlords in recent years.

That reality is one that many landlords have been grappling with, with many landlords working to find ways to maintain their competitive edge amid the coworking craze. Tishman Speyer, Hines and the Durst Organization have all recently launched flexible office platforms of their own, and industry analysts predict other landlords will join them.

Still, some players — Marx Realty and Empire State Realty Trust among them — have staunchly, publicly avoided WeWork altogether. After years of hearing now-departed CEO Adam Neumann describe his business of subleasing office space as a revolutionary, world-changing concept, some real estate players have enjoyed the weeks of deeply negative coverage, including a litany of unflattering details about Neumann's behavior.

“I was touring space in New York last week for [a new CoStar office], and I ran into a number of owners, and I was really struck by the joyous schadenfreude,” CoStar CEO Andy Florance told Bisnow. “The owners, even though they stood to lose money with WeWork running into trouble, they were really enjoying them being knocked down a clip. I would call them euphoric.”

Putting aside WeWork’s business model, most agree the demand for flexible space is not going anywhere.

“I am yet to hear from a single landlord or investor saying that they are now skeptical about the demand growth for the category,” Industrious CEO Jamie Hodari said.

Industrious is one of WeWork's biggest competitors, but Hodari said he wishes WeWork success.

Nevertheless, the negativity around WeWork’s IPO has presented him with a business opportunity — he has received more inquiries for business since WeWork filed its now-infamous prospectus. The fallout has sharpened the industry view on coworking.

“All of this has forced landlords to step back and think in a much more nuanced, clearer way about what the path forward for them is, as regards to workplace as service and how to meet that demand in their buildings," Hodari said.

Savills Vice Chairman Jeffrey Peck believes the result will be greater use of partnership agreements — which Industrious and others primarily operate in — so landlords can share in the upside.

"I think the coworking/flex industry is certainly going to be around for the foreseeable future,” he said. “What form or fashion that will take and who the leaders are going to be is yet to be seen.”