February 7, 2020
WeWork’s setback after a failed IPO and the resulting bailout from Japanese conglomerate SoftBank Group could have a negative effect on several U.S. office markets, according to a recent study from Transwestern.
The firm recently released a research report, Where WE Go From Here, which examined the notable growth of the coworking sector as a whole, as well as WeWork’s strategy and circumstances before and after its failed IPO.
When comparing coworking expansion to the growth of top industries nationally since 2015, coworking ranks ninth, according to the study. Prior to WeWork’s IPO, momentum in the sector accelerated dramatically, improving its ranking to sixth among all industries through the third quarter of 2019, and by itself accounting for nearly eight million square feet of absorption.
At present time, WeWork’s U.S. Portfolio comprises 27 million square feet of space in 35 U.S. metros. New York accounts for 10.3 million of that with Los Angeles coming in second with 2.2 million square feet. Other large markets for WeWork include San Francisco (1.8 million square feet), Washington, D.C. (1.6 million square feet), and Boston (1.5 million square feet).
The success or failure of WeWork’s locations in those markets has the potential to affect availability, lease terms and other real estate fundamentals, impacting neighboring properties and entire submarkets, according to Transwestern.
“WeWork committed to more than half the total space it has leased within the past two years, at a time when rent was rising nationwide,” said Jimmy Hinton, senior managing director, investments and analytics at Transwestern. “Notably, more than a quarter of that space remains ‘unsold,’ presenting a significant amount of financial liability for the company. Today, WeWork is pressed to try and market more than seven million square feet of space to users, as the economy is beginning to slow and businesses are taking a cautious stance in an uncertain political environment.”
WeWork’s business model is grounded in its strategy to build communities by saturating select markets, and was predicated on positive leasing spreads between its own base rent and that of its sublessees.
That is an increasingly difficult balance as prevailing market rents increase over time, according to Hinton.
“Risks inherent in WeWork’s business plan would most probably have played out in periods of adverse market conditions,” he said. “As we now know, such circumstances came in the form of restrictive capital supply to WeWork, not from a dearth of tenant demand.”
The workstation pipeline of WeWork, as explained in its IPO, included five phases – Find, Sign, Build, Fill and Run. As of November of 2019, 66.6% of WeWork’s Build space, 20% of Fill space, and 6.5% of Run space was vacant nationwide, with Atlanta exhibiting the greatest percentage of availability, at 42.4%, compared to the total market portfolio.
According to the report, the majority (90.5%) of risk is related to lease commitments still in the Build and Fill phases, where WeWork is constructing space it intends to sublease, or is currently subleasing.
“By no means are we undermining the value of the coworking model, which has strong merits and a host of viable providers, albeit all with significantly smaller portfolios than WeWork,” said Hinton. “Rather, we aim to proactively equip coworking space users, building landlords leasing to WeWork, and investors near WeWork locations with market intelligence that will inform their decisions in the months ahead.”
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