As WeWork Scrambles To Stay Afloat, Up To $7B In Building Value Hangs In The Balance

A Wework Office At 125 West 25Th St. In The Flatiron District In New York.

As WeWork works to reduce its rent bill by any means necessary, it leaves billions of dollars of potential real estate value in limbo.

The coworking operator's U.S. portfolio totals 15.5M SF across 268 properties, which have a combined total footprint of 90M SF. If WeWork ceases operations and its locations aren't backfilled, its landlords would lose a combined $7B in property value, CoStar reports.

If landlords were to backfill 75% of space vacated by WeWork, they would still take an aggregate valuation hit of $2.5B.

After a second-quarter earnings report in which WeWork reported “substantial doubt” about its ability to remain in business, interim CEO David Tolley announced in early September that the company is renegotiating all of its leases and intends to vacate “unfit and underperforming locations.”

The ultimate fate of WeWork will have different effects across the U.S. office sector, depending on the level of exposure certain markets and buildings have to the coworking operator. About 100 WeWork locations account for more than 30% of the office space in the buildings they occupy, per CoStar. WeWork takes up over half of the leasable area at 50 buildings.

New York has by far the most exposure to WeWork leases, two-thirds of which are in Class-B or Class-C buildings — the type of asset that is already facing questions of obsolescence as tenants take less space in more expensive buildings.

In his Sept. 6 announcement, Tolley expressed confidence in the viability of coworking and flexible office space, even amid historic tumult for the office sector overall. But WeWork gained historic market share in its first decade of existence by taking on long-term liabilities in the form of traditional office leases while relying on short-term income streams inherent to the flexible workspace model.

At some properties where WeWork has already exited or ceased paying rent, financial troubles have not been far behind. Although the range of outcomes for WeWork as a company remains wide, WeWork's survival may hinge on how much value destruction it can hand off to its landlords.

Even after spending years working to undo excessive spending and expansion before its failed initial public offering in 2019, WeWork still sank 74% of its revenue into rent payments in Q2. Rent made up two-thirds of the company's operating expenses during the same period.

From the beginning of the year through 2 p.m. on Monday, WeWork's stock had lost nearly 95% of its value as it weathered the shock departure of CEO Sandeep Mathrani in May and the exit of multiple board members soon after. WeWork has since brought on new board members and advisers with backgrounds in restructuring, reportedly in the hope it can stave off bankruptcy.

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