Hundreds of landlords are exposed to WeWork via $47.2bn of rental commitments, with little recourse if the office space company fails to pay. More than 220 landlords have leased space in the US to WeWork and more than 50 in the UK, according to CoStar, a real estate data firm, as the company expanded rapidly to become the largest office tenant in Manhattan and central London.
The CoStar data show that TIAA-CREF, Boston Properties, Beacon Capital Partners and Moinian Group are among the biggest US landlords to WeWork, which published its prospectus last week ahead of a highly anticipated initial public offering. WeWork sublets the space to businesses from start-ups to large corporations on a short-term basis. The mismatch in rental periods is seen by many in the industry as a potential weakness in its model during a recession.
“There are so many WeWork leases in town, and I think there are a lot of landlords who are very cautious, not about the quality of service but about the financial model. I’m one of them,” said one large London-based landlord who has opted against direct exposure. If WeWork does hit trouble, there are limits to what landlords can do to enforce rental commitments.
The company, like others in the shared office sector, creates special purpose vehicles for its leases, meaning landlords do not have direct recourse to the parent company if it fails to pay rent. In the past, companies in the sector have changed the terms of their leases when downturns hit. Regus, now IWG, renegotiated leases in 2002 when the end of the tech boom cut into its customer base. More recently, an IWG subsidiary that leased a site near Heathrow airport applied for voluntary liquidation.
To counter such concerns, WeWork has guaranteed a portion of its rental payments, though a small fraction of the overall obligation. About $4.5bn of rent payments are backed by corporate guarantees and $1.1bn by bank guarantees, according to the group’s pre-IPO filing. It has paid more than $268.3m in cash deposits to landlords and used another $183.9m of surety bonds, a form of insurance.
That leaves more than $40bn of rent payments, stretched over a typical 15-year lease length, with no such backing, though the group maintains in its filing: “Our business, reputation, financial condition and results of operations depend on our subsidiaries’ ongoing compliance with their leases.” WeWork’s $47.2bn of lease obligations dwarf the £6.6bn held by its largest rival, IWG; its leases last a typical 15 years, against IWG’s 10 years.
Meanwhile, landlords have paid cash to WeWork in the form of “tenant improvement allowances”, upfront payments that enable the group to transform buildings into its signature style. WeWork collected almost $455m of these in the first six months of 2019. Analysts at Fitch said: “We believe WeWork assumes an even greater proportion of gross capital expenditure being funded by landlords [in the future].”
As WeWork tends to lease offices from large landlords, it makes up only a small percentage of any individual landlord’s portfolio. But the group and its flexible office competitors are increasingly important to the health of certain markets. In London, shared office groups together have accounted for 15 per cent of all new deals by square footage over the past five years, according to the property agents JLL. In the UK, the property developer Almacantar has about 280,000 square feet devoted to WeWork and the owners of Canary Wharf Group have more than 280,000 sq ft, although the financial risk is borne by the European Medicines Agency, which sub-let its office there.
Other landlords with exposure include Columbia Threadneedle, the German fund Deka and the Tesco pension fund. Another big UK landlord said: “There’s potentially a question of ‘will the whole thing explode at some stage?’. But that’s a question you need to apply to a bunch of companies in every landlord’s portfolio.”