At the start of 2019, the coworking company WeWork was leasing between back in November 2018. The worry is that the company will fail just as the economy turns the corner toward a recession (which is not a given yet). As it stands, commercial vacancy rates are high (and rising) in New York, even after a strong surge in new commercial leases this year. The sting will be worse in WeWork markets where new office leases are harder to come by.
Some building owners are already spooked. Two anonymous landlords who operated large WeWork sites in London told the The Financial Times “they would not sign new leases for the foreseeable future and were making contingency plans for their existing WeWork offices in the event of a restructuring.”
Landlords may already be looking at the We Company’s smaller peers as riskier bets in light of WeWork’s frustrations. “This affects WeWork more than it affects the real estate market,” Ginsberg says. “It’s a bit of a rattling. In general the market always overreacts to bad news. People are going to look more carefully at perhaps leasing to other coworking companies.”
But companies aren’t abandoning WeWork yet. Rudin Management Company, which owns nearly 15 million square feet of real estate in New York City, is readying to open Dock 72 in Brooklyn Navy Yard, a six-story glass tech hub with WeWork as its anchor tenant. “Dock 72 was designed and built as a home for innovators like WeWork members, as the flexible office model has proven to serve significant market demands and has quickly become an economic engine in its own right,” says Nicholas Martin, Rudin’s vice president of external and governmental affairs. He’s received feedback from tenants who say they appreciate being in a building with a company like WeWork, because it gives them the flexibility to grow in one place if they expand their team. Instead of leasing more property from the building, they can stick a few employees in low-commitment “hot desks” on another floor.
Dock 72 also represents a departure from the stereotypical image of coworking life: It’s not just Kombrewcha-swilling freelancers at hot desks, but large multinational corporations such as IBM and Verizon that have signed on to lease WeWork’s space there. Such “enterprise tenants” have become key partners in WeWork buildings across the country. Thirty percent of Microsoft’s sales department operates out of WeWork spaces; Amazon rents out the entirety of WeWork’s Manhattan 2 Herald Square office; Airbnb hosts its Berlin office in a WeWork. (The Atlantic has a few employees in a San Francisco WeWork, too.) If WeWork winks out of existence, these enterprise tenants would likely figure out a way to stay put. Short-term pain is unavoidable if and when WeWork tanks, but others will step up—whether that’s landlords, third parties, or partnerships between the two.
Whelan predicts a slowdown in the growth trajectory for flexible office space—a “rightsizing,” as she puts it. The bad headlines for Adam Neumann alone could tell you that much. But coworking space isn’t going anywhere. Over the last five years, owners with all the necessary tools—the building, the ability to design and build out office space, and the capacity to operate an office—have been entering the market, whether by themselves or in partnership with third-party operators. “Landlords that have the resources to do it, the scale to do it, are playing in the space,” she says.
As a subleaser, WeWork only ever checked off the boxes for building out a space and operating an office—more an overly ambitious property-management company than a disruptive tech startup. That’s one reason why landlords and tenants likely won’t have a problem filling the gap in the long run.
“Despite all the jargon, it was not this platform company, which is a sexy idea that implies this almost endless growth,” Ginsberg says. “It turns out that technology was not a major part of that. It was just a real estate company. If it’s just a real estate company, then it comes back to basics.”
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