Wework wants a rent break; its customers do, too

Wework, the office space giant that was struggling even before the coronavirus shut down much of the economy, is asking landlords for a break on its huge rent bill as it tries to survive the pandemic.

Some of the company’s smallbusiness customers are also seeking relief on the rent they owe. But they say Wework has been unwilling to cut them much slack as they grapple with plunging revenues and stay-at-home orders that prevent them from using the company’s sleek spaces.

Klint Briney, who runs a marketing company in Los Angeles, was disappointed that Wework offered only to defer one month’s rent. Because much of his business comes from live events, his revenue is a small fraction of what it was a year ago.

“Something that was a legitimate offer, I certainly would have entertained,” he said. “What they offered was a slap in the face.”

So, Briney is doing to Wework what the company is doing to some of its landlords: He is not paying rent for April and May.

Wework’s chief executive, Sandeep Mathrani, acknowledged withholding April and May rent payments to some of its landlords in an interview with CNBC last week.

The tension between Wework, its landlords and its customers highlights the problems gripping the market for office space, a huge part of the economies of big cities. In the coming months, many tenants will be unable or unwilling to pay their rent. And landlords will have to decide whether to grant them relief, wait for them to make good on their arrears or seek to evict them. Banks and investors who lent money to property owners will face similar choices.

Wework is a huge tenant — the largest private renter of New

York office space — and has thousands of its own tenants. The company rents space to freelancers, startups, small businesses and large companies like Amazon. If it provided significant relief to its customers, it could help a crucial segment of the economy bear the costs of the pandemic and lockdowns.

But Wework may not be in a position to be generous.

The company nearly collapsed last year after investors balked at buying its shares in an initial public offering — and it is still burning through cash.

Softbank, the Japanese conglomerate that had fueled Wework’s rapid growth, rescued the company and promised to keep plowing new money into the company. But Softbank, which in May reported a $12.7 billion loss in the fiscal year that ended March 31, may no longer have the appetite to be Wework’s financial savior. It has walked away from an offer to buy up to $3 billion of stock from existing shareholders, including Adam Neumann, Wework’s co-founder. That move allows Softbank to withhold $1.1 billion of debt financing from the company.

Wework may have advantages, including leverage to get better deals from property owners. The company occupies so much space that some building owners would be hard pressed to find other renters if Wework left, especially in the next several months.

“We’ve paid our rent in over 80% of our locations in April and May,” Mathrani told CNBC. “We’re in discussions with our landlords in a friendly way, and we intend to make whole on our entire obligation.”

But even if Wework can get better terms, the company faces daunting odds. The pandemic may have undermined its business model, which rested on putting lots of people into communal spaces. Customers may shun highly trafficked offices and, after working from home for weeks, may decide they can keep doing so at least until the economy and their fortunes recover.

Wework has said it is overhauling its spaces in response to the pandemic. It is spacing out customers more. And Mathrani told CNBC that demand for Wework’s office space could increase if more companies decided they need room to spread out their employees.

But Wework’s reputation could suffer if many customers think it did not live up to its ideals. Neumann and other executives have long argued that Wework is far more than a provider of office space. Its locations, so the pitch went, offer customers a place to form supportive communities that will promote entrepreneurship and give work meaning. That’s why some customers expected Wework to cut or waive rents while they have been forbidden by local officials to go to offices.