Why co-working firms won’t save WeWork’s landlords

When Camilla Jensen joined co-working operator CIC Cambridge as chief financial officer last year, she saw an opportunity.

WeWork, one of its main competitors, had overextended and was paring back. To take advantage, she moved to expand CIC’s operational management business.

Now WeWork is in full scramble mode, seeking to renegotiate or exit nearly all of its leases within 45 days.

“It’s definitely a play to capitalize on WeWork opportunities,” Jensen said.

CIC has used the same business model as WeWork and others: sign long-term leases and sublease space to members on a short-term basis. But many co-working companies have moved to a management model where they don’t sign leases, but instead manage space on behalf of a landlord.

WeWork’s accelerated retrenchment means a flood of such opportunities, as well as traditional ones, is imminent.

“We’re already taking phone calls, talking to brokers who represent landlords and landlords directly on what’s going to happen,” said Michael Pollack of Premier Workspaces. “We have a team in place that’s ready to take these over on a weekend’s notice.”

Co-working operators say landlords have been reaching out to them, and vice versa, about taking over WeWork spaces for some time now, but it’s picked up considerably since WeWork acknowledged “substantial doubt” that it can continue operating.

It’s common for co-working spaces to change operators. Coworking executives liken it to one hotel brand taking over a landlord-owned property from another.

But transferring space isn’t a cure all for WeWork landlords, most of whom are already struggling to fill their office buildings in the work-from-home era. And WeWork’s exits are also not necessarily a windfall for its competitors.

That’s because co-working operators have their own criteria for choosing a space, and they’re also dealing with customers downsizing office footprints or abandoning them altogether.

Most operators target specific segments of the market. Conversely, WeWork signed long-term leases en masse on large spaces for above-market rents in a strategy venture capitalists call “blitz-scaling.” Many of those sites hold little interest for WeWork’s rivals.

“Out of the 220 or so in the US, maybe 100 are even a possibility,” said John Arenas, CEO of coworking operator Serendipity Labs, which has enlisted JLL to approach landlords about potential deals.

A primary hangup for co-working operators is WeWork’s high concentration in New York and San Francisco. Other companies have spaces in urban centers, but they are more diversified, with footprints in U.S. suburbs and all over the world. Premier Workspaces in particular focuses on suburbs in California because people there want to work closer to their homes.

Another issue is the size of the space and the quality of the buildout. Some operators target smaller spaces, while WeWork tends to have larger ones. Companies want a space that’s well maintained to limit the capital expenditure needed after taking over. If the cost of a buildout is too high, they pass.

That could be a major problem because operators are concerned about the condition of WeWork’s spaces, as vacating operators can sometimes slip on management toward the end of an occupancy.

“When you take over a building that has been operated by a bankrupt operator for three months — disaster,” said Brad Hargreaves, founder of co-working operator Common. “They’re not collecting rent, they’re not repairing things, they’re not doing any customer service.”

An executive at a co-working operator who wished to remain anonymous described touring a WeWork space recently and finding toilet seats on the floor and two inches of water in the reception area. Other executives, however, said they haven’t seen major problems with WeWork spaces. A spokesperson for the company said, “WeWork makes a point to leave our spaces in good condition at all times.”

One thing that should help WeWork landlords is that other co-working firms operate in different parts of the market, so a given building should appeal to one of them. Some market spaces as a premium product, while the rest offer them as budget-friendly.

“Some people stay at a Ritz Carlton and some people stay at a Hampton Inn,” said Industrious CEO Jamie Hodari. “They’re both viable options.”

Still, many landlords are in an increasingly dire situation and may have to resort to imperfect solutions. Highly levered buildings may depend on WeWork’s above-market rents to remain in the black, and negotiating a lower rent — whether with WeWork or a competitor — could put a building into financial peril.

The broader outlook for the office market also presents challenges. JLL estimates that 34 percent of office leases nationwide will expire by 2025. Losing a large tenant at a time when it’s difficult to attract new ones will push landlords to negotiate.

WeWork landlords are further pressured because if the company files for Chapter 11, it could exit leases without paying termination fees.

“If I ran that company,” Hodari said, “I would probably take it into bankruptcy.”

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