WeWork Brings Focus to the Commercial Real Estate Ecosystem

Last week, rumors of a bankruptcy of WeWork, a major player in the office rental market, sent shockwaves throughout the commercial real estate industry. With WeWork occupying substantial amounts of premium office space in prime markets like New York City, San Francisco, London, and Paris, the prospect of losing such a significant tenant has landlords around the world trembling with fear.

The timing of these reports could not be worse for property owners who are already grappling with the challenges brought on by the pandemic. Many companies have been downsizing their office footprint to reduce costs and adapt to the new era of hybrid work. As a result, office vacancy rates have reached unprecedented levels. According to real estate specialist Jones Lang LaSalle (JLL), the office vacancy rate in the United States and Canada reached 21 percent in Q3 2023, while globally it stood at 16 percent. These figures represent a staggering 60 percent increase compared to pre-pandemic vacancy rates.

statista Commercial Real Estate Trends Comparing Q3 2019 to Q3 2023

As commercial vacancy continues to rise, what are some follow-on effects to the global economy.

Lenders to Commercial Property Owners

Commercial property owners who rely on leasing office space are facing increasing pressures as the supply side of the economy is changing. With WeWork's lease obligations amounting to $14.2 billion, property owners may find themselves struggling as they find the “white horse” tenant suddenly adds to the vacancy pressures that were already in-flight since the global response to COVID led many cities to shutter their central office areas. The excess supply of prime office space could drive down rental prices and increase competition among property owners effecting the ability to meet their repayment schedules built around expected lease income and operational demand.

D&B Banking insights which shows how commercial entities use their financing from Financial Institutions is already starting show some pressure with increasing loan payment delinquency. This trend could be an early warning of an accelerating trend as interest rates make financing harder and long-term ownership less attractive as the city discovers it new normal patterns following the pandemic.

This chart shows severe delinquency payment patterns for commercial loans from the D&B Banking Insights datamart. Yes, delinquency rates are lower than they were in 2019, the trend is staring and shocks that a sudden exit like WeWork could inflict on this submarket could cause a rebound of slow and no-payment risking an acceleration to and then beyond 2019 per-pandemic patterns.

D&B Banking Insights Loan Delinquency 2019 to 2023

Beyond Lending, the Commercial Fallout

Property management companies will continue to face challenges as building owners see a further reduction in the tenants in there. This will require the management companies to adapt their strategies and attract businesses that are looking for flexible and agile office solutions in the post-pandemic work environment. Additionally, property management companies might need to renegotiate lease agreements with existing tenants to accommodate changes in demand and market conditions while protecting the needs of the property owners to remain solvent in the process.

And then there are the supporting businesses that rely on the presence of commercial properties and the tenants within them. Service providers, such as cleaning companies, maintenance contractors, and security firms, may experience a decline in demand as office occupancy rates decrease. Additionally, local businesses that rely on foot traffic from office workers, such as restaurants and retail stores, could face reduced customer flow and revenue.

The downtown business community is not just the owners of the commercial property, the lenders who funded the projects, it is the cities and the small businesses that these cities are based in. The impact is likely to broad, wide, and more on main street than many of the headlines might lead one to conclude.

Dun & Bradstreet can help you prepare for the changing risks in your business because of these changes by:

1.????? Helping you understand you client base.

The D&B Commercial Data Cloud provides insight into over 500M businesses global with ownership, corporate families, commercial payment, banking, and operational monitors. A foundation of identity and understanding is the basis for effective business decisions.

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2.????? Identifying interconnection

D&B provides clients with understanding of the business networks. Business networks arise form companies buying or selling to other businesses. Knowing these relationships can reveal where dependencies become dominos.

3.????? Predictive Risk Assessment

D&B provides several analytics that demonstrate where market conditions will impact a company. These measures include answering key questions including will the company be operational in the coming year, will the company become insolvent and seek bankruptcy or will the company start paying its bills late. These critical measures allow business partners to see where financial stresses will lead to operational and performance changes.

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4.????? D&B Banking Insights

Bank and FinTech’s backstop the US economy and understanding how companies use and repay credit cards, loans, leases, and lines of credit to support their commercial operations is a leading signal to what will happen next with a business. In addition to the current state information, D&B has built a suite of attributes and scores specific to lending

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