SAN JOSE — The bankruptcy filing by WeWork, the co-working company once valued at $47 billion with locations across the Bay Area, could potentially jolt parts of the region’s office market — especially if it terminates leases as it seeks to reorganize its feeble finances.
The New York-based company, which offered swank and hip office spaces to tech companies, startups and individuals, was hit hard by the pandemic and the move to remote work. WeWork stated in its Chapter 11 bankruptcy filing this week that its debts totaled nearly $18.7 billion while it had assets of about $15.1 billion. The company plans to remain open as it works to renegotiate its leases and debt obligations
Tucked away in the filings and pronouncements that arose from the federal bankruptcy is an ominous declaration poised to further rock an already wobbly office market in the Bay Area and other major metro regions nationwide.
“WeWork is requesting the ability to reject the leases of certain locations, which are largely nonoperational, and all affected members have received advanced notice,” the company said in a prepared release.
Lease terminations would pose a fresh complication for Bay Area office building owners who are already attempting to cope with a rising tide of vacancies, subleases and wide-ranging retrenchment by the tech industry.
“But the bankruptcy also isn’t that big of a surprise,” said Phil Mahoney, an executive vice chairman with Newmark, a commercial real estate firm based in San Jose. “WeWork has been bleeding red ink for a while.”
As a result, commercial property owners in the Bay Area with exposure to WeWork deals are believed to have taken defensive measures in preparation for the current calamities linked to the co-working pioneer.
“WeWork has been over its skis for some time,” said Dave Sandlin, an executive vice president with Colliers, a San Jose-based commercial real estate company. “Property owners have been getting ready for these problems.”
WeWork stated in a document it filed with the U.S. Bankruptcy Court in New Jersey that it is necessary to terminate leases in an effort to reduce the drain on the company’s shattered finances.
“For the landlords that have been getting rent from WeWork, it’s not a good outcome,” Mahoney said.
WeWork asked the bankruptcy court to terminate 69 leases in the United States and Canada, court papers show. The majority of the current wave of terminations affects buildings in New York City.
Some of the company’s landlords in the Bay Area are major players in commercial real estate. One of WeWork’s San Francisco buildings is owned, for instance, by an affiliate of Hudson Pacific Properties, a major Silicon Valley office building landlord. The downtown Oakland building it leases is owned by an affiliate of Harvest Properties, a veteran Bay Area real estate firm.
“A key component of WeWork’s go-forward business plan is the continuation and completion of its ongoing effort to rationalize its lease portfolio,” WeWork stated in bankruptcy court records. “This effort entails, among other things, the closure of certain underperforming locations.”
The bankruptcy filing listed 14 California office buildings where WeWork is seeking permission to terminate leases with property owners. Seven of the locations are in the Bay Area and seven are in the Los Angeles metro region.
The Bay Area locations include six office buildings in San Francisco and a lease in downtown Oakland at 1814 Franklin Street.
WeWork may also seek to rewrite existing lease agreements as a way to slash expenses. The company has enlisted Hilco Real Estate as an advisor to attempt to revamp potentially hundreds more leases.
“Hilco is in active negotiations with over 400 landlords in an effort to consummate lease amendment agreements to help maximize the value of the company’s go-forward business,” WeWork stated in a court filing.
WeWork still has 17 locations in the Bay Area, according to its website. They include seven sites in San Francisco, two locations in downtown San Jose, two sites in downtown Oakland, two locations in San Mateo, and single sites in Berkeley, Palo Alto, San Ramon and Mill Valley.
WeWork was founded in 2010 and quickly became a pioneer in the fledgling co-working industry
“We defined a new category of working,” said David Tolley, WeWork’s chief executive officer. “These steps will enable us to remain the global leader in flexible work.”
Yet commercial real estate experts say the company employs a business model that doesn’t appear able to withstand a slumping office market, since WeWork leases space from a property owner and then effectively subleases the offices to another tenant or several users on shorter-term deals.
“This business model works in a steady office market or one that is improving,” Sandlin said. “It just doesn’t work when you have a declining office market.”
