WeWork, a company that once struck gold by renting and then subletting sleek, amenity-filled office spaces, is filing for Chapter 11 bankruptcy protection after years of heavy losses. As part of the “comprehensive reorganization” the company will need to stay on life-support, WeWork is abandoning 1.57 million square feet of underperforming office space across 36 buildings in New York City, dumping more open real estate into a struggling market that does not want it.
A gauntlet of major landlords like RFR, Nuveen, and Chetrit Group have filed claims against WeWork, claiming that they are owed millions in unpaid rent. WeWork, for its part, is hoping for lenient terms from Judge John K. Sherwood, who will preside over the bankruptcy hearings from his perch on the U.S. Bankruptcy Court in Newark, NJ.
“There are two main paths forward with this case in terms of paying rent,” said Joel Shafferman, a New York City bankruptcy lawyer watching developments closely. “WeWork might have to pay the old rent unless the landlord agrees to some compromise, maybe not immediately, but over a reasonable period of time—three, six months maybe. There’s also a motion out there to permit WeWork to reject the leases, which they have already been doing and would save them from the burden of paying rent for unprofitable leases.”
If WeWork successfully files a motion that allows them to continue, they might still get slapped with rejection damage claims by the landlords, which would require them to pay a fraction of the owed rent. Filing the bankruptcy claim in New Jersey—which falls under the jurisdiction of the United States Court of Appeals for the Third Circuit (New York is in the Second Circuit)—might increase WeWork’s chances of a favorable outcome. “Rules and interpretations of bankruptcy codes in the Third Circuit are slightly different from those in the Second Circuit, and WeWork might have wanted to go to the former because they’re a little more pro-debtor,” Shafferman explained.
Under terms of a Chapter 11, a business continues to operate while seeking to come to terms with its creditors.
To correct their balance sheets, WeWork is focused on cancelling their leases of properties that have yielded them the least revenue. Nearly all of the shuttered or soon-to-be-shuttered New York City WeWork spaces are spread across Manhattan, including 1 Union Square West, 200 Broadway, 205 Hudson Street, 229 W 36th Street, and 511 W 25th Street. Some of them are ensconced in pre-WWII buildings, such as the spaces on 28 W. 44th Street and 1156 Sixth Avenue, both owned by real estate agency ABF Properties.
Altogether, these spaces account for around 1 percent of the total office space in the city. “That’s not a huge percentage in a market as big as New York’s, but it certainly doesn’t help landlords who are already struggling with empty spaces because the market’s so weak,” said Wharton Properties CEO Ruth Colp Haber. Landlords that have WeWork as a tenant will suffer the most, especially if WeWork’s lease cancellations are allowed to stand. They would have to find new tenants on short notice in a market saturated with high vacancy rates, caused in part by employees often choosing to work from home since the pandemic.
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey, and opened its first location in 2011. Subsequent expansion across New York and other cities was rapid—recklessly so, according to some observers. “The problem was that WeWork expanded too much and too quickly,” said Haber. “They took too many spaces in too many countries and then they branched out into other areas besides office spaces like schools and co-living, and things began to collapse on itself.”
After one failed attempt by WeWork to go public in 2019, investors pressured the company to oust Neumann, who faced accusations of mismanagement and erratic leadership. WeWork tried again in 2021 and succeeded with a much-reduced valuation. But attempts to resuscitate the struggling company amid high interest rates, scant demand for commercial space, and rising competitors have been in vain.