Just four days ago, I posted a blog pointing out that office vacancies are at a record high both in the U.S. and the rest of the industrialized world. I went on to suggest that we should watch developments in this sector closely because the office market affects many other businesses, the viability of cities, the health of lenders such as regional banks, and the capital markets. Well, one of those “developments” occurred only two days later with the bankruptcy filing of WeWork. The company’s business model is to lease large blocks of office space that are then rented to startup companies, sole proprietorships, and other entities requiring flexible space. In total, WeWork operates 18 million square feet in the U.S. and 44 million worldwide. Approximately 42% of WeWork’s U.S. occupancies are in New York, San Francisco, and Boston.
WeWork has already announced that it will reject 69 leases in the bankruptcy process, and more are sure to come. Additionally, the company will undoubtedly attempt to renegotiate other leases placing further pressure on already stressed office landlords. It is too early to predict the ultimate impact of this development, but a worst case scenario would involve mortgage defaults, pressure on lenders, and declining tax revenues for major cities.