May 24, 2024

For years, landlords around the world clamored to get WeWork into their office buildings, a love affair that made the co-working company the largest corporate tenant in New York and London.

Now, WeWork is perhaps days away from a bankruptcy filing — and its demise could not come at a worse time for office landlords.

With fewer employees going into the office since the pandemic, companies have slashed the amount of space they lease, causing one of the worst crunches in decades in commercial real estate.

Many landlords have accepted lower rents from WeWork in recent years to keep it afloat, but its bankruptcy would be an enormous blow. The pain would be centered on landlords that have leased a large proportion of their space to the company, particularly in New York, and are struggling to make payments on the debt tied to their buildings. Some landlords might quickly accept lower rents from WeWork as part of a bankruptcy reorganization and keep doing business with any new entity that emerges, but others might have to fight in court to get anything.

“If you look at a lot of the vacancy in New York City, you will find that a fair amount of that was space that was leased to WeWork — and there will be even more abandoned after a bankruptcy,” said Anthony E. Malkin, the chief executive of the company that owns the Empire State Building and an early skeptic of WeWork.

WeWork, despite its efforts to cut costs, still had an empire of 777 locations in 39 countries at the end of June, compared with 764 locations in 38 countries nearly two years earlier. On Friday, its website listed 47 locations in New York, where at the end of March it leased 6.9 million square feet of office space, equivalent to more than 60 percent of all co-working space, according to Savills, a real estate services firm. In London, WeWork listed 38 locations.

Speculation of a possible bankruptcy filing intensified in August when WeWork warned that it might not be in business much longer. Its shares have fallen 90 percent since then.

Last month, WeWork said it would miss interest payments totaling $95 million. After a 30-day grace period, the company reached a deal with creditors for a seven-day forbearance, which expires Tuesday.

In New York, where a fifth of office space is unleased or being offered for the sublet, the highest amount in decades, the fallout from a WeWork bankruptcy would be felt most in older office buildings in Midtown and downtown Manhattan. Nearly two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings, according to the real estate advisory firm Avison Young.

“We believe the value of Class B and Class C buildings will probably be 55 percent less than they were prior to the pandemic,” said Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School who has been tracking the decline in office building valuations. “These are the buildings that are struggling the most and will have a tough time with a WeWork bankruptcy.”

Owners of these older buildings were thrilled a few years ago to lease entire floors — or even entire buildings — to WeWork, but they now find themselves under siege. In cases where WeWork has stopped paying rent on the leases, landlords have been unable to make debt payments on buildings that are being valued sharply lower than they were a few years ago.

That’s the quandary facing Walter & Samuels, a real estate firm that has WeWork as a tenant in five of its office buildings in New York. At one, 315 West 36th Street, a small edifice built in 1926 in Manhattan’s garment district, WeWork leased about 90 percent of the space and stopped paying rent earlier this year, according to Morningstar Credit. Walter & Samuels stopped making payments on a $77 million loan on the building, Morningstar said.

The loan’s special servicer said the appraised value of the building had fallen to $42 million, down from $127 million when the loan was made five years ago, and the servicer is moving to foreclose, according to Morningstar.

Executives at Walter & Samuels did not respond to emails seeking comment.

WeWork occupies nearly all of the office space at 980 Avenue of the Americas, a mixed-use development owned by the Vanbarton Group. Joey Chilelli, a managing director at the company, said the firm could consider a range of options for the space if WeWork vacated, including turning it into residences.

“We have tried to do everything we could earlier this year when they went to every landlord and asked for rent reductions and concessions,” Mr. Chilelli said. “If they are able to reduce their footprint, it will hurt the office market again.”

Michael Emory, the founder of Allied, a real estate investment trust that operates office buildings in Canada’s largest cities, said his company walked away from a potential deal with WeWork in Toronto in 2015 because there were drawbacks for Allied. But he said he had watched other developers, particularly in New York, lease space to the company, believing that co-working providers would occupy a large percentage of office space for years.

Also, Mr. Emory said, WeWork focused on landlords that were eager to fill up their office buildings and then sell them based on the new occupancy and rental income.

A bankruptcy filing “will be very consequential for the New York market,” he said.

WeWork declined to comment for this article.

At its peak, when investors were feverishly bullish about the company and the vision of Adam Neumann, its eccentric co-founder, WeWork was valued at $47 billion. Its model was to rent office space, spruce it up and charge its customers — established companies, start-ups and individuals — to use the space for as long as they needed it.

The flexibility of using a WeWork space — and its community vibe: “Our mission is to elevate the world’s consciousness,” the company declared — was supposed to attract businesses away from stodgy offices that tied tenants down with yearslong leases.

But the economics of WeWork’s business were always upside down: What the company took in from customers was not enough to cover the cost of renting and operating its locations. It kept growing anyway, and from the end of 2017, it lost a staggering $15 billion. After WeWork withdrew an initial public offering in 2019, its largest outside investor — the Japanese conglomerate SoftBank — provided a lifeline with a multibillion-dollar takeover.

Before that debacle, WeWork had ardent fans in the commercial real estate world who believed the company was pioneering an exciting new service.

“We know these folks, we know them well,” Steven Roth, the chief executive of Vornado Realty Trust, one of the largest office landlords in New York, said in 2017. “We think what they’re doing is unbelievably impressive.”

Mr. Roth declined to comment for this article. Vornado leased space to WeWork in a building in Manhattan and another in Washington, and they teamed up outside Washington to introduce WeLive residences, one of WeWork’s much-hyped but failed subsidiaries, including the for-profit private school WeGrow.

Vornado no longer has WeWork as a tenant. In 2019, after questions about WeWork’s financial health mounted in the industry, Vornado’s chief financial officer said the company had limited its exposure to WeWork.

JLL, a real estate services firm, once predicted that co-working firms would be leasing 30 percent of all office space in the United States by the end of this decade. Such predictions did not seem outlandish just before the pandemic, when WeWork and other co-working providers accounted for 15 percent of both new and renewed leases signed in New York, according to JLL, up from 2 percent in 2010. Co-working providers accounted for less than 1 percent of all leases signed in New York last year, JLL said.

And some landlords believed they would be somewhat insulated from problems at WeWork.

“WeWork is out there taking on these start-ups en masse, realizing that some will stay, some will go,” Raymond A. Ritchey, an executive at BXP, formerly known as Boston Properties, said in 2014. “But they tend to be taking that risk as opposed to the landlord on a direct basis.”

BXP is a part owner of a shiplike office development in the Brooklyn Navy Yard, Dock 72, where WeWork has been a major tenant since it opened in 2019 but was struggling to fill its space. At the end of last year, BXP was leasing nearly 500,000 square feet of space to WeWork across its portfolio.

Douglas T. Linde, the president of BXP, said Thursday on an investor call that WeWork had stopped paying rent at two of its locations, including Dock 72. “We don’t expect WeWork to exit all the assets,” he said, “nor do we expect them to remain in place in the current footprint.”

Some landlords might be able to get other co-working companies to take over WeWork’s spaces, or operate their own version, avoiding a situation in which their buildings appear desolate. But they are unlikely to take in the revenue they were initially getting from WeWork, which did end up going public, in 2021, by merging with a special-purpose acquisition company.

Mr. Malkin, the Empire State Building landlord, said he had always doubted WeWork’s business model. Also, he never wanted WeWork in his company’s buildings because, he said, it packed too many people into its spaces, causing overuse of elevators and toilets.

“Why would you want to do business with these people?” Mr. Malkin said.