WeWork’s Collapse is More Proof of Commercial Real Estate’s Struggles


For years, WeWork was considered an innovative company that changed how the commercial real estate space functioned. 

Fast-forward to November 6, 2023, when landlords, tenants, and investors rushed to get WeWork off their books after the co-working giant filed for Chapter 11 bankruptcy, listing $19 billion of debt. The company said it had reached a restructuring agreement with stakeholders representing about 92% of its secured notes to reduce its debt and plans to streamline its rental portfolio. 

WeWork’s demise did not happen overnight, but it comes at a time when the commercial real estate (CRE) market is in a slump, with landlords struggling to keep tenants after the pandemic changed what office life looks like. This has investors wondering: Will the CRE crunch get worse because of WeWork? 

Will WeWork’s Bankruptcy Impact CRE? 

The CRE sector has been on shaky ground since the pandemic, with some predicting a crash soon. Offices have been struggling as remote work becomes more commonplace. Even as companies call for employees to come back to the office, pundits say the five-day office workweek is unlikely to return.

As such, CRE landlords have been struggling to fill space. The national vacancy rate rose to 19.2% in the third quarter of 2023, nearing a 1991 historic peak of 19.3%, according to Moody’s Analytics. Large metro areas are struggling the most, even as their vacancies are slightly lower than the national average. This has been driven by companies reducing their office footprint as employers seek bigger properties outside the city and work remotely.

Annual Change in Occupied Office Stock in Square Footage (2019-2024) - Moody's Analytics
Annual Change in Occupied Office Stock in Square Footage (2019-2024) – Moody’s Analytics

This trend also hit WeWork, which was already beset by financing issues. Its occupancy level failed to meet the levels needed to offset its lease liabilities, with occupancy in the U.S. and Canada dropping to 67% in the second quarter from 69% in the first quarter, according to CoStar.

With WeWork in the mix, it’s not looking good for major metro areas like New York, San Francisco, Boston, and Seattle, where there’s a large presence of WeWork spaces. This is even more true for offices that are in so-called Class B and Class C buildings. With such low demand for office space, these buildings could struggle to fill occupants once WeWork leaves. 

What Does WeWork’s Failure Mean for Investors? 

WeWork’s collapse could have ripple effects across the industry. With small and midsize banks holding landlord debt, it could cause banks to tighten loans even more across the board. That would make it harder for investors to finance real estate and could increase fears about the overall health of the economy. According to Goldman Sachs, about 55% of office loans are on bank balance sheets. 

The impact could also be felt on the local and state levels, as municipal governments often rely on commercial property taxes. In New York, for example, the city gets 21% of its revenue from commercial property.

Add increased interest rates and loans maturing in the next 12 months, with delinquencies on the rise, and things are not looking good for the CRE market as a whole. With $1.1 trillion worth of CRE mortgage loans expected to mature before the end of 2024, many landlords will need to refinance but could find it difficult to do so. 

“Office properties—already facing financing hardships and an evolution in values—now face a potential new wave of unexpected vacancies,” Moody’s economist Ermengarde Jabir said in a report

The Bottom Line 

CRE investors are not in a great place right now, and WeWork’s collapse will likely only make things worse. While it’s possible that WeWork survives and commercial landlords are able to negotiate with tenants, an increased interest rate environment will make it harder for CRE owners to refinance. And with ripple effects likely being felt throughout the economy, it’s possible the real estate market may need to tighten its belt for the foreseeable future.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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