What does WeWork's bankruptcy mean for NYC multifamily investors?
What does WeWork's bankruptcy mean for NYC multifamily investors?
TL;DR Probably very little.
WeWork filed for chapter 11 bankruptcy in a New Jersey court on Monday morning. The move will allow WeWork to do some heavy-handed restructuring of its debt and its outstanding liabilities. What does this mean and how might it impact multi-family investors?
Office properties have been standing on shaky footing in U.S. big cities ever since the Covid-19 pandemic, and WeWork’s bankruptcy will add to that distress. WeWork has filed to “reject” 69 unprofitable leases, 39 of which are in NYC (see pages 25-29). According to CRE Analyst, WeWork has somewhere in the ballpark of 220-240 locations in the U.S and 50-70 locations in NYC. That means the co-working company is cutting close to 1/3 of its existing leases and over half of NYC leases. WeWork also highlighted the top 30 landlords and leases (page 12) where it maintained IOUs of unpaid rent accrued. Out of ~$100MM owed to landlords today, ~$50MM is owed to NYC landlords. This pales in comparison to the rent WeWork is still on the hook to pay landlords in the future on its long-term leases, estimated to be in the billions.
But then, WeWork hasn’t been doing well for a while, so this outcome isn’t a surprise. Here are some anecdotes from certain landlords to drive the point home:
Walter & Samuels is an office landlord with five active leases with WeWork across its office buildings. Samuels’s building on 315 West 36th street is almost fully leased to WeWork and has been for a few years. When WeWork stopped making rent payments earlier this year, it forced Samuels to stop making mortgage payments on their $77 million loan on the building. As a result, the value of their property fell 35% by $42 million when it came time to re-appraise it.
Joey Chilelli of the Van Barton Group has a property at 980 Avenue of the Americas with close to 100% of the office square footage leased to WeWork. WeWork stopped paying earlier this year and the way Chilelli put it “We have tried to do everything we could earlier this year when they went to every landlord and asked for rent reductions and concessions.”
For office landlords, the silver lining should be that, even though WeWork has failed (for now) co-working as a concept has not. Other co-working companies have seen success since the pandemic. Industrious, a New York based company nearly doubled its number of locations since the beginning of 2020. Serendipity Labs will increase its location count by 50% next year. Most important among co-working companies is IWG, which controls brands like Regus, Spaces, and others, has signed up 600 new locations this year, and has plans to open more. Long story short – office landlords could try and strike deals with companies like these to shore up their bottom lines.
But this shouldn’t mean very much to multifamily investors because of how small co-working is as a portion of the overall office market in the U.S. According to Cushman & Wakefield, flexible office space accounts for less than 2 percent of the office space in the 20 largest U.S. metros. That number means that almost any distress that happens within the U.S. office market will be because of hybrid working and the pandemic, not WeWork’s challenges. Sure, WeWork’s troubles could in some select cases cause landlords to default on loans and they could cause some loan workouts – perhaps a handful of foreclosures (if lenders elect to do so). The bigger picture is that, in most cases, if “it” happens whatever it is, it’s because it was going to happen anyway. That means that this is something contained to WeWork. The only caveat to this is if somehow WeWork made up more than 10% of the office market in NYC, versus like 2% outside of NYC.
NYC multifamily investors are totally good!
For opportunistic office investors who read this, the full list of proposed rejected NYC leases is here:
• 1 Little West 12th St.
• 1 Union Square W
• 10 East 38th St.
• 10 East 40th St.
• 1156 Sixth Ave.
• 130 Madison Ave.
• 161 Avenue of the Americas
• 1619 Broadway, 11th Floor
• 183 Madison Ave.
• 200 Broadway
• 205 Hudson St.
• 22 Cortlandt St.
• 229 West 36th St.
• 255 Greenwich St.
• 261 Madison Ave.
• 28 West 44th St.
• 311 West 43rd St.
• 315 West 36th St.
• 38 West 21st St.
• 419 Park Avenue S
• 437 Fifth Ave.
• 437 Madison Ave.
• 44 Wall St.
• 483 Broadway
• 500 Fifth Ave.
• 505 Park Ave.
• 511 West 25th St.
• 54 West 40th St.
• 57 East 11th St.
• 599 Broadway
• 6 East 32nd St.
• 7 West 18th St.
• 8 West 40th St.
• 81 Prospect St., Brooklyn
• 980 Sixth Ave.
Sources: NYT, Crain’s NY, WeWork bankruptcy filing, Bisnow, The Real Deal, WSJ, Costar