Turmoil at WeWork may impact Metro office market
Co-working company currently leases 700,000 square feet of space in the region
Turmoil at WeWork, the giant office co-working company, has yet to impact Vancouver’s office market, but future leases here between landlords and the New York company could eventually be affected, local commercial property insiders say.
In recent weeks, dysfunction at WeWork has been whipping up negative headlines and fuelling angst around the massive shared office provider business, which has 837 co-working locations in 125 cities around the world.
Last month, WeWork’s co-founder and CEO Adam Neumann was forced to resign over concerns about his erratic leadership and inability to guide the company through massive financial losses and a now-shelved IPO process.
A Bloomberg report on Oct. 4 said WeWork was considering cutting 2,000 jobs, citing people familiar with the discussions with executives at their New York headquarters. Those layoffs would represent 16 per cent of WeWork’s global workforce, the report said.
WeWork is one of Metro Vancouver’s largest office tenants, with a total footprint of 678,000 square feet, including 279,000 sq. ft of existing space and 399,000 sq. ft of planned space, with firm deals across nine locations, according to a recent report on Canada’s co-working market by CBRE brokerage house.
WeWork declined to make someone available for an interview, but emailed a statement saying WeWork continues to sign new lease agreements with its landlord partners.
“We expect the pace of entering new lease agreements to slow over the next several quarters as we pursue more strategic growth and focus on accelerating our path to profitability,” the statement read.
So far, WeWork’s existing locations in Vancouver don’t appear to be affected “in a material way,” said Kirk Kuester, the managing director for Colliers International in British Columbia.
“They’re up, they’re running,” he said.
The bigger issue, Kuester said, could be over pre-leases that WeWork may have signed, or planned to sign, at buildings that have not yet been completed in Vancouver’s current construction cycle.
“There are other deals in the works,” he said. “It will really take some time to see how those deals play out. The landlords would likely be looking at those deals closely and making sure they’re well-secured from a covenant perspective and perhaps from a credit perspective.”
It is possible those deals won’t happen at all.
Ross Moore, a senior vice-president and tenant advisory specialist with Cresa in Vancouver, said WeWork will not want to give up its first mover advantage in this market.
“(But) they now have constraints,” he said. “I’m hearing anecdotally that they have made commitments that require a lot of capital in a relatively short period of time.”
Would they turn and run? “If you sign a lease, that’s a very significant commitment,” Moore said. “But if you don’t have the capital to build that space out, then what do you do?”
He said WeWork is the region’s second-largest office tenant, after Amazon, which currently has 863,000 square feet leased at various buildings in downtown Vancouver, including at the old Canada Post building, which is being redeveloped.
In a worst-case scenario, if WeWork abandoned the market, that 700,000 square feet would be a major blow.
For context, office tenants in downtown Vancouver absorb a total of about 250,000 square feet per year, Moore said.
Over the long term though, more vacancy downtown wouldn’t necessary be a bad thing, he added, noting that the city’s office vacancy is at a historic low.
The problems at WeWork may force its new management team to take a critical look at its business model, said Glenn Gardner, a principal and office specialist with Avison Young in Vancouver.
“From a long-term perspective, it might be a really good thing,” he said.
Currently, WeWork’s supply and demand situation in Vancouver appears strong, he said. “If you call them up and need some short-term space for someone, it’s not readily available.”
Gardner said the bigger question in his mind is how WeWork and its members would handle an economic recession, given their business model is based on providing short-term, flexible office space. “Is the business mature enough? Are the tenants within their sites stable enough to weather that storm?”
Even if WeWork went bankrupt tomorrow, it’s unlikely its co-working spaces in Vancouver would disappear, Kuester said.
“Someone else would step in and restructure WeWork as an entity and likely assume the existing obligations that WeWork have in the way of their leases,” he said.
Vancouver’s office vacancy is so low that landlords would likely be able to lease out any extra space, he said.
I’m hearing anecdotally that they have made commitments that require a lot of capital in a relatively short period of time.