a photo of a WeWork office building
There are more than 100 WeWorks locations in Manhattan alone. Mark Makela/Reuters

The troubled coworking company is the largest office tenant in New York City. What happens to the city’s commercial real estate market if it goes under?

At the start of 2019, the coworking company WeWork was leasing between 500,000 to 1 million square feet of new space in cities around the world, every day. As startups and freelancers and established firms turned to its network of shared offices for flexible rentals, WeWork started to resemble tech goliaths like Amazon and Uber—more than a business, it was a vehicle for grandiose statements about the future. WeWork’s expansive vision included opening a pricey “conscious entrepreneurial school” called WeGrow, and the company’s CEO, Adam Neumann, dreamed of becoming the first trillionaire prime minister of Israel, or maybe (also?) the next president of the United States.

Over the past few months, however, bad news about the business has snowballed. WeWork’s parent operation, the We Company, was primed to go public in September at a value of $47 billion. That number was slashed in half overnight as doubts about the company’s business model and details about Neumann’s spendy behavior started to fill the news. The losses are staggering: $1.3 billion in the first half of the year, or a loss of $5,200 per customer per year. By mid-October, Neumann was out, and the IPO had been delayed indefinitely. The WeGrow academy shuttered. Thousands of layoffs are planned. This week, Bloomberg reported that the We Company is considering a bailout that would put the company under the control of Softbank, the Japanese investment company that heavily funded it.

WeWork is the largest office tenant in New York City, surpassing J.P. Morgan Chase in 2018: It holds some 8.9 million square feet of office space and has more than 100 locations in Manhattan. The company’s sudden decline—and the specter of a broader economic slowdown—has some observers asking what will happen if WeWork goes under, especially in Manhattan, where flexible office space is king.

The short answer is nothing immediately dramatic: The We Company’s bonds may be in freefall, but the demise of WeWork would be unlikely to spell doom for New York commercial real estate. However, the company’s fate could shake up how flexible office space is designed, leased, and occupied, in New York City and beyond.

WeWork’s fundamental problem is that the company doesn’t own its product. This is true of the physical space it occupies—which is leased, not bought—but also true of the concept the startup has popularized. Though the We Company raised money (and hype) by marketing itself as a tech innovator that used algorithms to reconfigure office spaces and build the ideal conference rooms, it’s at heart just a middleman.

“The truth of the matter is that this is not an industry that [WeWork] really created,” says Ari Ginsberg, professor of entrepreneurship and management at New York University’s Stern School of Business. “A lot of the light that was on this industry was 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.”

It’s tempting to read the signs of the We Company’s rollercoaster year and potential demise as evidence of a bubble primed to burst: It’s often lumped in with disruptive platforms like Uber, Postmates, and other buzzy companies that stand to lose billions of dollars this year. Nevertheless, real estate experts say that coworking itself is here to stay, with or without WeWork and its signature “Do What You Love” mugs. The sector is top-heavy, but not disastrously so: Nationwide, WeWork provides one-third of flex spaces, while nine other operators account for another third. (Nearly 700 companies make up the final pie slice, according to the commercial real estate and investment firm CBRE.) Demand is strong. Consumers appreciate the speed to market and capital deferral that flexible office space provides, and landlords know it.

But there is a sea change coming for flex rentals, one that predated the We Company’s troubles. If WeWork leaves the picture, there’s nothing stopping landlords from building their own flexible offices, renting them out in pieces, and cornering the market that WeWork championed. How landlords will incorporate coworking spaces in their portfolios going forward is more of an open question, according to Julie Whelan, head of occupier research for the Americas at CBRE.

“In the past it has been through third-party flexible office operators in very traditional lease agreement formats,” Whelan says. “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.”

In other words, large or corporate landlords that can WeWorkify their office spaces may do exactly that. There’s no landlord or submarket that’s wholly dependent on WeWork, at least in New York, meaning that the long-term pain will be manageable. None of the 10 largest landlords in Manhattan has more than 5 percent exposure to potential WeWork fallout. Of the properties WeWork occupies across New York City, the median square footage is just over 50,000, according to a CityLab analysis of CoStar data, with a median occupancy of 28 percent of the total property. For the most part, WeWork doesn’t run whole buildings.

There’s nothing stopping WeWork’s many boutique coworking competitors from stepping up, either. There are several hundred coworking spaces in Manhattan alone, holding down about 14 million square feet of office space, according to market intelligence firm Yardi Matrix. All told, flexible office space accounts for about 4 percent of New York City’s total commercial real estate; that share isn’t likely to crater even if the We Company does. The company’s retreat could have consequences for those other flex-office providers, though, if landlords themselves decide to step up into the role.

There’s a precedent for such a shakeout. When Regus, an early WeWork-style office sharing company based in the U.K., filed for bankruptcy in the midst of the 2001 dot-com bubble, many of its tenants fled. That left the firm with long-term leases and no one to fill them. (It was reorganized into a now-powerful office services company called IWG, and still operates 46 locations in New York City.) Twenty years ago, that company looked too big to fail, and some fear that now WeWork is, too.

“WeWork has gobbled up leases for so much space in so many cities, there’s a compelling case to be made that its landlords wouldn’t be able to afford for it to go under,” Andrew Ross Sorkin wrote in The New York Times back in November 2018. The worry is that the company will fail just as the economy turns the corner toward a recession (which is not a given yet). As it stands, commercial vacancy rates are high (and rising) in New York, even after a strong surge in new commercial leases this year. The sting will be worse in WeWork markets where new office leases are harder to come by.

Some building owners are already spooked. Two anonymous landlords who operated large WeWork sites in London told the The Financial Times “they would not sign new leases for the foreseeable future and were making contingency plans for their existing WeWork offices in the event of a restructuring.”

Landlords may already be looking at the We Company’s smaller peers as riskier bets in light of WeWork’s frustrations. “This affects WeWork more than it affects the real estate market,” Ginsberg says. “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 coworking companies.”

But companies aren’t abandoning WeWork yet. Rudin Management Company, which owns nearly 15 million square feet of real estate in New York City, is readying to open Dock 72 in Brooklyn Navy Yard, a six-story glass tech hub with WeWork as its anchor tenant. “Dock 72 was designed 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,” says Nicholas Martin, Rudin’s vice president of external and governmental affairs. He’s received feedback from tenants who say they appreciate being in a building with a company like WeWork, because it gives them the flexibility to grow in one place if they expand their team. Instead of leasing more property from the building, they can stick a few employees in low-commitment “hot desks” on another floor.

Dock 72 also represents a departure from the stereotypical image of coworking life: It’s not just Kombrewcha-swilling freelancers at hot desks, but large multinational corporations such as IBM and Verizon that have signed on to lease WeWork’s space there. Such “enterprise tenants” have become key partners in WeWork buildings across the country. Thirty percent of Microsoft’s sales department operates out of WeWork spaces; Amazon rents out the entirety of WeWork’s Manhattan 2 Herald Square office; Airbnb hosts its Berlin office in a WeWork. (The Atlantic has a few employees in a San Francisco WeWork, too.) If WeWork winks out of existence, these enterprise tenants would likely figure out a way to stay put. Short-term pain is unavoidable if and when WeWork tanks, but others will step up—whether that’s landlords, third parties, or partnerships between the two.

Whelan predicts a slowdown in the growth trajectory for flexible office space—a “rightsizing,” as she puts it. The bad headlines for Adam Neumann alone could tell you that much. But coworking space isn’t going anywhere. Over the last five years, owners with all the necessary tools—the building, the ability to design and build out office space, and the capacity to operate an office—have been entering the market, whether by themselves or in partnership with third-party operators. “Landlords that have the resources to do it, the scale to do it, are playing in the space,” she says.

As a subleaser, WeWork only ever checked off the boxes for building out a space and operating an office—more an overly ambitious property-management company than a disruptive tech startup. That’s one reason why landlords and tenants likely won’t have a problem filling the gap in the long run.

“Despite all the jargon, it was not this platform company, which is a sexy idea that implies this almost endless growth,” Ginsberg says. “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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