NYC Landlords Worry About WeWork’s 8.6M SF of Manhattan Office Leases as Company Tries to Avert Bankruptcy

The New York Stock Exchange took action last Wednesday, suspending trading of firm-bank warrants backed by SoftBank and initiating their delisting due to low trading activity and a penny stock share price. WeWork, which recently expressed "substantial doubt" about its ability to sustain operations, has reportedly engaged real estate advisors and legal experts to guide it through the process of restructuring and avoiding bankruptcy proceedings.

The primary challenge in averting Chapter 11 bankruptcy revolves around managing the company's extensive real estate portfolio. This entails negotiating reduced rents or terminating leases with property owners. This predicament is particularly bitter in Manhattan, where a significant portion of WeWork's leases, approximately 64%, are situated in Class-B and Class-C buildings, leaving landlords ill-prepared to replace such a substantial tenant.

John Giampolo, an attorney specializing in bankruptcy, restructuring, and real estate litigation at Rosenberg & Estis, remarked, "It's rarely ever a good situation for a commercial landlord to have your tenant teetering on bankruptcy, especially in a market for commercial tenants that many analysts are saying is not great in general."

WeWork had achieved notoriety as the largest private tenant in New York City, surpassing JPMorgan Chase in 2018 with its lease of 5.3 million square feet of office space. Its expansion continued with the signing of significant leases in established buildings, such as a 236,000 square foot deal at CIM's 1440 Broadway in December 2018, a 200,000 square foot deal at One Seaport Plaza in February 2019, and a 362,000 square foot lease at William Kaufman Organization’s 437 Madison Ave in September of the same year. Presently, WeWork occupies over 8.6 million square feet of office space in Manhattan, representing 1.7% of the borough's total inventory.

WeWork also has a presence in Queens and Brooklyn, including a 220,000 square foot lease at Rudin and Boston Properties’ Dock 72 in the Brooklyn Navy Yard and 217,000 square feet at Tishman Speyer's Jacx building in Long Island City. Its market share had declined since its peak, marked by a failed IPO, the removal of former CEO Adam Neumann, and subsequent cost-cutting measures. Following a merger with BowX Acquisition Corp, WeWork went public in October 2021, with its share price initially at $10, rising to $11.79 on its first trading day, and eventually trading at 13.4 cents a share.

The uncertainty surrounding WeWork's future poses a significant challenge for landlords. Landlords owed substantial rent by WeWork in the event of bankruptcy may find their claims classified as "nonpriority general unsecured claims," reducing their chances of recovery. Priority claims would cover rent accrued after bankruptcy is filed. Given these circumstances, some landlords are exploring alternative tenant options.

Landlords like Scott Rechler, CEO of RXR Realty, who has WeWork as a tenant, has taken steps to protect his interests, including provisions allowing them to cancel leases with WeWork. 

For many landlords, the best course of action may be to wait and hope that WeWork continues to meet its rental obligations. While exploring alternative operators is an option, securing replacement tenants may not be straightforward in the current market environment.