WeRisk, WeFear – CRE Dangers from WeWork Implosion
WeWork’s failed IPO, subsequent scandals and latest near takeover by Softbank run real risk for CRE markets and players overall. This risk, call it WeRisk, is shared across the community like so many other We-things. These risks are large, given the often-prime locations and valuations of WeWork office buildings. Nationally, owners, lenders and their broader portfolios stand exposed to risks that the market is only beginning to absorb and CrediFi data can uniquely help it understand.
Quick history: On August 14th The We Company, better known in the commercial office market as WeWork, filed its Form S-1 with the Securities and Exchange Commission prior to an IPO.
In the risk factors section of the S-1, WeWork stated that the company’s business strategy “includes entering into new markets and introducing new solutions, products and services. This strategy is inherently risky, may not be successful and could be costly.”
Losing $40 billion in six weeks
That disclosure turned out to be just a bit of an understatement. Within a few weeks, WeWork’s market valuation plummeted from $47 billion to around $7 billion, according to Reuters.
The controversial behavior of the firm’s eccentric founder – such as buying the rights to the word ‘We’ and selling it back to his company for $6 million or borrowing money from WeWork to buy office space that was then leased back to WeWork at profit – might have had something to do with the plunge in market value.
However, in what Forbes recently called “the most ridiculous IPO of 2019”, WeWork’s pre-IPO value was nearly decimated due to WeWork losing money, and lots of it.
In fact, through the first half of 2019, WeWork spent about $2 for every $1 of revenue generated, racking up a loss of nearly $1 billion through the middle of this year.
Why WeWork’s huge office footprint is risky for CRE
WeWork has approximately 300 locations in the US alone, comprising a $50 billion pile of leases in buildings worth many times that. Its largest concentrations are in New York, San Francisco and Los Angeles, but no surprise, it also has sizable footprints in Dallas, Denver, and even Detroit.
WeWork buildings account for about 2% of the total office inventory in New York City, 2.8% in San Francisco’s central business district. WeWork is, reportedly, one of the biggest private tenants in Chicago, Denver, and Central London. This is a potential problem for the CRE community, because most of WeWork’s lease obligations are held by We subsidiaries with limited parent guarantees, according to the IPO filing. In other words – WeWork could just hand back the keys and walk away.
As many of these office properties are large ones, in which WeWork is a major tenant, the ownership, loan and bond positions on these properties are equally large. One can only hope that owners, lenders and bondholders employed cautious underwriting and pricing.
While WeWork is often thought to have occupied “Tier 2” properties and then dressed them up, that has not spared Tier 1 players. The owners exposed to WeWork risk are a who’s who of institutional owners of CRE – from public company Brookfield on the East Coast, to private owner Beacon Capital on the West, with many other US owners, like Onni Group, and foreign players like Ivanhoe Cambridge across the country.
The ownership community is only one part of the financial community with WeRisk. Lenders, including banks, insurance companies and alternatives, especially the biggest of them, have sizable WeWork exposure, nationally. Not only did the big national players originate WeWork-connected loans, but so did many others. Consider the diversity of players – foreign lender Banca d’Impresa, along with debt fund TPG and life co MetLife all share significant WeRisk. So do multiple banks thought of as “simple” regional players like Fifth Third and New York Community Bank.
WeWork is also one of the top five tenants behind about $3.3 billion in CMBS debt across 36 properties.
Property loans with more than 50% exposure to We include:
- 600 California Street, San Francisco $240,000,000
- 8 Time Square, New York $100,000,000
- 315 West 36th St., New York $77,000,000
- 57 East 11th St., New York $55,000,000
- Chinatown Row, Washington $29,685,000
The $40 Billion Question: Where does the CRE Market go from here?
SoftBank’s Vision Fund is the main backer of WeWork. Last week SoftBank announced it would inject an additional $10 billion into We in exchange for 80% control. So, for the time being, WeWork has the money it needs to pay severance to the employees being laid off and to cover its cash burn.
This also gives the commercial office market some breathing room as well. Two weeks ago, MarketWatch asked how WeWork’s $50 billion pile of office leases could unravel. For property owners and lenders and CMBS holders, the answer isn’t pretty.
In theory, WeWork could simply walk away from individual property leases without the parent company incurring any liability. To be fair, a WeWork spokesperson told MarketWatch that “New York and San Francisco remain important markets for us, where we intend to fully honor our lease commitments”.
However, “intending” to do something doesn’t always mean actually doing it, especially when you’re losing money hand over fist.
What happens to the commercial office market if large amounts of space suddenly become available?
It’s not only building owners who may end up with large amounts of former We-space on their hands. Neighboring property, occupancy rates and market rents could also be affected. In a worse-case scenario, there may be contagion risks that affect the broader portfolios of owners or lenders currently exposed to WeWork.
The fairy tale may be coming to an end for WeWork. However, the company’s potential implosion could create unique opportunity for competitors like IWG and commercial real estate investors and lenders offering more stable options for rental office space.
Understanding a WeWork Implosion
CrediFi tracks over $13 trillion in loan originations. Our company has data on thousands of owners and lenders, and 8.7 million properties nationwide, including those leased to and owned by WeWork.
CrediFi’s big data brings transparency to the ownership of CRE, along with the financing of balance-sheet and securitized loans backed by commercial properties across the U.S. These including debt and players that could be worth less because of We.