About ten years ago, I was sitting with my friend Lee Brodsky, who also is Marcum’s lead national real estate broker, discussing our NYC space needs. At the time, WeWork was quickly becoming NYC’s largest office tenant, renting more office space than any other company. I was scratching my head, trying to figure out how their business model made sense. I just didn’t get it. As it turns out, it wasn’t me. The business model didn’t make sense.
WeWork announced it is filing for bankruptcy earlier this week and will be rejecting (the bankruptcy term for sticking it to its landlords) many of its leases. We knew this was coming—the company’s current predicament was a long time in the making—but this latest development will no doubt send shockwaves through the commercial real estate world for a while. Once worth $47 billion, the company is now worth maybe $45 million and buried in debt fueled by a long spending spree.
WeWork’s bankruptcy is sure to put a damper on any immediate recovery from the downturn seen by urban office owners.
We are seeing some commercial office space back in action, with many companies fully back to the office or finding they are much more productive with their teams under one roof most of the time. But in late 2023, demand is still not back to 2019 levels in many markets. In the Tri-State area, where our headquarters is, back-to-the-office could mean a suburban satellite office, and many of the WeWork locations happen to be in urban settings, not in the markets where commuters live. Meanwhile, the tech industry—which was filling the cubicles at many of the urban WeWork locations—has hit a slump, and, without funding, the only option for many a future Elon Musk is the garage startup.
The question will now be what to do with all of that vacant office space. Many zoning laws are dated. It may be time for cities to give them a second look so commercial landlords can use the space they own more creatively. During the pandemic, we saw many vacant buildings transformed into urgent care clinics and testing sites, but that phase seems to have passed. There are now programs in several cities, like Boston, to incentivize building developers to convert office buildings to residential housing. New York City is considering a similar approach to fight the housing crisis. Regardless, it’s time for some new ideas to take hold.
Redeploying these spaces quickly will be important. The high-interest-rate environment is putting a lot of pressure on commercial landlords and their lenders, who will need to keep revenue coming in. Then again, necessity is the mother of invention. Perhaps robots will fill some of these spaces instead of humans, similar to some of the Amazon warehouses. That could make life very interesting for the doormen and building staff. As long as someone is paying the rent on time, I doubt anyone will be complaining.
Finally, I want to take a moment on this Veterans Day to honor all those who have served in our armed forces. Your commitment and sacrifices are deeply appreciated, not just today but every day. Your unwavering dedication to our nation’s safety and freedom commands our utmost respect and gratitude. Thank you.