The troubles possibly faced by WeWork, the shared office space company, were well documented long before the global impact of COVID-19 was felt. WeWork, unlike other shared office companies, tends to use a more inherently risky business model, taking long leases and carving them up into short-term flexible letting arrangements. Whilst some shared office companies take on geared leases, passing up a percentage of revenue, and thus sharing the risk and reward, WeWork are understood to have a larger holding of fixed rent leases. That means in good times they can scoop larger rewards, but that comes with bigger risk when the market turns bad. The company was forced to abandon its IPO last year, and on 1 April, its largest shareholder, SoftBank, walked away from purchasing $3bn of WeWork stock. SoftBank explained that the move was due to a number of conditions which WeWork had failed to fulfil. Those conditions included the existence of criminal and civil legal proceedings and a failure to roll up WeWork’s Asia joint venture.
Turning to the current pandemic, restrictions imposed due to COVID-19 have left landlords with an increasing number of tenants who are either unable or unwilling to pay rent. Shared-office companies such as WeWork are particularly vulnerable here. Although they offer their tenants flexible letting arrangements, those arrangements are expensive. The flexibility which they pride themselves on means that their tenants are able to quickly reduce overheads by walking away from arrangements with relative ease, unlike tenants of traditional leases who are often locked in for five or more years.
WeWork itself is one of the largest tenants in London. If this perfect storm leads to its insolvency, the city could be left with a lot of WeWork landlords with unanticipated debt write offs and voids on their hands.
Bloomberg has reported that WeWork is in discussions with its major landlords in an attempt to reduce as much as 30% from its rent liabilities. In the current climate, where new tenants will be in short supply, it may be in a landlord's interest to collaborate with their existing tenants. Further, once an existing tenant formally enters an insolvency regime there are wide-ranging knock-on effects to the landlord's ability to recover rental losses, which vary depending on the operative insolvency regime. For example, if a moratorium arises in administration the landlord will usually need the Court's permission before taking action to recover rent.
While current circumstances present shared-office companies with a potentially fatal challenge, those that are able to weather the storm and adapt their business models may see opportunities present themselves. In financially uncertain times companies may increase their appetite for flexibility and become more reluctant to commit to traditional long-term leases.
The shift to remote working has already led to questions over whether traditional office working space is, after all, as much of a requirement as originally thought. Employees are now well and truly set up and used to working remotely, and it will be difficult for employers to say 'no' to employee requests to work from home more frequently in the future. Software aimed at facilitating remote working, such as Zoom, is by no means new, but companies have now been left with no choice but to learn and embrace it. A total shift to working from home seems very unlikely, not least because this pandemic has emphasised how important social interaction is to all of us. However, it seems likely that many companies will evaluate their current setups and be open to trying new, innovative ways of office working.
This article first appeared in CoStar UK on 24 April 2020.