Test­ing the mar­ket

IN JUNE, WEWORK BE­CAME CHICAGO’S LARGEST OF­FICE TEN­ANT. TO­DAY, THE COM­PANY’S VALUE HAS PLUM­METED, CRE­AT­ING UN­EASE DOWN­TOWN.

Chicago Tribune (Sunday) - - BUSINESS - [email protected]­bune.com Twit­ter @Ryan_Ori

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

ERIN HOOLEY/CHICAGO TRI­BUNE

WeWork signed a lease with Bar­nett Cap­i­tal and Do­mus Group; it is re­de­vel­op­ing the Ful­ton Mar­ket build­ing.

Ryan Ori On Real Es­tate

ERIN HOOLEY/CHICAGO TRI­BUNE

Elan Peretz’s Bar­nett Cap­i­tal has two build­ings be­ing re­de­vel­oped for a com­bined 110,000 square feet in Ful­ton Mar­ket.

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