Testing the market
IN JUNE, WEWORK BECAME CHICAGO’S LARGEST OFFICE TENANT. TODAY, THE COMPANY’S VALUE HAS PLUMMETED, CREATING UNEASE DOWNTOWN.
Less than six months after becoming downtown Chicago’s largest office tenant, co-working giant WeWork is in survival mode.
A recent attempt to go public instead resulted in questions about the company’s finances, leading to a plunge in WeWork’s valuation and the ouster of CEO Adam Neumann.
WeWork’s sudden turn derailed leases that were in the works, including a massive space the company had planned in the recently opened Old Post Office redevelopment.
The company’s troubles could mean a rare crisis in a Chicago leasing market that has soared in recent years, amid corporate relocations downtown from the suburbs and businesses expanding.
The question mark surrounding WeWork and the local space it leases comes at a time when office landlords already are bracing for the impact of a wave of new construction and potentially huge property tax increases.
It’s yet to be determined whether there will be a broader fallout. More setbacks could shake up a downtown office market that has been on a roll for years, but also faces several upcoming large vacancies as tenants prepare to move into new buildings along the Chicago River and in the Fulton Market district.
Also unclear is how WeWork’s spaces will be valued by real estate investors, which creates a potential impediment when the buildings it occupies are sold.
WeWork has accounted for 10% of the absorption of vacant office space downtown the past six years, according to Cushman & Wakefield office tenant broker Ari Klein.
“WeWork was a lifeline to any building with a big vacancy,” Klein said. “What happens now?”
During those six years, WeWork has gone from no space in Chicago to more than 1.1 million square feet spread over 14 downtown buildings, as the co-working concept gained in popularity.
Overall, co-working companies have more than tripled their collective space and memberships the past four years, according to a report from Newmark Knight Frank and Chicago Creative Space. Next year, the sector is expected to rise to 57,000 co-working members and almost 3.9 million square feet of space. That’s big enough to fill the 110-story Willis Tower.
WeWork became the largest tenant leasing space in downtown Chicago in June, when it passed the 1 million-square-foot mark, eclipsing giants such as Bank of America and United Airlines. The list of largest tenants does not include companies and government agencies that occupy more total square feet but own all or most of their space.
Co-working firms such as WeWork typically sign long-term leases, then fill those spaces with shortterm memberships. Coworking users range from individual entrepreneurs and small startups to Fortune 500 companies.
New York-based WeWork has emerged as coworking’s biggest player. Amassing that market share came at a steep cost.
Scrutiny of the company’s finances amid its planned IPO led WeWork’s valuation to plunge from $47 billion to about $8 billion, and led to the removal of executives including Neumann.
Japan’s SoftBank Group, already an investor in the company, is backing a major restructuring to keep the company afloat.
Ripples already are being felt in office markets throughout the country, including several other cities where WeWork is the largest office tenant.
Chicago deals that had been in negotiation — including a huge lease in the redeveloped Old Post Office that the Tribune first reported in early September — are off, according to real estate sources.
There’s no immediate indication that the company plans to close existing locations, and WeWork appears to be moving toward opening new spaces in buildings where it has signed leases, including three buildings in the Fulton Market district.
Those include a 138,000square-foot lease in a building that Shapack Partners and Focus Development are constructing at 167 N. Green St., and two deals for a combined 110,000 square feet in buildings Barnett Capital and Domus Group are redeveloping at 1114 and 1155 W. Fulton Market.
“We’re full speed ahead,” said Elan Peretz, managing director and general counsel at Northbrook-based Barnett Capital.
Despite WeWork’s shaky financial footing, the company is an excellent operator of co-working spaces, Peretz said. That, combined with overall strong demand for offices in the former meatpacking district, made the developers comfortable in moving forward with funding build-out costs for WeWork’s spaces, Peretz said.
“It would be stupid not to have thought about various possibilities, when it’s been all over the news,” Peretz said. “But Fulton Market is one of the best submarkets in the country, where demand far exceeds supply.”
He added, “WeWork has built the Ritz-Carlton of the co-working world. For me, the concept of having a company that’s going to put my building in the condition where it has just the right density and amenities and technology, I feel pretty good about that.”
The co-working giant said it is “excited about WeWork’s future in Chicago.” In the emailed statement, the company added: “WeWork continues to sign new lease agreements with our 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 company declined to comment beyond the emailed statement.
WeWork’s pause comes as the range of co-working players has expanded to include commercial brokerages such as CBRE, big landlords such as Tishman Speyer and even hotels offering smaller co-working areas.
The Hoxton, Chicago, a Fulton Market boutique hotel, will open 294 desks for its co-working brand by mid-November, the company said.
Larger rivals such as Spaces and Industrious could step into any voids created by WeWork.
Industrious now leases 260,000 square feet in Chicago and Evanston, and the company plans expansion in the city and suburbs, CEO Jamie Hodari said.
His company’s model differs from WeWork, in that Industrious manages spaces on behalf of landlords, rather than leasing space. Industrious has partnerships with 25 landlords nationally, Hodari said.
A full-scale WeWork retreat seems highly unlikely, Hodari said. Chicago is a key co-working market because virtually every Fortune 500 company and Silicon Valley tech firm does business and needs office space in the city, he said.
“It’s clear they’re going to hit the pause button and stop growing,” Hodari said of WeWork. “They’re going to add zero seats for some period of time until they regroup. Either other operators will come in to provide more space or there will be a tightening of space.
“Because a lot of supply has come online in Chicago in the last 12 to 18 months and more is coming, you’re unlikely to see a mismatch in supply and demand that causes a spike in pricing. In other cities, you’ll see a more dramatic effect.”
There’s no reason for WeWork to shutter profitable locations in Chicago or elsewhere, and it’s unclear how much defection there will be to rival brands, Hodari said.
“Because of the moment of flux, a lot of companies are taking stock and looking at what their options are,” he said. “This has reminded people that this is a big decision and it’s worth comparison shopping.”
“Fulton Market is one of the best submarkets in the country, where demand far exceeds supply.”
— Elan Peretz, managing director and general counsel at Northbrook-based Barnett Capital
WeWork signed a lease with Barnett Capital and Domus Group; it is redeveloping the Fulton Market building.
Elan Peretz’s Barnett Capital has two buildings being redeveloped for a combined 110,000 square feet in Fulton Market.