Increased Burden from Lease Contracts Signed Before COVID-19
Adjustments Made Considering US Commercial Real Estate Market Slump
Attempts to Adjust Instead of Bankruptcy... Landlord Acceptance Is Key
Office sharing company WeWork, facing bankruptcy due to severe financial difficulties, has decided to pursue changes to the contract terms of its existing leased properties. Although the commercial real estate market has slumped due to COVID-19, WeWork aims to resolve its financial troubles by adjusting the high rents stipulated in its existing contracts.
According to The Wall Street Journal (WSJ) and others, David Tolley, WeWork's Chief Executive Officer (CEO), stated in a company release on the 6th (local time) that WeWork's lease liabilities are "significantly different from the current market conditions," and that the company plans to negotiate with landlords to change contract terms with the goal of reducing expenses. WeWork also intends to terminate contracts for unprofitable buildings during the renegotiation process.
WeWork is a company that leases office spaces at fixed prices on a long-term basis and then rents them out to consumers to generate revenue. It currently provides shared office services in 777 locations worldwide. Since lease costs account for more than two-thirds of WeWork's operating expenses, reducing these costs is essential to improving profitability.
The problem is that most of WeWork's contracts with landlords were made before the COVID-19 pandemic, when the commercial real estate market was booming. With the spread of remote work due to COVID-19, demand for leased office space has decreased, leading the U.S. commercial real estate market into a slump. Although rents have generally fallen across the market, WeWork has not benefited from this due to the terms of its existing contracts.
For the same reason that the U.S. commercial real estate market is in decline, WeWork's corporate value, which once reached $47 billion (approximately 62.7 trillion KRW), has now fallen into financial distress. In a disclosure submitted to the U.S. Securities and Exchange Commission (SEC) earlier last month, WeWork stated, "Net losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern."
Following WeWork's disclosure, reports emerged that creditors such as BlackRock are considering restructuring options, including filing for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Chapter 11 bankruptcy protection temporarily suspends a company's debt obligations and allows it to reorganize through asset sales to restore normal operations.
However, in this situation, WeWork's management intends to improve its financial condition by negotiating lower rents through lease contract discussions without filing for bankruptcy protection.
Ultimately, the key issue will be whether landlords agree to renegotiate and amend existing contracts as WeWork desires. If bankruptcy proceedings occur, landlords may be exposed to unwanted contracts or potentially lose the right to hold WeWork responsible for repayment, placing landlords in a difficult position. WSJ assessed that "landlords stand to lose a lot if the company goes bankrupt."
Ruth Kolf, founder of Harbor Wharton Asset Advisors, said, "No one wants to negotiate while watching a company go bankrupt," but added that landlords owning buildings in prime locations may be less willing to negotiate compared to others. However, if bankruptcy becomes imminent, they are more likely to come to the negotiating table.
CEO Tolley explained, "We will ensure that WeWork remains financially sustainable while continuing to provide the highest quality service and maintaining its global network."
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