WeWork, the office space giant that was struggling even before the coronavirus shut down much of the economy, is asking landlords for a break on its huge rent bill as it tries to survive the pandemic.
Some of the company’s small-business customers are also seeking relief on the rent they owe. But they say WeWork has been unwilling to cut them much slack as they grapple with plunging revenues and stay-at-home orders that prevent them from using the company’s sleek spaces.
Klint Briney, who runs a marketing company in Los Angeles, was disappointed that WeWork offered only to defer one month’s rent. Because much of his business comes from live events, his revenue is a small fraction of what it was a year ago.
“Something that was a legitimate offer, I certainly would have entertained,” he said. “What they offered was a slap in the face.”
So, Briney is doing to WeWork what the company is doing to some of its landlords: He is not paying rent for April and May.
WeWork’s chief executive, Sandeep Mathrani, acknowledged withholding April and May rent payments to some of its landlords in an interview with CNBC last week.
The tension between WeWork, its landlords and its customers highlights the problems gripping the market for office space, a huge part of the economies of big cities. In the coming months, many tenants will be unable or unwilling to pay their rent. And landlords will have to decide whether to grant them relief, wait for them to make good on their arrears or seek to evict them. Banks and investors who lent money to property owners will face similar choices.
WeWork is a huge tenant — the largest private renter of New York office space — and has thousands of its own tenants. The company rents space to freelancers, startups, small businesses and large companies like Amazon. If it provided significant relief to its customers, it could help a crucial segment of the economy bear the costs of the pandemic and lockdowns.
But WeWork may not be in a position to be generous.
The company nearly collapsed last year after investors balked at buying its shares in an initial public offering — and it is still burning through cash.
SoftBank, the Japanese conglomerate that had fueled WeWork’s rapid growth, rescued the company and promised to keep plowing new money into the company. But SoftBank, which on Monday reported a $12.7 billion loss in the fiscal year that ended March 31, may no longer have the appetite to be WeWork’s financial savior. It has walked away from an offer to buy up to $3 billion of stock from existing shareholders, including Adam Neumann, WeWork’s co-founder. That move allows SoftBank to withhold $1.1 billion of debt financing from the company.
Masayoshi Son, SoftBank’s chief executive, seemed to take a dim view of WeWork’s prospects on a call with analysts and investors on Monday. Speaking through an interpreter, Son said some companies in which SoftBank had invested had a good chance of “going through” the coronavirus crisis but said WeWork was an “exception.” He suggested that businesses might be reluctant to sign long-term office leases after the pandemic and might instead opt for shorter-term agreements at WeWork locations.
But a SoftBank executive who serves as WeWork’s executive chairman, Marcelo Claure, said later onTwitterthat SoftBank and Son were confident of the company’s ability to weather the pandemic.
WeWork may have advantages, including leverage to get better deals from property owners. The company occupies so much space that some building owners would be hard pressed to find other renters if WeWork left, especially in the next several months.
“We’ve paid our rent in over 80% of our locations in April and May,” Mathrani told CNBC. “We’re in discussions with our landlords in a friendly way, and we intend to make whole on our entire obligation.”
But even if WeWork can get better terms, the company faces daunting odds. The pandemic may have undermined its business model, which rested on putting lots of people into communal spaces. Customers may shun highly trafficked offices and, after working from home for weeks, may decide they can keep doing so at least until the economy and their fortunes recover.
WeWork has said it is overhauling its spaces in response to the pandemic. It is spacing out customers more. And Mathrani told CNBC that demand for WeWork’s office space could increase if more companies decided they need room to spread out their employees.
But WeWork’s reputation could suffer if many customers think it did not live up to its ideals. Neumann and other executives have long argued that WeWork is far more than a provider of office space. Its locations, so the pitch went, offer customers a place to form supportive communities that will promote entrepreneurship and give work meaning. That’s why some customers expected WeWork to cut or waive rents while they have been forbidden by local officials to go to offices.
Stacey Brook helps advise high school students on writing essays for college admissions. She ran her business, which is not considered an essential service, out of a small office at a WeWork in Manhattan when New York told people to stay at home. The uncertainty over college attendance has reduced demand for her service. In addition, her partner takes medicine that suppresses his immune system, making him particularly vulnerable to the coronavirus.
As a result, Brook wanted to end her rental agreement. WeWork offered to defer one month’s rent, but told her that if she broke the contract, she’d owe nearly $19,000 for the remaining 12 months.
“We understand the contract breakage fee is substantial and doesn’t help ease the stress of the global pandemic — please bear with us during this time as we work to come up with the best solutions for our members,” a WeWork employee wrote to Brook.
Brook said she felt that WeWork had fallen short of its values, particularly its claim that it helps small businesses. “We are operating with much less room for error than the company that houses us,” she said. “It’s infuriating.”
Mathrani, speaking to CNBC, said WeWork had collected “over 70%” of April rents. WeWork declined to say how many customers had been granted a deferral or some other relief.
“WeWork has been working closely with individual member businesses to offer mutually beneficial solutions, and ultimately has been able to provide concessions to an overwhelming majority of those that have requested one,” the company said in a statement.
WeWork has kept its locations open during the lockdowns, contending that some of its services, like mail, shipping, security and storage, are among those government agencies have classified as essential.
But a lawyer representing 80 WeWork customers, including Brook, says the pandemic and the lockdowns provide legal grounds for freeing customers from their contracts. The lawyer, Jim Walden, a managing partner of Walden Macht & Haran, is pressing WeWork to stop charging members monthly fees. He has asserted that WeWork’s customers can get out of their agreements under a provision of New York state law that says an event that is “virtually cataclysmic” and “wholly unforeseeable” renders the contract void.
Briney, the owner of the marketing company in Los Angeles, said he hadn’t made recent payments because he was hoping that WeWork might offer more than a deferral of one month’s rent.
“It is widely known that WeWork is skipping rent payments on its buildings,” he said, “They are a global company and using that leverage. Why not pass that down to the fabric of who rents from you?”
May 19, 2020