Wedon'tWork: uncertainty for office landlords with WeWork as a tenant

WeWork has announced that it has "substantial doubt" about its ability to continue as a going concern and Fitch Ratings has downgraded its main rating to CC.

React News has highlighted that institutional landlords, big businesses, overseas investors and private individuals have let office space to WeWork in the UK. Allwork explains that WeWork’s operating model involved taking long leases from office landlords and subletting them on monthly contracts. Whilst there is flexibility for the member/client/customer entering into a member's agreement with the WeWork tenant in regard to occupation or use of the facility, there may not be flexibility for the WeWork tenant making a long-term lease commitment.

WeWork's ability to continue operating depends on the successful implementation of its management recovery plan which involves reducing rental costs. WeWork has indicated its intention to review its leases.

I have previously written an article on how working from home and hybrid working have led to falling demand for office space in the UK, with lower commercial property valuations placing pressure on loan to value ratios required by lenders as part of mortgage conditions. React News reports that landlords of WeWork are now exposed to lower rental yields or even empty office space, and this jeopardises their compliance with their mortgage conditions.  

Landlords of WeWork not only face loss of rental income. Where WeWork has a lease of a whole building (React News lists examples in London where WeWork is the sole tenant), WeWork have control of the office space which enables them to provide co-working amenities and they likely also have the repairing liability for the whole building. So, landlords where WeWork is the sole tenant are also exposed to the prospect of bearing the cost of repair if WeWork give up office space.

Flexible office space provision should suit flexible office attendance and so WeWork's predicament may have more to do with WeWork's operating history rather than the business model of flexible office provision.