WeWork’s New Normal: Trying To Fill The Huge Spaces From Its Pre-IPO Leasing Binge
Want to get a jump-start on upcoming deals? Meet the major D.C. players at one of our upcoming events!
WASHINGTON, D.C. — As WeWork tries to right its ship following its disastrous IPO attempt, it is opening several large, new spaces in the D.C. market that will add hundreds of thousands of square feet to its portfolio.
As it attempts to fill those spaces, it will do so with a radically different corporate outlook: The company is laying off 2,400 employees, has a new chairman and co-CEOs and is grappling with mounting losses: $1.25B in the third quarter alone.
WeWork has signed eight new D.C.-area leases totaling over 550K SF in the last year, and several of them are set to open in the coming months. The spaces will bring its D.C.-area portfolio to 22 locations totaling over 1.7M SF of coworking space, according to CBRE. The openings will require WeWork to capture a significant share of the office demand in a D.C. market that has experienced rising vacancy.
“I still think coworking is alive and well and will remain in demand, but as for WeWork itself, I’m not sure how they’ll be able to absorb a lot of this vacancy that is existing and coming online, especially here in Washington,” Savills Corporate Managing Director Jon Glass said.
The large blocks of coworking space WeWork is bringing to the D.C. market are opening as the city experiences record-high office vacancy rates. As of Sept. 30, D.C.’s office vacancy rate is 13.3%, according to CBRE. Market vacancy statistics count coworking facilities as occupied space, whether or not the operators have filled them.
Coworking providers have accounted for the lion’s share of D.C.’s leasing demand so far this year. CBRE’s research found 703K SF of net demand in 2019 has come from coworking, a majority of the city’s 1.3M SF of leasing demand this year.
“The coworking market has absorbed a lot of space, and it’s waiting to demonstrate its efficacy,” said Republic Properties CEO Steven Grigg, who signed a lease with WeWork in a North Capitol Street building in April. “But I do think that you’re going to need additional demand. Whether that demand goes into coworking or directly into leases, you need additional demand.”
Adding to the challenges WeWork faces in filling its rapidly expanding D.C.-area footprint is the negative publicity the company has faced after attempting to go public. The company’s August IPO prospectus provided a glimpse into its financials and was heavily scrutinized by investors, in part because of its nearly $50B in long-term lease commitments. The disclosures ultimately led to WeWork’s stunning fall from grace.
At least one potential deal WeWork had in the works for a D.C.-area lease fell through after the filing. Shooshan Co. Chairman John Shooshan told Bisnow that WeWork had been in talks to sign a lease at his company’s 4040 Wilson Blvd. project in Ballston, but those discussions ended without closing a deal.
“They’ve got new leadership, they’re trying to figure out how to go forward, so I think they’ve stepped back,” Shooshan said. “The industry has tried to figure out whether this is isolated to WeWork or will metastasize with the coworking industry.”
Despite the company’s constant state of uncertainty over the past few months, one thing remains clear for WeWork’s D.C. team: It still has hundreds of thousands of empty square feet it must fill with new members.
WeWork, which declined to make anyone available for an interview for this story, said in a written statement it has seen strong interest in its new D.C. buildings. It said that interest has included midsize companies and larger enterprises, including one full-floor tenant that moved into its new Rhode Island Avenue space this week.
The companies that can absorb significant chunks of space could play a critical role in WeWork’s ability to fill up its huge pipeline of new D.C. spaces, an effort that has included taking out advertising space in Metro stations and offering significant discounts to new members.
But there are only so many companies in D.C. looking to lease a full floor of office space, and many of them are still opting to stick with the traditional model of a direct lease with a building owner.
Additionally, the troubles WeWork faced with its attempted IPO have caused some tenants that are leaning toward coworking to take a closer look at the other options on the market, brokers say. In a tenant-favored market with a heavy supply of new coworking options to choose from, these companies are able to use their leverage to secure even greater discounts.
The Leasing Binge
In January, WeWork celebrated the opening of its 13th D.C.-area location, a coworking space on the University of Maryland’s College Park campus. The ribbon-cutting happened as WeWork was fresh off a new funding round from SoftBank that valued it at $47B. It had grown its global portfolio to more than 335 locations across 84 cities, and it showed no sign of slowing down.
It has grown largely by leasing spaces, but has also partnered on acquisitions. In D.C.'s Dupont Circle neighborhood, WeWork bought a building in partnership with The Meridian Group and plans to open a 100K SF coworking space, a project that led to the closing of bars The Front Page and Buffalo Billiards.
A timeline of WeWork’s D.C.-area leasing activity over the past 12 months shows rapid-fire deals for large coworking facilities, often near its other spaces.
- December: WeWork leased 67K SF at 700 K St. NW.
- Feb. 12: WeWork signed a full-building, 104K SF lease at 1701 Rhode Island Ave. NW.
- April 1: WeWork announced a 110K SF lease at Midtown Center, 1100 15th St. NW.
- April 22: WeWork announced a 25K SF lease at 660 North Capitol St. NW.
- May 9: WeWork announced a 111K SF lease at Capitol Crossing, 200 Massachusetts Ave. NW.
- July 30: Carr Properties announced it signed WeWork at 7272 Wisconsin Ave. It did not disclose the square footage, but a CBRE market report pegs it at 60K SF.
- July 31: Piedmont Office Realty Trust announced it signed WeWork for 28K SF at 901 North Glebe Road in Arlington’s Ballston neighborhood.
- Aug. 7: Building permits reveal WeWork signed a 107K SF lease at 655 New York Ave. NW.
Just one week after the 655 New York Ave. permit was filed, marking its eighth D.C.-area lease in less than a year, the tide began to turn for the company.
The We Company, WeWork’s parent, released its IPO prospectus Aug. 14, disclosing that WeWork recorded a net loss of $690M during the first six months of the year, and that it had $47.2B in lease payment obligations with an average term of 15 years.
The prospectus also revealed details about CEO Adam Neumann’s controlling ownership position and history of intertwining his personal finances with the company’s. Six weeks later, after investors expressed concern over the revelations from the prospectus, Neumann resigned as CEO.
The company later scrapped its plans for an IPO, and SoftBank in October agreed to take ownership of WeWork at an $8B valuation, less than a fifth of its valuation nine months prior. SoftBank Chief Operating Officer Marcelo Claure took over as WeWork’s executive chairman, overseeing new co-CEOs Artie Minson and Sebastian Gunningham.
Despite the turbulence the company has experienced, the build-out of its new D.C.-area spaces has continued, though not without some apparent delays.
The Capitol Crossing, 700 K and 655 New York spaces are all slated for 2020, according to a WeWork spokesperson. A sign on display in September in WeWork’s original Chinatown space advertised the 655 New York space as opening in December. (Disclosure: Bisnow is a member at the WeWork Chinatown space.)
WeWork declined to comment on any delays for the opening of the new locations. But Glass, a tenant broker, said the WeWork members he has talked to have been delayed by as much as five months for agreements they signed at its yet-to-open spaces.
Avison Young Principal Nick Gregorios, a Northern Virginia leasing broker, said he has concerns about the size of some of the new coworking spaces on the market.
"I get worried, personally, when I see these operators take down 100K SF to 200K SF at a time," Gregorios said. "Some of the operators, in my opinion, have been taking a rifle approach, as opposed to a shotgun approach, where they identify certain markets to do smaller facilities. For some of these groups to come in and take down a full building, it’s worrisome because we haven’t been through a downturn with this."
To We Or Not To We?
That is the question for many companies, especially growing startups deciding what type of office environment will help take them to the next level. Whether more midsize to larger companies choose WeWork will play a big role in determining the lease-up pace for its new wave of spaces.
One deal WeWork shared with Bisnow shows a positive sign for its efforts to ink larger users. GetUpside, which began in a four-person WeWork space in Chinatown, moved into a full-floor office at WeWork’s new 1701 Rhode Island Ave. NW building this week.
GetUpside Chief Financial Officer Daryl Ribeiro said the main factors in its decision were location, flexibility, branding and, of course, money.
The 1701 Rhode Island location allowed GetUpside, a tech company that connects customers with discounts at local businesses, to be in a central location with many nearby retailers.
The building also gives GetUpside the flexibility to grow. It has about 75 employees in a 15K SF space that WeWork says can fit up to 285 people. Ribeiro told Bisnow the company doesn't plan to pack the space with that many people, but he said GetUpside could double its headcount by the end of 2020.
The company’s 24-month lease gives it an option for a third year, and Ribeiro said if it needs more expansion space, it is confident WeWork could accommodate it within its ample space in the building.
GetUpside’s space also has some branding touches, including logos, painted walls and a soon-to-be-installed logo on the entrance to the building. Because it occupies a full floor, the common areas inside its space and a small outdoor patio will be reserved for GetUpside’s employees.
“It feels less impersonal and it actually feels more and more like your own space, your own office, and that typically does not happen in coworking space anywhere,” Ribeiro said.
The company considered direct leases, but Ribeiro said GetUpside didn’t have enough certainty in its growth trajectory to commit to more than five years. When it looked at potential five-year leases and factored in the costs of building out and furnishing the space, he said it was no cheaper than WeWork’s deal, which included a discount.
“When we contemplated the all-in cost of a fully built-out space over the term … it was an economically superior option taking the space here,” Ribeiro said.
The company’s growth and commitment to WeWork could give the coworking giant confidence in its ability to lease up its incoming D.C. footprint. But for every GetUpside that expands from a four-person office to a full floor of WeWork space, there could be a company that chooses to go the path of Aquicore.
A D.C.-based PropTech company that started in a coworking space, Aquicore then graduated to a subleased space. This month, it announced it signed a 17K SF direct lease with Boston Properties at 401 Ninth St. NW.
Aquicore founder and CEO Logan Soya said he considered coworking spaces, including WeWork. He said the ability to customize its space and have its own branding played a part in Aquicore’s decision to pursue a traditional office lease rather than taking a large portion of a coworking space.
“I know some of the coworking spaces advertise the ability to make it your own, but you still have that WeWork smell and feel when you end up going down that road,” Soya said.
Soya said cost also played a role. While WeWork offered Aquicore a discount, he said it got a better deal out of its lease with Boston Properties, which runs through December 2023. It is not currently utilizing about 6K SF of its leased space, giving it room to grow.
Whether the majority of D.C.’s growing companies go the direction of GetUpside or Aquicore remain to be seen. But CBRE Senior Manager of D.C. and Baltimore research Wei Xie said she is not seeing many companies that engage third-party brokers opting to occupy coworking space.
“It’s very rare we see a major tenant that was in the market that ended up not signing a traditional lease and instead ended up going to a coworking provider,” Xie said, adding that she defined a “major” tenant as one that could occupy at least one full floor.
The Battle For Tenants
Even for growing companies that decide to open large spaces in coworking facilities, there are many competing options that could take D.C.-area business away from WeWork.
The region has 170 coworking spaces — including 88 in the District, 53 in Northern Virginia and 29 in suburban Maryland — totaling 4.8M SF, according to CBRE. While WeWork comprises 47% of the District’s coworking stock, it makes up 22% of the market in Northern Virginia and 17% of the market in suburban Maryland.
Competing coworking and flexible office operators include MakeOffices with 10 locations, Spaces with seven locations, Industrious with six locations, plus additional providers like Novel Coworking, Convene, Bond Collective, Mindspace, Mixer, Serendipity Labs, Cove, Two Birds, Eaton House, The Wing and Knotel.
The plethora of providers vying for members has given tenant brokers the leverage to negotiate better deals for their clients, Glass said. He said WeWork has offered generous discounts, and many companies are still willing to lease with the coworking leader if it’s the best deal, despite the negative headlines in recent months.
“A lot of them think it’s still worth the risk because of the discounts,” Glass said. “They’re still open to doing business with WeWork, but they’re a lot more mindful of what the alternatives are than they were this time last year.”
Tom Fuge, regional vice president for Truss, a platform that connects companies with traditional office and coworking space, said tenants have begun to look at WeWork with a more critical eye following the failed IPO.
“People are cautious right now,” Fuge said. “They’re asking more questions than they were before, primarily: what’s WeWork’s plan? What are they going to do? And are they going to continue to grow?”
Adding to the growing stock of flexible workspaces, many landlords such as WashREIT, Carr Properties and Tishman Speyer are also building out coworking-style office suites in their buildings. The efforts from landlords come as they see coworking providers beginning to take larger tenants off the market because they can offer shorter lease terms with more flexibility to grow and greater amenities.
“What we’ve seen is a shift in the market,” Fuge said. “WeWork grew so fast and were able to give so many options in so many pockets of D.C. that owners realized they had to start competing.”
WashREIT Vice President Anthony Chang said his company’s flexible workspace concept, branded as Space+, has benefited from companies growing out of coworking spaces and seeking more customizable offices. But as coworking providers like WeWork move more toward enterprise users, he said the environment may become more competitive.
“As it stands now, I think all of the coworking growth has been positive because it’s basically creating a feeder of demand for the product that we’re delivering,” Chang said. “Right now, it’s a pretty healthy relationship. Ask me in another three years, and we’ll see what that looks like.”
Many landlords also say they prefer to keep coworking space to a maximum of 20% or 30% of a building, making WeWork’s full-building lease at Akridge’s 1701 Rhode Island development an outlier.
Akridge sold the building in July for more than $1,000/SF, putting it among the priciest D.C. office building sales in history. EagleBank Executive Vice President Ryan Riel, whose bank financed the project, said he was initially wary about leasing the entire building to WeWork.
“We feel very lucky to have been repaid on a certain project that went wholly leased to WeWork and got transacted for over $1,000/SF,” Riel said at a September Bisnow event. “Personally speaking, that was a scary lease to take on. The coworking space, the depth of that market is to be defined. It feels like it’s oversupplied to some extent, but I don’t know what the future holds in that space. It’s one of the danger points in my view.”