CEO David Tolley says that the current lease liabilities of the co-working company are extremely high
In a bid to lower costs and rightsize its business, provider of co-working spaces WeWork said it is embarking on a plan to renegotiate nearly all of its leases with the owners of the buildings in which it rents space. The move is a sign of the company's ongoing distress as it navigates the aftermath of a period of unsustainable growth. It’s also a warning sign for the broader commercial real estate industry.
WeWork CEO David Tolley said in a letter that its current lease liabilities “still remain too high and are dramatically out of step with current market conditions”. Those “current market conditions” refer to a commercial real estate market that is under increasing pressure from higher interest rates, lingering work-from-home trends, and declining commercial real estate values.
As fewer employees work in offices compared to the pandemic, demand for office space has been in decline, leading to falling revenues for landlords. And as demand for office space falls, so does the underlying value of the building itself. Dwindling demand creates an especially difficult situation for landlords that are on the verge of refinancing the debt behind their commercial real estate, given that interest rates have soared over the past year and are at multi-year highs. Refinancing debt from pre-pandemic interest rate levels of near 0% to today's rates in the mid-to-high single digits could put increasing financial pressure on commercial real estate owners and lead to further defaults.
WeWork senses this widespread weakness in the commercial real estate market as an opportunity to renegotiate its leases on more favourable terms, and they could have some leverage if they threaten to walk away from the lease entirely. “As part of these negotiations, we expect to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product,” Tolley said in his letter.
