‘There’s no rulebook for this’: Real estate braces for WeWork fallout

WeWork’s chief executive has vowed the company will emerge from bankruptcy protection as the “global leader in flexible work”, but for many on this side of the Atlantic big questions remain over how much of a role the UK will have in this revamped vision. In a personal declaration filed in New Jersey, the company’s chief executive, David Tolley, whose role was made permanent in October after a five-month stint as interim chief executive, remained steadfast that this is not the end of the line for the company, but merely a point of redirection. Little has been said on the future of the UK business, which has left the commercial real estate community with more questions than answers. What is clear is that the flexible office industry was not immune to the financial strain that the Covid-19 pandemic put on the wider office sector, and remote working exposed WeWork’s vulnerabilities. Its filing for bankruptcy protection has been a long time coming. Lease negotiations Lease negotiations are ongoing for WeWork, which is now tied into leases on 777 buildings around the world. In the UK, things have come to a head in certain cases – it forfeited its leases at Helical’s the Bower, EC1, the week before last, after the landlord reportedly locked its doors to WeWork members following rental arrears for the September quarter. The flexible workspace provider had leases for six floors of the Old Street office building. Despite the company having since reoccupied the building after agreeing a short-term licence agreement with Helical and paying back the money it owed plus service charges, the incident has raised concerns for other landlords who may face similar situations with the operator. This will “of course prompt concern from landlords here in the UK”, says Andy James, director of flexible offices at DeVono. “While lease negotiations are continuing as part of their turnaround plan, the current proceedings are likely to strengthen the resolve of landlords here in the UK with their negotiating tactics to ensure they retain the upper hand.” He adds: “It has been apparent for a number of weeks that other flex providers are ready to step into the shoes of WeWork and its centres. The bankruptcy news in the US will give landlords further impetus to talk to others, or even plan to take on the space themselves.” As a result, some major WeWork landlords, including Almacantar, which owns One and Two Southbank Place, SE1, have avoided commenting on the future of covenants with the provider. But while some building owners are yet to put their heads above the parapet, others have said the company’s stake in their portfolios is not of a large enough scale to affect balance sheets. Deka Immobilien, which has WeWork as a tenant in four of its locations – two offices in London, one in Paris and one in Manchester – says it does not expect “any significant burdens for our funds”. It adds: “The WeWork share accounts for less than 1% of the total rental income in Deka Immobilien’s property portfolio. We are convinced we could continue to lease the space let to WeWork well due to its location and facilities.” Perhaps an unintended consequence of the company’s rapid expansion, this raises questions about whether there are limited numbers of landlords for which WeWork is a big enough part of the tenant make-up to raise significant concerns. Members, on the other hand, may be more perturbed. “The process has lifted the lid on the finances of WeWork,” adds DeVono’s James. “Although WeWork’s leadership have assured that it is business as usual in the UK, it will do little to dissipate growing uncertainty among its members. That uncertainty derives from a couple of aspects: first, is their centre to remain open? And, second, is WeWork likely to go into administration in the UK? Obviously, this will have financial and operational implications for members.” Wider impact While many have been left wondering whether WeWork’s struggles will seep into the wider flexible working sector, sentiment remains positive that demand for high-end flexible office space will not waver. Other operators are keen to stress that WeWork is not reflective of the sector in its entirety. “Everyone needs to be thankful to WeWork for what it has done to help define the market, but WeWork will not define its future,” says Chris Davies, chief executive of Uncommon. “The market is in good health and WeWork is a pit stop in this story.” Market sources remain confident that the Chapter 11 filing will not be the nail in the coffin for WeWork but acknowledge that the company has a struggle ahead. “It will still be around in some form,” adds Davies. “It has been a beacon in the market for showing that employees should have better.” Others are keen to note that demand for WeWork office space in the UK remains strong. “The UK is a healthy, pretty vibrant market for those guys, and they have higher occupancy rates here than in the US,” says John Williams, chief marketing officer at the Instant Group. “We still see clients who are looking for spaces,” he adds. “While some people are looking at this as possible contagion for the sector, that doesn’t seem to be the case as WeWork continues to be a big driver for interest in flex and co-working.” Although questions remain when it comes to WeWork’s fate, the sole certainty seems to be continued uncertainty as the operator figures out its next move. Though this may mark the beginning of the end for WeWork, one market source who did not wish to be named noted that “it’s called bankruptcy protection for a reason”, noting that WeWork can still recover, but that there is “no rulebook for this on such a global scale”. To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews Image: WeWork