After WeWork’s giant crash, what’s next for landlords?

Columbus, Ohio’s Short North District, a hub of retail and commerce, has become a prime target for new development. So roughly a year ago, when local real estate developer Brent Crawford began looking for tenants for his forthcoming 800 North High development, a $45 million mixed-use project in the Short North, it made sense to reach out to the fast-growing coworking giant WeWork. Eventually, his firm Crawford Hoying signed a lease with the startup, with plans to turn 30 percent of the building over to flexible office space.

Now that the project is on the verge of opening, how does he feel after WeWork’s implosion over the last few months?

“We couldn’t be happier,” he tells Curbed. “We’re in a far better position than we were a year ago.”

Crawford’s logic goes as follows: He owns a brand-new building in a great location, as well as easily convertible coworking space WeWork spent roughly $1.1 million upgrading (what he calls “the best finished office spaces in Ohio”). Crawford’s firm also has a letter of credit from WeWork guaranteeing lease payments for a fixed amount of time. Crawford wouldn’t elaborate further on details, but said “If they left, they wouldn’t hurt our feelings.” That stance may, in part, be due to the fact that in the weeks after the WeWork news first hit, three other coworking companies called, asking him to “let them know if anything happens.”

“We were never concerned, because of Softbank,” he says, in reference to the bank and venture capital fund that recently invested billions of dollars to bail out the coworking giant. “They had so much invested, we expected them to give them a cash infusion.”

Crawford Hoying/Cory Klein Photography

WeWork’s pipeline problem

The fallout from WeWork’s spectacular devaluation, from $48 billion to roughly $7 billion in the space of weeks, will have a significant ripple effect. But while the saga of Adam Neumann’s mismanagement and pre-IPO financial statements have led to reckonings around venture capital and investments, the real estate and coworking industries have varying degrees of exposure⁠—some even say opportunity⁠—that will come into clearer focus over the coming months.

Crawford’s experience offers a distillation of one of WeWork’s largest challenges, establishing profitability at the same time that it scales back. Many building owners leasing to the company have extensive safeguards and financial backstops to protect against WeWork leaving, more than those applied to traditional commercial tenants (a recent report by investment research company Morningstar qualified WeWork as “a traditional tenant with below-investment-grade credit”). These obligations, according to the company’s own S-1 filings, total $6 billion.

Crawford was concerned about the company’s rate of expansion, but now that the company is forced to turn all its attention to making existing space profitable, he feels like he was one of the last building owners to get in on a good thing. Depending on their degree of exposure and risk, other landlords may feel the same way.

CZ Properties, owners of the new SXSW Center in Austin, Texas, set to include a few floors of WeWork space, told Curbed, though a spokesperson, that it was “excited to welcome WeWork and its members to the SXSW Center. We believe that WeWork will be a great addition to our tenant lineup and look forward to a great partnership for years to come.”

According to a leaked transcript of a WeWork company meeting from late last month with new CEO Marcelo Claure, WeWork is trying to right the ship and plans to cut back on growth-at-all-costs expansion, lay off a significant portion of its workforce, and be more strategic.

“I think you’re going to see us be a lot more focused on where do we play, in which parts of the world do we play, which are the cities that we should be playing in, and double-down, triple-down in those cities,” Claure told a crowd of employees.

But even if WeWork stops adding new projects to the pipeline, the combined burdens of existing and soon-to-open locations add even more pressure to make every square foot of shared workspace profitable.

And the company’s own announcements suggest that growth won’t be curtailed immediately. According to a New York Times report, WeWork is still set to add a total of 9.9 million square feet of space this year in the United States and Britain, per data from CoStar, including spaces such as Crawford’s building in Columbus. A recent Reuters analysis of information on WeWork’s website counted 622 sites open in 123 cities on October 10, as well as 89 sites as “coming soon” and 117 sites as “just announced.” (Crawford’s space is now listed as “opening soon.”)

WeWork didn’t answer Reuters requests for clarification on whether or not all these plans were still going forward. However, analysis of the company’s IPO filing by Reuters found that “the 97 new locations WeWork added in the first half of this year on average cost $2.63 million each in design and construction costs, up 38% from the $1.91 million that 82 openings each cost in the first half of 2018.”

Will other coworking companies pick up the slack?

Many in the industry say that, rather than bad publicity, WeWork’s problems have led corporations and potential tenants to give other flex space and coworking companies another look. Landlords looking to add coworking, as well as those already committed to WeWork, are more aggressively exploring their options.

WeWork’s stumbles, and what many expect to be an end to expansion, if not an outright contraction, for the company, won’t stop the industry’s expansion and the long-term corporate shifts towards flexible office spaces and leases. Coworking is working, says Pete Bacevice, Director of Research at HLW, a design firm that works on office projects, and is now “embedded in the workplace strategies of a growing number of organizations.”

Michelle Bodick, managing director for the Americas for The Instant Group, a shared workspace specialist, says that WeWork’s sizable but not overwhelming market share, roughly a third of U.S. inventory, means other companies have an opportunity.

“We are seeing more inquiries, especially from large corporate organizations that haven’t used flex space before,” she says. “Of course, there have been some concerns, but for the most part, that has come from companies wanting to understand their options in a market flooded with a huge amount of choice.”

Jamie Hodari, CEO of Industrious, a coworking company which operates nearly 100 locations in roughly 45 cities, says coworking is a good business that doesn’t require Silicon Valley subsidies to run profitably.

“I’m not glad it happened,” he says of WeWork’s troubles. “But it’s easier for people to say, ‘This is why you sign management contracts rather than leases. This is why you focus on parent-level profitability than building a cash-burning machine that required the market to keep stepping in.’ There’s no way around it, it’s been helpful for us to have this public counterfactual.”

He says Industrious has also been contacted by numerous landlords with WeWork exposure, looking to learn more about other coworking options, and his firm is simply providing information. The vast majority of landlords want a good quality manager who can run their coworking space. (Hodari added that contracts with WeWork are “not meant to be walked away from either side”).

“For better or worse, we’re rooting for them,” Hodari says of WeWork. “Underneath it all, there’s a good company that deserves a second shot.”

He also added, “If Hilton was shutting down a hotel, you’d bring in a Hyatt.”