Analysis: WeWork's troubles darken outlook for embattled office market

Jones Lang LaSalle Incorporated

03/11/2023 06:00

By Sinead Cruise
       LONDON, Nov 3 (Reuters) - The troubles faced by
co-working titan WeWork  WE.N  are darkening the outlook for the
world's largest business hubs, where rising office vacancies are
already heaping pressure on investors set to refinance
big-ticket mortgages next year.
    Media reports on Wednesday suggested the New-York listed
flexible workspace provider - once privately valued at $47
billion - was weighing a petition for bankruptcy next week.
    Backed by Japan's SoftBank, WeWork aimed to revolutionise
the office market by taking long leases on large properties and
renting the space to multiple smaller businesses on more
flexible, shorter arrangements.
    But like other landlords, it has struggled to persuade some
customers since the pandemic to swap working from home for the
office at its 650-plus locations worldwide - a trend that has
shaken confidence in the sector.
    Global office vacancies are expected to climb, hurting
rental prospects in cities like New York and London, eight
industry executives, investors, lenders and analysts said.
    Some leveraged property investors could struggle to earn
enough rental income to service rising debt costs, they said.
    "The loss of any tenant, especially during a time of
relatively slow office leasing, will have a negative impact on
office building cashflows and values," said Moody's Analytics'
Commercial Real Estate Industry Practice Lead, Jeffrey Havsy.
    "This will add to the negative sentiment in the marketplace
and make financing harder, especially those buildings that need
to refinance in the next 12-18 months," he said.
    A WeWork spokesperson told Reuters the firm was in talks
with landlords to address "high-cost and inflexible lease terms"
and was striving to remain in the majority of its locations and
markets. 
    The number and volume of real estate loans due for
refinancing in 2024 is unclear because many deals are struck
privately between borrower and lender, Ed Daubeney, co-head,
debt and structured finance, EMEA, at real estate services firm
Jones Lang LaSalle, told Reuters.
    Analysts estimate the global commercial property lending
market is around $2 trillion in size, roughly split 50:50
between banks and alternative lenders in the United States and
85:15 in Europe. 
    Several experts contacted by Reuters predicted a year of
reckoning for property investors and lenders in 2024, with time
running out for those turning a blind eye to assets that would
be in breach of key lending terms if revalued today.
    The value of all global real estate - residential,
commercial, and agricultural land - was $379.7 trillion in 2022,
Savills said in a report in September, down 2.8% on 2021.
    
    TRANSACTION SLUMP
    Real-estate loan refinancings have already been complicated
by a plunge in transactions, which are crucial in tracking
changes in asset values. 
    MSCI's Capital Trends report for Europe showed third quarter
volumes down 57% on 2022 levels - the lowest since 2010.
    What's more, the gap between what investors believe assets
are worth and what prospective buyers are willing to pay is
between 20% and 35% in core office markets - "far worse than the
height of the global financial crisis", MSCI said.
    MSCI said prices in Europe's two largest office markets,
Britain and Germany, would have to fall another 13%-15% to bring
market liquidity back to its long-run average.
    Global lenders to UK real estate holding and development
companies, which supplied credit risk assessments to data
provider Credit Benchmark in October, said those firms were now
9% more likely to default than they estimated 12 months ago. 
    U.S. industrial and office real estate investment trusts
(REITs) were seen 35.8% more likely to default, versus
expectations a year ago.

    RE-LETTING
    WeWork has 3.25 million square feet of space in central
London, with a total annual rent roll of 192 million pounds 
($234 million), Jefferies said in a September note. Its biggest
U.S. markets are New York and California, where it operates 49
and 42 sites respectively, according to WeWork's website.
    Industry sources said some of its most popular locations
could be taken over by rivals at similar rental rates,
minimising cashflow issues for landlords.
    But flexible workspace demand in Britain is still 11% below
pre-pandemic levels, the Instant Group's 2023 State of the UK
Flex Market report in September showed.
    Lenders might view the WeWork debacle as a cautionary tale,
sources said, potentially requiring borrowers to inject more
equity into their properties to reduce the loan-to-value ratio.
    But such a request could be problematic if the quantum and
duration of rental income remain uncertain.
    London office vacancies have surged to a 30-year high,
Jefferies also said in September, with average lease lengths on
central London offices sliding to six years from 11.6 years a
decade ago, according to BNP Paribas Real Estate.  
    UK property company Helical  HCL.L  said it was working on
"next steps" for the space at one London property let to WeWork,
after recouping rent it had failed to pay via a short-term
licence arrangement.
    Under-occupied urban offices are not only generating lower
than expected rental income for owners but some are also ageing
rapidly in a world increasingly sensitive to carbon consumption.
    "We're at a massive turning point in the real estate
investment market globally," Jose Pellicer, head of real estate
strategy at M&G Real Estate, said. 
    "For the last 20 years, property yields have been higher
than financing costs. But a far bigger percentage of a property
return is going to have to come from growth in the 2020s." 
    ($1 = 0.9407 euros)
    ($1 = 0.8214 pounds)

 (Reporting by Sinead Cruise
Editing by Elisa Martinuzzi and Mark Potter)
 ((mailto:sinead.cruise@thomsonreuters.com; 020 7513 5026;
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