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WeWork Landlords in London and New York Are Bracing for a Market Fallout

Jack Sidders and Natalie Wong

(Bloomberg) -- WeWork’s landlords in New York and London, the two biggest markets for the troubled co-working firm, are preparing for any drop in demand from the company, which had arrived in both cities just when vacancies were poised to rise.

WeWork is the largest private-sector tenant in both cities. In Manhattan, the company has 7.2 million square feet of space, according to brokerage firm CBRE Group Inc. In London, the company has leased about 3.7 million square feet since 2014, according to data compiled by broker Savills Plc, making it a major source of demand that’s helped the U.K. capital weather the uncertainty following the 2016 Brexit vote.

“The flexible-office sector as a whole has accounted for 20%-25% of leasing across London in the last three years of which WeWork was a major contributor, so it is significant,” said Mat Oakley, Savills head of commercial research. “When WeWork began growing in London, the leasing market was relatively weak so landlords were grateful for that source of demand. But now you have a fairly strong market and they are probably not as needed to keep occupancy high.”

Doubts about WeWork’s future have emerged after its plans to go public this month collapsed. In the past few weeks, several executives left the company, with co-founder Adam Neumann stepping down as chief executive officer. Deals for some office buildings largely leased to WeWork are on the line, a round of job cuts in the company was made in New York City and its valuation continues to drop. At the same time, WeWork parent We Co., which needs to raise cash, is selling the $60 million Gulfstream G650 that it bought last year for Neumann.

Short-Term Benefit

“The office markets have had a short-term benefit over the last few years from the uptick in leasing,” said Danny Ismail, an analyst at Green Street Advisors. “There’s definitely a downside risk, but I don’t think it’s an existential risk to markets like New York or others that are exposed to co-working.”

After the Brexit vote, many in London feared there would be a sharp drop in demand for office space and a decline in rents as jobs shifted to Paris, Frankfurt and Dublin. While some banks have established new hubs in continental Europe, the projected exodus hasn’t happened. That, along with demand from WeWork and expanding technology companies such as Apple and Facebook, has kept leasing volume and rents largely stable.

About 5.1% of office space in the City of London and 3.8% in the West End is currently vacant, Savills data show, below the long-run average. Ultimately, London still may be harder hit than New York by a WeWork retreat, though traditional landlords, brokers and rival providers of flexible space in both cities would step in.

Pending Deals

WeWork currently has about a half-dozen pending deals in London that landlords are awaiting clarity on. The largest of those is for space in Peterborough Court, the current London headquarters of Goldman Sachs Group Inc., that the bank will soon vacate. Talks are progressing and WeWork hasn’t notified the building’s owners of any change, people with knowledge of the talks said.

Sage Realty Corp, a unit of the William Kaufman Organization, announced Friday that it finalized a long-term lease with WeWork for 362,197 square feet of space spanning 12 floors at 437 Madison Avenue. The deal was done 15 months ahead of a lease expiration with an existing long-term tenant, the firm said in a statement.

“In this environment where large blocks of space can sit on the market for months, if not years, our talented leasing team has brought in several interested parties and now successfully negotiated a deal 15 months before vacancy,“ Jonathan Kaufman Iger, CEO of Sage Realty, said in a statement.

Some London landlords have clauses in their leases with WeWork that would allow them to essentially operate the company’s space independently, two people with knowledge of the contracts said. Land Securities Group Plc, British Land Co. and Great Portland Estates Plc, three of London’s largest real estate investment trusts, have also launched their own short-term rental units, as have traditional office landlords in New York such as Silverstein Properties Inc., Tishman Speyer, and Durst Organization.

“Even if they vanished off the face of the earth it wouldn’t really impact this market -- it might create some decent vacancy, but I don’t think they’re going to vanish,” said Jordan Barowitz, a spokesman for Durst, which recently created Durst Ready, a flexible-office service aimed at tenants seeking 2,500 square feet to 25,000 square feet. “What we’re doing is a way of capturing some of WeWork’s market.”

Providers such as IWG Plc, Knotel and Industrious are pitching themselves as safer flexible-office options. IWG, owner of the Regus brand, is one of the oldest co-working firms and one of the few that has survived several recessions. A key danger is growing too quickly in concentrated markets, according to IWG CEO Mark Dixon.

“Our network’s been put together over 30 years on these cycles,” Dixon said. “We’d accelerated too much at the top of the market and haven’t ever done that again since, but it was painful and costly and it was very expensive to get out of the problem.”

Now, IWG focuses on keeping its liabilities low and its growth balanced, Dixon said. “If you are a very large occupier in very large cities, these are danger zones. If you have a seismic event, call it a recession, it tends to hit those liquid cities.”

(Updates with new WeWork lease in Manhattan starting in ninth paragraph.)

To contact the reporters on this story: Jack Sidders in London at jsidders@bloomberg.net;Natalie Wong in Toronto at nwong133@bloomberg.net

To contact the editors responsible for this story: Rob Urban at robprag@bloomberg.net, Christine Maurus

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