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WeWork says it will renegotiate nearly all of its leases – and it’s another sign that commercial real estate is in trouble

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Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images

WeWork is attempting to renegotiate all of its leases for commercial office space, according to the company.The move is designed to help the company rightsize its cost structure after years of unsustainable growth.It’s also worrying sign of deep trouble in commercial real estate as debts near maturity amid sagging property values. 

In a bid to lower costs and rightsize its business, WeWork said it is embarking on a plan to renegotiate nearly all of its leases with the owners of the buildings in which it rents space. 

The move is a sign of the company’s ongoing distress, as it navigates the aftermath of a period of unsustainable growth, but it is also a warning sign for the broader commercial real estate industry.

WeWork CEO David Tolley said in a letter on Wednesday that its current lease liabilities “still remain too high and are dramatically out of step with current market conditions.”

Those “current market conditions” refer to a commercial real estate market that is under increasing pressure from higher interest rates, lingering work-from-home trends, and declining commercial real estate values.

As fewer employees work in offices compared to the pandemic, demand for office space has been in decline, leading to falling revenues for landlords. And as demand for office space falls, so to does the underlying value of the building itself.

Dwindling demand creates an especially difficult situation for landlords that are on the verge of refinancing the debt behind their commercial real estate, given that interest rates have soared over the past year and are at multi-year highs.

Refinancing debt from pre-pandemic interest rate levels of near 0% to today’s rates in the mid-to-high single digits could put increasing financial pressure on commercial real estate owners and lead to further defaults.

WeWork senses this widespread weakness in the commercial real estate market as an opportunity to renegotiate its leases on more favorable terms, and they could have some leverage if they threaten to walk away from the lease entirely.

“As part of these negotiations, we expect to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product,” Tolley said in his letter.

Vacancy rates in commercial office buildings has consistently ticked higher since the pandemic began in March 2020, with US office vacancy rates at about 13%, well above their pre-pandemic levels of about 9.5%. The hybrid work movement is also taking its toll on the commercial office real estate market, as companies consolidate their footprint or lean on co-working spaces like WeWork to facilitate in-person office meetings a few times each month. 

The percentage of workers who are still remote has stabilized at about 20%-25%, lower than pandemic levels but much higher than before COVID-19. According to Goldman Sachs, the amount of vacant office space will jump by 267 million square feet over the next decade and beyond.

All of this is driving a weakening market that is leading to rising defaults and delinquency rates for commercial mortgages. The delinquency rate for commercial office loans hit 5% last month, representing a near two-year high.

A recent report from Newmark Group suggests about $1.2 trillion in commercial real estate debt is “potentially troubled” and at risk of defaulting. Newmark estimated that there are $303 billion of troubled loans that mature through 2025, leading to a potential wave of painful refinancings.

“There’s going to be a reckoning, and everyone that waited to deal with the problem is going to regret they did,” head of research at Newmark David Bitner said in an interview with the Los Angeles Times last month. 

That reckoning could ultimately play to WeWork’s favor if they can secure more favorable leases, especially if workers eventually head back to the office.

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Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images

WeWork is attempting to renegotiate all of its leases for commercial office space, according to the company.The move is designed to help the company rightsize its cost structure after years of unsustainable growth.It’s also worrying sign of deep trouble in commercial real estate as debts near maturity amid sagging property values. 

In a bid to lower costs and rightsize its business, WeWork said it is embarking on a plan to renegotiate nearly all of its leases with the owners of the buildings in which it rents space. 

The move is a sign of the company’s ongoing distress, as it navigates the aftermath of a period of unsustainable growth, but it is also a warning sign for the broader commercial real estate industry.

WeWork CEO David Tolley said in a letter on Wednesday that its current lease liabilities “still remain too high and are dramatically out of step with current market conditions.”

Those “current market conditions” refer to a commercial real estate market that is under increasing pressure from higher interest rates, lingering work-from-home trends, and declining commercial real estate values.

As fewer employees work in offices compared to the pandemic, demand for office space has been in decline, leading to falling revenues for landlords. And as demand for office space falls, so to does the underlying value of the building itself.

Dwindling demand creates an especially difficult situation for landlords that are on the verge of refinancing the debt behind their commercial real estate, given that interest rates have soared over the past year and are at multi-year highs.

Refinancing debt from pre-pandemic interest rate levels of near 0% to today’s rates in the mid-to-high single digits could put increasing financial pressure on commercial real estate owners and lead to further defaults.

WeWork senses this widespread weakness in the commercial real estate market as an opportunity to renegotiate its leases on more favorable terms, and they could have some leverage if they threaten to walk away from the lease entirely.

“As part of these negotiations, we expect to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product,” Tolley said in his letter.

Vacancy rates in commercial office buildings has consistently ticked higher since the pandemic began in March 2020, with US office vacancy rates at about 13%, well above their pre-pandemic levels of about 9.5%. The hybrid work movement is also taking its toll on the commercial office real estate market, as companies consolidate their footprint or lean on co-working spaces like WeWork to facilitate in-person office meetings a few times each month. 

The percentage of workers who are still remote has stabilized at about 20%-25%, lower than pandemic levels but much higher than before COVID-19. According to Goldman Sachs, the amount of vacant office space will jump by 267 million square feet over the next decade and beyond.

All of this is driving a weakening market that is leading to rising defaults and delinquency rates for commercial mortgages. The delinquency rate for commercial office loans hit 5% last month, representing a near two-year high.

A recent report from Newmark Group suggests about $1.2 trillion in commercial real estate debt is “potentially troubled” and at risk of defaulting. Newmark estimated that there are $303 billion of troubled loans that mature through 2025, leading to a potential wave of painful refinancings.

“There’s going to be a reckoning, and everyone that waited to deal with the problem is going to regret they did,” head of research at Newmark David Bitner said in an interview with the Los Angeles Times last month. 

That reckoning could ultimately play to WeWork’s favor if they can secure more favorable leases, especially if workers eventually head back to the office.

Read the original article on Business Insider
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