How WeWork’s Potential Downfall Could Impact NYC Real Estate

WeWork impact NYC

WeWork’s Recent Woes

Flexible office space provider WeWork’s recent woes have been well documented in this space as well as others. The canceled initial public offering (IPO), founder and CEO Adam Neumann resigning his post amid investor pressure and the most recent story, SoftBank struck a deal to take control of the company.

For the most part, these issues have impacted WeWork investors and employees. Alot of whom could lose their jobs in the near future. However, CityLab reporters Sarah Holder and Kriston Capps recently explored what WeWork’s demise could mean for the New York City real estate landscape, where as they put it, flexible office space is king.

Will There Be a Lasting Effect?

The initial reaction is that WeWork’s problems will not immediately become a problem for the New York commercial real estate industry. WeWork’s fate could impact the flexible office space industry. in terms of how space is being designed, leased and occupied in New York City and beyond is a different story, according to CityLabs. Part of the reason for concern is WeWork did not own its product. Not just the space it occupies, but also flex space concept.

“The truth of the matter is that this is not an industry that WeWork created,” Ari Ginsberg, professor of entrepreneurship and management at New York University’s Stern School of Business told CityLabs. “A lot of the light that was on this industry has shown on them. When investors started questioning if is there’s a ‘there’ there, they began to question whether they had a solid business model.”

With WeWork’s setbacks, insiders believe the concept is sustainable, according to CityLabs. WeWork provides about a third of flexible office spaces across the United States. Approximately 700 other companies make up the final third of the co-working space providers, according to CBRE. The demand remains strong because customers enjoy the cost and lease terms these spaces provide.

Competition in the Market

Landlords could shake up the flexible office space industry however. If WeWork is out of the picture, landlords could create their own flexible offices. Then proceed to rent them out and dominate the market. It’s still unknown how landlords would include co-working spaces in their portfolios.

“In the past it has been through third-party flexible office operators in very traditional lease agreement formats,” Julie Whelan, head of occupier research for the Americas at CBRE told CityLabs. “There are some landlords that have the ability to conduct the offering on their own. There are others that want to get into partnership agreements. That way they have more control over the space and, frankly, the benefit of it in upside scenarios.”

That means corporate or the bigger landlords than can transform their office spaces into flexible office may do so. Since landlords aren’t dependent on WeWork in New York, they can sustain the long-term pain. Currently, none of the 10 biggest landlords in Manhattan have more than 5 percent exposure to a potential WeWork demise. CoStar data shows WeWork’s New York properties median square footage is a little more than 50,000 square feet. Plus, the median occupancy is 28 percent of the property. Meaning, WeWork does not operate entire buildings.

Distributing the Wealth

Smaller co-working space providers could step up to fill any void WeWork leaves, too. There are hundreds of co-working spaces in Manhattan that control about 14 million square feet of office space, according to market intelligence firm Yardi Matrix. Given that flexible office space makes up just four percent of NYC’s total CRE, it’s unlikely the share will drop a lot if WeWork does not rebound. The biggest threat to other flexible office providers appears to be from landlords if they opt to assume WeWork’s hold on the market.

“WeWork has gobbled up leases for so much space in so many cities, there’s a compelling case made that its landlords wouldn’t be able to afford for it to go under,” Andrew Ross Sorkin wrote in The New York Times in 2018.

Cautious to Trust

Some CRE owners have concerns however, according to CityLabs. Two landlords who operated WeWork sites in London told The Financial Times they wouldn’t sign new leases for the foreseeable future. They were actually making back-up plans for their existing WeWork offices if the company were to restructure.

“This affects WeWork more than it affects the real estate market,” Ginsberg told CityLabs. “It’s a bit of a rattling. In general the market always overreacts to bad news. People are going to look more carefully at perhaps leasing to other co-working companies.”

Meanwhile, companies like Rudin Management Company are standing by WeWork for now, according to CityLabs. The company, which owns approximately 15 million square feet of real estate in NYC, has just opened Dock 72 in Brooklyn Navy Yard with WeWork as its anchor tenant.

“Dock 72 got its design and built as a home for innovators like WeWork members, as the flexible office model has proven to serve significant market demands and has quickly become an economic engine in its own right,” Nicholas Martin, Rudin’s vice president of external and governmental affairs said.

According to Martin, tenants have said they appreciate being in a building with WeWork because it allows them to grow in one place if they expand their team. They can put a few employees in a low commitment area rather than lease more space.

“Despite all the jargon, (WeWork) was not this platform company, which is a sexy idea that implies this almost endless growth,” Ginsberg told CityLabs. “It turns out that technology was not a major part of that. It was just a real estate company. If it’s just a real estate company, then it comes back to basics.”

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