CRE’s existential crisis didn’t need more drama, but it got some

WeWork’s potential collapse could cause more headaches for landlords in an already-reeling commercial market

Real Estate Week in Review for August 12, 2023
WeWork's Interim CEO David Tolley (Illustration by The Real Deal with Getty)

The big news of the week was WeWork’s announcement that there is “substantial doubt” that it will remain in business.

If — or when — that happens, the shockwaves will be felt across the office sector, such is the reach of the coworking giant. 

Interim CEO David Tolley blamed “excess supply in commercial real estate, increasing competition in flexible space and macroeconomic volatility” — i.e. the pandemic and flex and work from home arrangements — for the decline in memberships. A rise in interest rates has made it difficult to refinance debt.

News of its possible implosion comes less than three months after Sandeep Mathrani left the company as CEO. “I am firm in my belief that this is WeWork’s moment,” he said at the time.

But WeWork has lost an eye watering $11.4 billion since 2020, according to the company. Merely operating the business has burned $4 billion in cash over that period.

But as the office market continues to struggle, a CBRE report says a small fraction — just 10 percent — of office buildings account for the surge in vacancy rates.

Yes, office vacancy was 18.2 percent last quarter, the worst in 30 years, and is expected to continue creeping up.

But, the report says, the vast majority of office buildings are not much worse off than they were before the pandemic.

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In Chicago, Rubenstein Partners is facing an $82 million foreclosure suit from special servicer Rialto Capital Advisors over a Rolling Meadows office complex after defaulting on a loan secured by the property. 

The Philadelphia-based private equity firm’s $85 million CMBS loan on the Continental Towers at 1701 West Golf Road was moved to special servicing in May due to a “borrower-declared imminent monetary default,” according to information from credit ratings agency DBRS Morningstar. The loan was watchlisted in February.

The complex spans nearly a million square feet across three 12-story buildings and has struggled to retain tenants since the pandemic. A February report from Wells Fargo, the master servicer, put the property’s occupancy at about 64 percent. 

The multifamily and residential sectors have shown an equally confounding mixed-bag of results.

In New York, rents have again reached record hights in Manhattan, Brooklyn and Queen. But that’s been tempered by sluggish demand during the typically torrid summer months, according to a report by appraisal firm Miller Samuel on behalf of Douglas Elliman. 

That pullback signals some tenants can no longer stomach New York’s astronomical cost of living, a trend that may suppress rent growth in the coming months.

Meanwhile, in South Florida, developers are attempting more condo buyouts and terminations from Brickell and Miami Beach up to Fort Lauderdale and West Palm Beach. 

But lately deals have been falling apart, or delayed, due to a combination of factors including high interest rates and construction costs, difficulty securing enough support from owners and pullback from lenders and equity partners. 

“There’s no doubt that the real estate market, as red-hot as it is in South Florida, we’re not as red-hot as we were last February or March,” attorney Jose Rodriguez, of Rennert Vogel Mandler & Rodriguez, said.
But in Hialeah, SP Developments and Continua Developments bought a block of single-family homes in Hialeah for $23.5 million, with plans to build a 612-unit apartment complex.