Illustration: Aïda Amer/Axios
WeWork's bankruptcy filing this week offers a firsthand glimpse at how the collision of rapidly rising rates with the stalled return-to-office movement is roiling the office space industry.
The big picture: Distress in the commercial real estate sector has so far been mostly on paper — it's a slow-moving wreck that'll take years to shake out.
- WeWork, once valued at $47 billion, is one of the industry's first high-profile companies with a sprawling national footprint to file for bankruptcy in the post-COVID, high-rate world.
State of play: The exodus of workers from their cubicles has made office space abundant and cheap, WeWork says.
- Commercial office space "has become available and accessible at unprecedented prices and in significant volume," WeWork CEO David Tolley said in bankruptcy papers filed Tuesday morning.
- Landlords are now "more willing than in the past to reduce rent and offer flexible leasing terms," he added.
The impact: "This amounts to much greater competition in WeWork's target market," Tolley said.
Between the lines: WeWork was already facing financial problems before COVID hit — its canceled IPO, rescue by SoftBank, and ousted founder were some of 2019's most theatrical Wall Street dramas.
- This made WeWork especially vulnerable to the challenges of the changing office market and the end of the loose money era — whereas better-capitalized real estate companies have more of a buffer to absorb the shocks (for now).
- "WeWork lacks the necessary financial flexibility to adjust to the rapidly shifting commercial real estate market," Tolley said in his court declaration.
What's next: WeWork isn't going away. The idea is to emerge from bankruptcy protection with a stronger balance sheet, and better able to compete.
How that works: The bankruptcy process allows companies to cancel debt and walk away from leases more easily.
- Right off the bat, the company has motioned the court for permission to reject over 60 leases.
- It's also in active negotiations with more than 400 other landlords to restructure lease agreements — and it may have the leverage to extract much better terms since it can wield the threat of canceling the leases altogether.
What to watch: Under WeWork's reorganization plan, its most senior lenders and bondholders will extinguish their debt holdings — but they get to take over ownership of the company (similar to how a mortgage lender seizes a house when the homeowner defaults).
- If the new WeWork — unburdened of billions in debt and unprofitable leases — performs well, investors who bought those bonds at deep discounts could turn out to be the winners here.
- The losers: WeWork's shareholders who aren't SoftBank (it went public via SPAC in 2021) and its junior bondholders — the reorganization plan deems those securities worthless.