April 21, 2017
Interviewed by: David Snow
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The Risks of a WeWork Tenant

Co-working office providers like WeWork are quickly becoming the biggest lessees in the US. What does this mean for investors in office properties? Three experts discuss the potential impact of month-to-month office models in a recession.

Co-working office providers like WeWork are quickly becoming the biggest lessees in the US. What does this mean for investors in office properties? Three experts discuss the potential impact of month-to-month office models in a recession.

The Risks of a WeWork Tenant
The Millennial Impact on Real Estate

David Snow, Privcap:
I read that WeWork is now the largest tenant in New York City. Is that worth commenting on? You might see the rise of these super leaseholders that either present a challenge or an opportunity for long-term investors.

Andrew Jacobs, Metropolitan Real Estate:
With Beacon, we bought Goldman Sachs’ old headquarters, 85 Broad Street here. Ironically, or maybe not, the largest tenant in the building now is WeWork at a quarter of a million square feet. And We Work is sold out. This is just not some flyer that a group of investors are taking on a concept. This concept has been proven to work and it’s worked across markets.

Snow: Are there risks? What are the uncertainties of investing in an office property that would appeal to a WeWork type of occupant? Is that considered a stable, long-term relationship? Or is it unknown what the long-term commitment of a WeWork would be to your office space?

Jacobs: They’ll sign a long lease. The question is does their credit hold up for the term or more when you want to sell the building?

Michael Schwartz, RSM US LLP:
I think the jury is still out on that concept. Yet, to underwrite those properties now, a lot of our clients are taking a bit of a risk to do that, to Andrew’s point. They did sign a long-term lease, but—

Peter Ciganik, GTIS Partners:
We just signed on WeWork as a tenant as well and we were hesitant to do it for more than a part of the building for those reasons. But what gives me some comfort is that their model has evolved as well. A lot of their tenants are now established companies—the Fortune 100s that are using WeWork as excess space. And there is some component to that where you can both attract the millennial workers that these older companies desperately want, as well as manage your space needs on a more temporary basis. I think the landlords are changing their views, but also WeWork and co-working companies are changing the way they look at the space. I think it will converge to some good equilibrium.

Of course, if there is a recession, there is no doubt in my mind that these malls are more prone to lose their tenancy. They walk in and out the door every day. These are fee-based subscription systems. They are not tenants who actually have long-term leases except the WeWork component is a lease. Their own users are not on a lease.

Snow: And WeWork has not been through a recession as an organization, but—

Ciganik: That’s right.

Schwartz: Correct.

Snow: —it’s been in a consistent rising market, so it will be interesting to see what happens when the next recession comes along.

Jacobs: Yes. One of the reasons people like investing in our product type is because we have certainty of cash flow with 10-year leases. Hotels have one-day leases. I think what we’re describing is somewhat analogous to that. And with a correction in GDP and in the economy, obviously the income of these sorts of tenants is impacted immediately.

Ciganik: That’s why the convergence between asset classes comes in again. Office and hotel—you would never think of that as something that has a common operating element. But, in effect, you check into a hotel for a day to sleep or maybe work and you check into WeWork for a day to do your office work.

Jacobs: And there’s WeLive now, right?

Ciganik: There is WeLive, too. That’s right.

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