What does WeWork’s potential bankruptcy mean for Houston?

Houston’s struggling office real estate market could face more losses if co-working giant WeWork, already facing potential bankruptcy, closes any of its remaining locations.

WeWork, which closed a downtown Houston location this year, is leasing more than 200,000 square feet in three buildings across the region that could fall victim to further cost-cutting.

The New York-based company is also trying to renegotiate most of its leases in an attempt to stay in business, but Houston is home to just 3% of US WeWork-branded coworking spaces — good news for the city’s office real estate market, which It is 25 percent vacant. New York has 30%, and Los Angeles and San Francisco each have 8%, according to research by Texas-based real estate firm Partners.

“Houston is much more isolated,” said Steve Treolet, a senior vice president at Partners.

WeWork, co-founded by charismatic CEO Adam Neumann in 2010, has signed large leases in high-profile buildings where its trendy interiors welcomed young entrepreneurs who can enjoy free beer and foosball tables amid expansive collaboration areas.

WeWork has grown strongly into one of the largest coworking companies worth $47 billion despite not turning a profit. But a failed initial public offering in 2019 led to Neumann’s ouster, and the pandemic has exacerbated its financial woes. However, the company went public in October 2021.

In the first half of 2023, WeWork said expenses exceeded $2.2 billion, and it lost $696 million over the two quarters. By last month, WeWork’s market capitalization had fallen below $200 million, 98% less than it was on its first day of trading, The Street reported, and the company warned that losses and ongoing cash needs could threaten its future. Talk of bankruptcy started spiraling.

On September 6, WeWork said it would seek new terms for nearly all of its leases, payments on which account for more than two-thirds of operating expenses, interim CEO David Tolley said in a letter to investors. WeWork will exit so-called “inadequate and poorly performing locations” and invest more in its strongest locations, Tolley said.

But WeWork had already closed some locations in the United States. In February, it closed one of its largest locations in Houston, 708 Main, leasing the entire 10-story, 95,000-square-foot building. Real estate brokerage CBRE is marketing the furnished space, though it and building owner Lionstone Investments declined to comment. A company spokesperson said WeWork members were given the opportunity to relocate and make ends meet.

That leaves three WeWork-branded locations in Houston: 56,000 square feet, or 5 percent, of 609 downtown cores; About 100,000 square feet, or 19 percent, of 2700 Post Oak at Uptown Galleria; and about 52,000 square feet, or about 16 percent, of 1725 Hughes Landing in The Woodlands. Square footage numbers are from 2019 ads; The owners declined to comment.

As the company tries to recover, WeWork appears to be taking signals from Common Desk, a Dallas-based chain of co-working sites that WeWork acquired last year for $21 million. Common Desk does not pay rent; It shares the revenues of the joint business with the owners. If membership is declined, Common Desk will not have to pay rent that membership income may not allow it to afford.

WeWork, looking to ease its rent burden, said in its 2019 five-year plan that it would consider joint ventures, franchise agreements and partnerships with landlords similar to those of Common Desk.

“WeWork is trying to move more toward a Common Desk model, and I think one of the main reasons they bought it, wasn’t because of the footprint, it was because of their experience negotiating leases with landlords,” Triolet said.

If WeWork files for bankruptcy, any leases or agreements with landlords could be rejected or renegotiated, said Brian Kilpatrick, an attorney at the Houston-based law firm Wilson, Krebs & Goerne. The threat of bankruptcy that wipes out much of what WeWork owes landlords could encourage them to reach a settlement, Kilpatrick said.

If WeWork closes additional locations in Houston, it could leave large holes in office towers and owners will scramble to fill space in an office market already flush with space.

“It certainly doesn’t help an already weak market. It’s just a question of whether there are operators who can and will fill these spaces,” said Dan Boyles, an office broker with Partners.

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