WeWork didn’t mince words in its earnings report this week, flatly stating what anyone paying attention to its business and the office market could surmise: There is “substantial doubt” that the company can continue operating.
That’s obviously bad news for WeWork shareholders and employees, but Chapter 11 or Chapter 7 bankruptcy would also suck WeWork’s landlords, lenders and even the office market as a whole into the wreckage.
It’s an extremely unappetizing situation for all involved.
Chapter 11 would give WeWork the right to terminate its leases, leaving a lot of office owners with swaths of empty space and a lot of WeWork’s tenants without desks.
Because WeWork primarily leases older buildings, its demise could accelerate the pandemic-induced plunge in value and revenue for Class B and C offices. WeWork’s lenders wouldn’t fare any better, as it would be unclear how much money — if any — they could recoup.
“It’s an extremely unappetizing situation for all involved,” said Anthony Sabino, a bankruptcy expert at law firm Sabino & Sabino and law professor at St. John’s University’s Tobin College of Business.
The source of WeWork’s recent troubles isn’t hard to pinpoint: It suffers from the same problems as its landlords. Broad adoption of work-from-home has allowed tenants to shrink or even zero out their office footprints, and the rise in interest rates makes it hard to refinance debt.
But questions about WeWork’s long-term viability circulated for years, even before the pandemic.
“Our primary concern with WeWork is that while it has been successfully pioneering the shared office concept, the company has yet to post a profit or experience a downturn,” read a Morningstar report from August of 2019.
That would change — the downturn part, that is — six months later when Covid began spreading across the globe.
Once valued by its private investors at $47 billion, WeWork, now a public company, was worth just $274 million when the market closed Wednesday. Its stock price, which was $13 at its IPO, is just 13 cents.
At one time, WeWork was the largest leaseholder in New York City, so the number of landlords the company’s collapse would affect is vast. Crain’s reported that WeWork occupies about 6.4 million square feet across 70 Manhattan offices, with Boston Properties, Rudin Management, RXR Realty and Tishman Speyer among the landlords leasing the most space to the flailing firm.
Should WeWork file for Chapter 11 bankruptcy, which offers companies the chance to reorganize and continue, it could postpone payments on old debt and back rent. However, the company would be on the hook for any bills that come due after that. So if WeWork filed today, it would still have to pay September rent.
Landlords would have the option to force WeWork into liquidation, just as if WeWork filed for Chapter 7. But it’s uncertain how much cash that would actually leave for creditors, given that WeWork’s assets are leases that wouldn’t fetch as much money as they would have before the pandemic.
It’s an unappetizing choice for WeWork’s landlords: push the company into liquidation for an uncertain payout, or keep negotiating with the firm in hopes that it can stay solvent through bankruptcy.
“I think it’s a potential cluster situation,” said Ed Weil, national co-leader of law firm Dykema’s CMBS practice. “It could have a cascading effect.”
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