WeWork identifies several US office leases it intends to keep in court filing
By Ashley Fahey
Tampa Bay Business Journal
Published: Jan 29, 2024

WeWork Inc. (NYSE: WE) has identified more U.S. coworking offices it intends to keep as it restructures its business after filing for Chapter 11 bankruptcy protection in November.

The coworking company today filed a motion for four lease assumptions in the United States. The assumptions, which are subject to court approval, include offices in New York; Arlington, Virginia; Tempe, Arizona; and Columbus, Ohio.

Additionally, a WeWork executive told The Business Journals its goal is to stay in every building it's operating in today, and it's currently working through that process in a series of one-on-one conversations on lease adjustments.

The four new lease assumptions two other lease assumptions made so far by WeWork through its restructuring process, at 1440 Broadway in Manhattan and The Wilson in Bethesda, Maryland. WeWork has so far rejected 80 leases, including the 69 it initially rejected in November when it filed for bankruptcy protection.

The lease assumptions filed in court documents Jan. 29 include WeWork offices at 71 Fifth Ave. in New York, The Watermark in Tempe, 901 N. Glebe Road in Arlington and 800 N. High St. in Columbus.

According to court documents, the lease amendments call for a reduction in space at three of the offices, as well as reduced rent at all four locations. WeWork declined to share details about the expected rent reduction.

A WeWork spokesperson said the company is giving back two floors at 71 Fifth Ave., where it initially had four floors, and is also cutting its space roughly in half at The Watermark, from two floors to one. A spokesperson for Crawford Hoying, part of the ownership group for 800 N. High St., said WeWork is reducing its space at the building from three floors to two. The size of its Glebe Road office in Arlington will remain the same, the WeWork spokesperson said.

WeWork’s Watermark office measured 68,000 square feet across two floors when it opened in 2020, the Phoenix Business Journal previously reported. In 2019, WeWork signed a lease for about 46,000 square feet at 800 N. High St. in Columbus, the Columbus Business First reported at the time.

It's the latest chapter in WeWork's quest to restructure its business and reduce its lease costs, efforts that predate the bankruptcy filing. In September, WeWork CEO David Tolley said lease liabilities represented more than two-thirds of the company's total operating expenses in the second quarter of 2023, and that it planned to renegotiate nearly all of its leases.

Where WeWork's negotiations stand

Outside of lease rejections, the company says it's accomplished more than $1.5 billion in total rent savings through 60-plus lease agreements across the globe.

"Our goal is to stay in every building we're operating in today," said Peter Varellas, vice president of global real estate at WeWork, in an interview, although much depends on how lease negotiations transpire.

Varellas declined to estimate where the company's U.S. footprint or number of locations may ultimately end up but, he said, the company is progressing well on lease adjustments with the majority of its landlords. Varellas said he expected more lease assumptions and rejections to occur soon.

"These are very bespoke, one-on-one conversations," he continued. "We have some landlords with multiple buildings, but for the most part, you're talking about over 500 landlords here. Each building is unique. Each economic situation is unique, and it takes a long time to work through."

The most common modifications being sought by WeWork include reducing the amount of space it's leasing at an individual location, reducing its rent and entering into revenue-sharing agreements with landlords, he said. Historically, the majority of WeWork's leases have been traditional fixed-rent leases with a landlord, which have been widely viewed as one major reason for the company's recent financial challenges.

Of the 80 leases WeWork has so far rejected, those locations were largely either nonoperational or single-member full-floor offices, which isn't the core of WeWork's business, Varellas said.

Court filing alleges $33M-plus in unpaid rent

Separately, a Jan. 23 court filing with the U.S. Bankruptcy Court for the District of New Jersey claims WeWork hasn't yet paid a collective $33 million in January rent.

The filing, made by attorneys for the committee of the company's unsecured creditors, says U.S. Bankruptcy Code "establishes specific parameters and limitations" for Chapter 11 debtors, so cases "are not funded on the backs of administrative creditors, including landlords for properties that the debtor continues to occupy." It adds bankruptcy code is "unequivocal" in mandating a debtor in possession most honor post-petition rent obligations as they come due.

The complaint says the leases in question haven't been rejected, adding the committee believes bankruptcy code requires WeWork to pay all unpaid January rent.

"The Debtors instead appear to be pursuing a strategy where unilaterally, in an effort to strong-arm negotiations with certain landlords, they can receive all the benefits of their leases, including receiving fees from their members, without any payment on account of the administrative rent claims," the filing reads. "It is improper for the Debtors to use the bankruptcy process to have it both ways."

It goes on to claim WeWork is inappropriately funding its cases through withheld rent payments and other unpaid administrative claims while the parties continue to negotiate the restructuring.

When asked about the filing's allegations, Varellas said he couldn't comment on bankruptcy court proceedings specifically but added the company is taking action in order to move all conversations along "as best we can with our landlords."

Daniel Gielchinsky, a partner at Aventura, Florida-based DGIM Law PLLC who specializes in commercial litigation matters, said it's not uncommon to see a dispute around rent in cases like WeWork's. For the company to successfully reorganize, it has to keep locations with a critical mass of coverage — and in places where people still want to lease coworking space — but reduce its costs, he added.

Because its business is solely real estate, one of the only ways for WeWork to successfully renegotiate is to get more favorable lease terms, Gielchinsky said.

Speaking generally about bankruptcy proceedings, he said a debtor unable to make administrative payments when they come due sometimes can negotiate to make those payments later or come up with another resolution.

Gielchinsky said, on a broader level, WeWork is the proverbial canary in the coal mine for the U.S. office market. Many landlords continue to hold firm on pricing in a market with weaker tenant demand, reduced occupancy as companies rethink their real estate and billions on the line in upcoming loan maturities.

"This story is playing out throughout the country in the office rental market," he said. "In my mind, there will definitely be repercussions. I think a lot of landlords are saying, 'Are the WeWork landlords going to blink and lower their prices?’ If they do, chances are (all) landlords will have to reduce their prices (and) this could represent a dramatic shift in pricing in the entire commercial real estate office market."

If landlords that lease to WeWork don't reduce their rent, it's not a foregone conclusion that WeWork's business will be successfully reorganized, Gielchinsky added, which could leave those landlords sitting with big blocks of empty space.