WeWork is Renegotiating All Its Leases: Can You Do the Same?

Commercial landlords are about to be slammed by a wave of lease renegotiations, and it’s starting with WeWork.

Under new financial pressure and potential bankruptcy, the co-working pioneer is reexamining one of its top costs, real estate. Because on top of closing offices in under-performing locations, they found that there’s still savings to be unlocked in their existing leases. And whether or not their landlords take the bait in wide-scale renegotiations will affect the leverage that corporate tenants have everywhere.

Modern Tenants are Losing Money on Old Leases

Wework’s co-working business model couldn’t have come at a worse time. Since 2017, the company has lost $15 billion.

WeWork promised businesses the ability to be flexible and pause while the outlook of CRE adapts. Because of early corporate interest, it amassed massive amounts of office space in a pre-pandemic leasing environment. However, WeWork is facing the same problem as any other landlord: Most companies don’t want to take on office space right now - even if it's temporary.?

Resounding low demand in commercial real estate has put office valuations in a tailspin as vacancy rates climb to never-before-seen levels in major metros. Now, the prime space it scooped up prior to 2020 is worth a fraction of what it was.

And the company has been forced to reckon with its business model as it plummets in profitability along with its office stock.

WeWork’s overly (and, in retrospect, foolishly) generous use of money to lock down locations early on means there is likely a very large gap between where rents are and where the company wants them to be.” -GlobeSt

Last November the company announced it was to close 40 underutilized locations. To do so, they planned to pay $200M over 15 months to exit the leases on spaces it is giving up, hoping to generate cost savings estimated at $140M in EBITDA.

It’s moves to stop the hemorrhage of cashflow on underutilized properties highlights the same issue many corporate tenants are trying to solve. When corporate real estate is typically the second most significant cost, it comes under intense scrutiny when it’s time to slash expenses. Because of this, over half of the world’s largest businesses have planned to cut into their footprints. But this is an expensive solution.

Landlords aren’t always willing to terminate corporate leases. When they are, it comes at an extreme cost to the tenant. But what’s challenging right now is the amount of trouble commercial landlords are widely in. With major defaults on the horizon and CMBS loans coming due, they aren’t likely to let tenants off the hook that easy.

“In many areas, office landlords already face serious challenges in keeping space leased, battling vacancy rates, and needing to maintain rents for the leased parts of buildings that can sustain the business of the whole.” GlobeST

Now, more than ever, they are instead willing to work with tenants to keep them in their buildings. And this means renegotiating the terms and price of their leased space that have since been outdated rather than risk losing more business.

Why Lease Renegotiation is Possible

After closing offices have proved to not be a strong enough solution, WeWork announced that it now plans to renegotiate essentially all of its leases.

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