As WeWork Grows, No Single Landlord Seen Having Excessive Leasing Exposure

Co-working Giant has Struck Deals with a Wide Variety of Partners

WeWork leased 222,000 square feet in Boston Properties and Rudin Management's Dock 72 development (pictured above) set to open in the revitalized Brooklyn Navy Yard this summer.

When the much-anticipated Dock 72 office tower opens in the revitalized Brooklyn Navy Yard this summer, Boston Properties Inc. and Rudin Management Co. will become WeWork’s largest landlords by a longshot.

WeWork’s lease for 222,000-square-feet at the joint venture’s $380 million development, part of a larger project to turn that stretch of the Hudson River on the outer borough into a hub for creative and tech firms, brings the Boston-based national real estate investment trust and New York family-real estate firm each up to about half a million square feet in lease agreements with the co-working giant.

That’s nearly double the amount of space WeWork leases with any other landlord in the country now. And still, with all that space, WeWork’s deals with Boston Properties only make up about 0.8 percent of the real estate trust’s 50.3 million square foot portfolio, according to Boston Properties' data. For WeWork, Boston Properties holds less than 5 percent of its more than 10 million-square-foot presence.

That seems to reflect a trend.

While WeWork is expanding at breakneck pace, doubling its footprint nationwide with about 90.5 percent year-over-year growth in 2017, the company has yet to dominate a substantial portion of any large landlord’s portfolio.

Rudin, which also owns the building where WeWork set up its first co-living WeLive concept on Wall Street, holds about 30,000-square-feet less of WeWork’s space than Boston but the co-working firm still makes up less than 5 percent of the company’s office portfolio.

"With a veritable who’s-who of institutional owners lining up to do deals with WeWork, there is still no single owner with significant exposure," read an Eastdil Secured report about WeWork, which it counts as a client, from November.

Dozens of landlords across the country continue to bet big on the co-working company’s success with large--and often discounted--leases.

Among WeWork’s other top landlords is presidential son-in-law Jared Kushner’s real estate firm Kushner Cos., according to CoStar Group data. The New York firm has about 177,000 square feet with WeWork in deals ranging from nearly all of the 95,000-square-foot building at 81 Prospect St. in Brooklyn to a 14,000-square-foot lease at a mid-sized building in northeast Philadelphia.

New York real estate firm L & L Holding Co. has done about 265,000 square-feet in deals with WeWork, including a lease for 171,000 square feet in the 776,000 square-foot building at 222 Broadway in Manhattan, according to CoStar Group data. It represents about 4 percent of that company’s 6 million square foot portfolio.

Others include San Francisco’s Merlone Geier Management LLC, New York’s Kato International LLC and Chicago’s Callahan Capital Properties.

In general, WeWork's model centers on leasing an office from a landlord for as little as half the asking rate at a building. The company then renovates the space into an open, creative office environment. Other businesses or individuals then rent out the updated space through a membership program at a rate that's inflated by as much as one and a half times.

As it grows, WeWork has been expanding and branching out with new strategies that include co-managing spaces with landlords and buying its own real estate.

WeWork’s aggressive valuation, at around $21.6 billion, outshines even that of Boston Properties, which is closer to $18 billion. Its recent bond offering garnered the company $702 million and upped its cash on hand to $3 billion.

But the bond offering also revealed WeWork has $18 billion in rent commitments over the next several years and that its cash-heavy business model seems to be predicated upon continuing to raise funds through debt and equity offerings.

Some have questioned whether the WeWork model is sustainable--and whether landlords should continue to be so gung-ho about a business that hasn't been tested in an economic downturn.

Brokers say that if landlords are having second thoughts about WeWork after its latest offering, they haven't heard about it yet.

WeWork counts large corporate tenants ranging from Amazon to IBM among its members at locations across the country. But the co-working company also curates an entrepreneurial environment for smaller firms and start-ups that may not have otherwise found office space. And that’s a huge draw for landlords.

"Some people think that co-working environment is the way of the future," said George Crawford, a broker at Charles Dunn Co. in Los Angeles. "It’s a different way for the landlord to accommodate tenants. If you look at the way businesses are kind of growing, you have a lot more entrepreneurs and freelancers, many more small companies that are starting up, using the Internet. If you lease to WeWork--or their competitors --you can lease a bunch of space and let that operator deal with the smaller tenants. Now you can accommodate both" smaller tenants and larger ones.

The diverse economies in cities such as New York, Los Angeles and San Francisco, which together are home to more than half of WeWork’s offices, offer a bit of a security cushion for landlords, too.

Consider that WeWork upgrades its office space--at an average of more than $100 per square foot---into desirable creative space with open layouts and glass walls and touches such as motivational sayings on the walls and beer taps in the kitchens.

Those improvements can prove valuable to landlords even if WeWork vanished suddenly, said Bob Safai, founder of Madison Partners brokerage in Los Angeles. He pointed to the Mani Brothers’ 101,000-square-foot building in Silicon Beach’s Playa Vista where WeWork has a lease for 77,000 square feet. If WeWork moved out, "I could put 10 different tenants in there," he said. "Anything from tech to entertainment. It’s so high-end."

For now, landlords and WeWork seem satisfied in this diversified arrangement.

"The cost savings WeWork can then pass on to corporate clients are a massive accomplishment in technical efficiency, as well as a compelling outsourced service," read a CBInsights report on WeWork, later noting that the company’s "short-term risk of default on its lease obligations seems low, but only given the strength of its balance sheet and deep-pocketed investors."

One thing is certain, with $3 billion in new capital, WeWork shows little sign of slowing down.

Editor's Note: The news story was corrected from an earlier version which inadvertently listed Crawford as a broker with Avison Young.

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Jacquelyn Ryan, Los Angeles Market Reporter  CoStar Group