From left: Rudin Management CEO Bill Rudin, SL Green CEO Marc Holliday, WeWork CEO Adam Neumann, and Zar Properties’ Dario Zar (Credit: Getty Images, SL Green, and iStock)
Office landlords in New York City — known to play it safe and fill their buildings with multiple tenants to mitigate risk — are breaking the rules for WeWork, the office space startup that has gobbled up 5 million square feet across the city.
In the rare case that a landlord is smitten by that one tenant, they’re almost always looking for a company with a great track record or a sturdy business model, such as a white-shoe law firm or a well-capitalized financial institution.
But in the case of WeWork — a co-working startup that is valued at $47 billion but is yet to turn a profit — the company occupies the entire rentable office space in at least five buildings in New York City. In at least a dozen other buildings, it occupies more than 50 percent of the space, according to an analysis by The Real Deal.
It’s a gamble taken by landlords, and their lenders, that WeWork will continue to pay its leases — a factor that depends primarily on the success of the company’s core business model of leasing office space and sub-leasing it at a premium. WeWork only guarantees 11 percent of its overall lease obligations, the Wall Street Journal reported in June. And some of the city’s largest landlords, such as Columbia Property Trust and SL Green Realty, have already begun to demand stronger guarantees from the co-working company to reduce exposure.
The nine-year-old startup is now gearing up for an initial public offering that will test the strength of its business model in the public markets. Landlords are increasingly asking themselves how much space they’re comfortable leasing out to WeWork.
“More than 20 percent of one tenant, and I say to myself ‘is that too much for one building?” said Greg Kraut, managing principal of K Property Group, a landlord that has explored buying buildings with WeWork occupancy.
“It allows you to get a tenant in and lease your building,” he said. “But you’re going to sell it at a higher cap rate. It’s a risk that you’re willing to take.”
A 2018 study from Cushman & Wakefield found that properties with high WeWork occupancies traded at capitalization rates that were higher compared to the overall market rate for similar buildings – indicating that investors viewed these properties as riskier bets.
Last month, the question of whether WeWork’s impact on the sales value of a New York City building was nearly tested when Rudin Management put its 110 Wall Street, which is entirely occupied by WeWork, on the market.
An offering memo issued by Eastdil Secured offered a sober look at the risk of having WeWork fully occupy a building, which detailed in marketing materials that the startup could potentially default on lease payments.
“That’s [an outcome] regardless of who the tenant is, whether it’s a startup, law firm, whomever,” said Nick Martin, a spokesperson for Rudin. “Whenever you have a single tenant to one building, you look for security.”
Rudin re-evaluated its decision last month and pulled the building off the market. When asked if WeWork’s occupancy added or decreased the sales value of 110 Wall Street, Martin said “we thought they had added value to the asset.”
The SoftBank-backed startup, which rebranded as The We Company in January, has raised over $10 billion to date. In less than a decade, it has already become the largest tenant in New York, Washington, D.C. and central London. In Chicago, it is poised to become the biggest office tenant in the main office district.
With that kind of hype — and billions in cash on hand — the firm has been embraced by institutional landlords. Of 61 WeWork locations in New York City, the co-working startup accounts for more than half of the office space in 18 of its buildings, the TRD analysis found. WeWork declined to comment on TRD’s analysis, and declined to disclose how much space it took in 14 of the overall 61 buildings.
SL Green, the city’s largest office landlord, has three properties that are occupied by WeWork. At 609 Fifth Avenue, WeWork signed for all 139,000-square-feet there last year.
Some landlords have been bullish on WeWork since the beginning. Zar Properties, which owns WeWork’s second-ever location at 349 Fifth Avenue in Midtown, said the startup fully percent occupies the 46,000-square-foot building.
“I highly doubt [WeWork] will go bankrupt or default, even though they have had some losses,” said Dario Zar, managing principal of Zar Properties. “They’re going to be around, they are too huge.”
Even as uncertainty mounts around WeWork’s IPO, and reports have documented peculiar business moves by its chief executive Adam Neumann in recent months, some lenders have doubled down on providing loans to buildings that are majority-occupied by the startup.
At 214 West 29th Street, a 125,000-square-foot building where WeWork occupies 80 percent of the space, Bank of America provided a $74 million loan to landlord Walter & Samuels in June.
And in May, Germany-based Arreal Capital provided a $105 million loan to L&L Holding Company and PGIM Real Estate to refinance 511-541 West 25th Street in Manhattan, which has 40 percent WeWork occupancy. (Arreal also issued a $134 million to Himmel + Meringoff and Swig Company for 1460 Broadway in 2014. Arreal declined to comment.)
But given the uncharted future of WeWork’s business model — it posted losses of $1.9 billion against revenue of $1.8 billion last year — some landlords are reluctant to go all-in on the startup.
“I kind of like WeWork in our buildings,” said Kraut, the head of K Properties. But, he added, “I typically wouldn’t buy a building with 100 percent WeWork.”