In early May real estate powerhouse Brookfield Asset Management said it would spend $5 billion to invest in struggling retail businesses. Brookfield owns 152

Can the potential collapse of WeWork cause serious repercussions in the commercial real estate market given that they are one of the biggest lessees in the world?

Yes, a dramatically weakened or bankrupt WeWork will have serious impact on commercial real estate markets where WeWork has a strong presence, such as London, New York and Tokyo, and, to a lesser degree, Bengaluru, Shanghai & San Francisco.

And this impact will be significant even with a weakened WeWork.

Here are some of the specific reasons for this.

  1. WeWork reportedly has 7.7m square feet of office space in New York City and 4.1m in London, making it the largest private tenant in both cities. WeWork’s profligate expansion has almost certainly lead to pricing distortions for commercial real estate markets in both cities.
  2. As we learned from their S-1, WeWork is on the hook to pay landlord $47B in rental commitments over the duration of the longer term leases signed, with over $2B in commitments due in 2020. The majority of these have reportedly been structured in such a way that the money cannot be recovered from WeWork. In the event of defaults, landlords would most likely work with other providers (like IWG/Regus, WeWork’s profitable competitor) or install their own brands to fill up the vacancies. It is hard to imagine something like this occurring without seriously impacting commercial real estate prices in these cities.
  3. WeWork’s post-”aborted IPO” financing plan is very much a work in process, with some urgency. As I posted here Unicorns & Public Markets earlier, WeWork runs out of cash in November 2019. They are trying to line up financing with banks lead by JP Morgan (one of their advisors for the IPO) which will also require an equity injection from Softbank, almost certainly at a valuation far below $47B. In the meantime, their bonds are severely discounted, indicating that the capital markets see risk of default. In parallel, they are trying to sell 4 businesses earlier bought by Mr. Neumann, decide on layoffs (where they will incur some costs while taking the burn-rate down). All this is going on in an environment where Softbank is having difficulty raising capital for their Vision Fund II,(because of losses on Uber, Slack and WeWork, all of which need to be acknowledged in Softbank’s Q3 financials..) When a company gets this close to the brink, a few mistakes can be fatal.

It is not fun being a landlord to WeWork right now, particularly in London, New York, Tokyo, Shanghai, Bengaluru or San Francisco

Thank you for the a2a.