By Aaron Jodka | OCTOBER 2019
WeWork has aggressively expanded its footprint in Boston, becoming the city’s second-largest tenant in a matter of just five years. Its growth has been nothing less than spectacular. The company has made headlines for its rapid expansion, but lately it’s made them due to its now-defunct IPO. And that is raising a lot of questions in the minds of tenants, landlords, and capital sources alike.
First, it’s important to understand where WeWork is. The map below shows all of WeWork’s Boston locations in black; white areas indicate spaces where the company has been in negotiations in order to expand. The dots show other coworking or flexible office providers. In total, WeWork’s Boston footprint is nearly 1.6 million SF. Adding in its Cambridge space, its footprint tops 1.7 million SF.
So, what’s next for the coworking giant? I see three most likely scenarios for Boston:
1. Stay put. WeWork decides to halt its expansion to prove the business model ahead of a future-date IPO. This would leave it a major space occupier but remove it from the “active tenant in the market” list and stop its expansion mode.
2. Cut back. WeWork has set up each location as a separate LLC/identity so in the event of sluggish tenant/enterprise demand, it could shutter underperforming locations — think how retailers such as Sears or JCPenney cull their portfolios. Because the firm has grown dramatically recently, it has a lot of space to fill. If lease-up is slower than expected, we could expect to see some of the most recent locations closed, as they have the highest costs in their local portfolio.
3. Bankruptcy. Recent reports suggest that WeWork is cash-strapped, and SoftBank is coming to the rescue with a capital infusion/ownership takeover. Right now the firm has tremendous liabilities, to the tune of $40 billion, in lease obligations (across its entire portfolio). In the event of bankruptcy, Boston’s vacancy would increase 2.1 percentage points if all spaces came back empty. In reality, however, landlords would be able to make deals with current WeWork tenants, lessening the impact.
The strategy for tenants, landlords, and capital sources will vary. Tenants should have a Plan B in mind in case scenarios two or three occur. That could be looking to other coworking/flexible office providers, working with an advisor on finding readily available move-in-ready sublease space, or the cheapest of alternatives, working from home, the coffee shop, or the library. Landlords still in the free rent period with WeWork will need to strategize on how best to re-tenant space if scenario three occurs. This will weigh on their returns, as WeWork has recently been receiving TI allowances of $120/SF–$160/SF. If spaces were to be ripped out and turned into spec suites, landlords would be in the hole by $200/SF-plus, certainly not what they planned during underwriting. Along those lines, landlords can be proactive and invest in their vacant spaces with spec suites. Landlords have proven very successful in attracting tenants in this cycle, and having on-demand space for firms to move into can be a differentiator.
Capital sources need to price risk into any WeWork lease. Lenders are likely to discount the value — in some cases substantially or in totality — of in-place WeWork leases. Alternatively, opportunistic funds could target good pieces of real estate and pick off mezz debt or strategic pieces of the capital stack to be in line to foreclose on assets with major cash-flow challenges. But foreclosure is not likely to occur in Boston, even in a bankruptcy scenario. While WeWork is a massive tenant, its leases are spread throughout the market and it doesn’t own anything here, nor — aside from 1 Milk Street and 745 Atlantic — does it lease a majority share of a building.
WeWork, along with other coworking/flexible office space firms, has been a key disruptor in the commercial real estate space. All have a place in the market, serving a varied group of tenants ranging from small startups looking for ultimate flexibility and ease of occupancy to enterprise firms seeking shorter-term leases and outsourced real estate risk. Coworking is here to stay. Is WeWork?