Coworking Companies like WeWork Represent a Clear and Present Danger to the Commercial Real Estate Market
The madness has ended, the only question now is who will be left standing once the last shoe has dropped.
Last week the other proverbial shoe dropped in the WeWork scandal — landlords and their lenders suddenly realized that the coworking giant (and their competitors) represented a clear and present danger to their survival. Over the past three years coworking companies leased more than 54 million square feet generating more than 16% of commercial office demand. Landlords and their lenders have advanced billions and billions of dollars to coworking companies for tenant improvements — money that, in the event of a WeWork collapse, will simply evaporate. WeWork’s sudden failure has sent shockwaves through the real estate market and everyone is in the process of calculating their exposure to the coworking space.
Commercial landlords have no one but themselves to blame. They leased their space to coworking companies like WeWork and provided billions to improve those spaces. The coworking companies then turned around and began marketing their space to the commercial landlord’s typical clients — in fact coworking companies licensed space to 44% of the Fortune 1000 in 2017 and that number has skyrocketed. Fueled with billions in venture capital the coworking companies offered these companies months of free rent and 5X commissions to commercial brokers. WeWork even offered brokers 100% of the tenant’s first year (even if the tenant only signed a one year contract).
Instead of having thousands of tenants to distribute their risk, landlords decided that having just a few coworking tenants was a better idea. The problem is that on the heels of the failed WeWork IPO their lenders have drawn a line in the sand — cut off the coworking companies or find a new source of capital for your tenant improvement allowances. The commercial real estate market has called an end to the madness even though coworking companies like WeWork are offering to pay rents 20% higher than market.
There will be blood. The capital markets are all but closed to the coworking players and when they go bankrupt landlords and their lenders will get caught holding the bag. The smart money is already using LexusNexus to search through landlord press releases — those with the most coworking deals are doomed and the market will punish them.
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.