Published on Friday, May 3, 2024
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Older and less modern class B and C buildings could see even more flight with a withdrawal by WeWork from trophy space.
Court approval of WeWork’s proposed bankruptcy exit, which could come as early as the end of May, is likely to set off more office disruption. Using tools available through the bankruptcy process, WeWork supposedly had already rejected 16% of its future long-term lease costs and ultimately the company could reduce their future rent obligations by 40%.
That could mean previously amended leases, new management agreements, or rejection of additional leases. But whether dropping obligations or cutting previously accepted prices, there will be some impact on the office market in the locations that WeWork has operated. The lower local market average rents or the more space available, the less that many property owners may be able to command from tenants.
This is a different situation than previous periods with high office vacancy rates.
“Although the office sector recovered after from the previous peaks, the key difference is that those filling offices work differently now,” wrote Moody’s Senior Economist Ermengarde Jabir. “Technology made the rise and permanence of remote and hybrid work schedules possible. Office properties – already facing financing hardships and an evolution in values – now face a potential new wave of unexpected vacancies. In late summer 2023, WeWork announced that it was in the process of renegotiating its leases and would vacate underperforming properties, giving landlords relatively short notice about just how dire the company’s situation was before word spread that a bankruptcy filing was imminent. “
Moody’s take on the immediate future for office is that “fortunes will diverge.” WeWork had primarily taken space in class A and A+ buildings. If space opens for other companies, the condition runs directly in the question of flight to quality and Cushman & Wakefield’s estimate early this year of the limited nature of space available for such shifts.
The most attractive and desirable office space is only between 10% and 15% of total inventory, the firm said. Demand for the buildings is high. Top-tier space in gateway markets enjoys vacancy rates that are 700 basis points lower than the remaining market. “Direct vacancy in the best buildings is sub-11%,” they wrote, an impressive number in relative comparison.
The availability could set off a rush to pick up the space, “potentially shifting the balance even further away from older, less modernized Class B/C offices to the highly amenitized Class A/A+/trophy office properties in prime locations,” Moody’s wrote.
There will still be some demand for class B. It’s class C that will take it on the nose. “For locations where WeWork has stable quality tenants in place (e.g. large international consulting firms), office owners can take some comfort in knowing that such subletters are likely unwilling to vacate that space due to the costs associated with a move,” Moody’s wrote. “Office landlords and such tenants will likely be able to come to an agreement together, without the WeWork middleman.”