With the U.S. office vacancy rate rising to a record 13.1% at the end of the first quarter, according to the National Association of Realtors, the struggling office space sector isn't being emboldened by the impending crash of former coworking giant WeWork WE.
Once the most prominent commercial tenant in New York and London, the company has spent most of this year trying to shed leases. Despite its efforts, the company still leases 6.4 million square feet in 70 buildings in New York alone, according to Crain's. And watching its stock crash has undoubtedly not helped WeWork in its efforts to regroup.
On Friday, the company announced plans to proceed with a 1-for-40 reverse stock split of its outstanding shares to avoid getting bumped from the New York Stock Exchange. Initially, the move hasn't impressed investors as WeWork shares fell 11% after the announcement, closing the day at 14 cents per share. WeWork has been trading under $1 since the end of the first quarter.
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The biggest worry for office space investors and owners is that if WeWork takes the Chapter 11 bankruptcy route, it would be able to terminate its thousands of leases, leaving even more vacant office space across the country. And because WeWork has invested in Class B and C, predominantly older business offices, a bankruptcy could continue contributing to declining office building values.
Anthony Sabino, a bankruptcy expert at law firm Sabino & Sabino and a law professor at St. John's University Peter J. Tobin College of Business, said a WeWork bankruptcy could potentially lead to new investor opportunities.
"So it would be a troubling and damaging situation if WeWork goes into the tank — that would knock back commercial real estate in New York for a bit, but there will also be opportunities for more adventurous actors in the sector," Sabino said. "There is a move among business leadership to get people back to the office. Someone will be there to pick up the slack."
WeWork claims it has been dealing with elevated costs and expenses as well as a high membership turnover and reported a net loss of $397 million in the second quarter. One company looking to take up the slack by also adding hospitality services is Convene, which says its recent comeback after a rough post-COVID period is related to slowing its growth, which WeWork does not have a reputation for.
"The discipline now is learning to say no," Convene Head of Real Estate Brian Holland told Benzinga. "You just can't enter a new market with one location and one day suddenly decide to have seven locations. We've tried to stay more methodical and disciplined in our approach."
The highs and lows of WeWork have been well documented, including a television mini-series. But the company made it clear the future is grim, saying there is "substantial doubt" it can stay in business, adding to the nation's office space vacancy woes.
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