WeWork Wants Rent Break – and So Do Its Tenants
WeWork, the multi-billion-dollar landlord that rents about 11 million square feet of workspace to gig workers and young companies, is finding almost a third of its tenants are unable to pay their rent. As a result, WeWork can’t either.
WeWork does not own the space it leases, rather leases it from property owners.
WeWork has allowed some tenants to defer or skip one month’s rent but otherwise is demanding its renters keep their commitments or pay hefty fees to void their rental contracts.
The company marketed its workspaces as not just a place with a desk but as a community where entrepreneurs could synergize with like minds.
Now tenants unable to pay WeWork rents claim the company is abandoning its stated purpose of supporting small business. Some tenants have banded together to hire lawyers to void or renegotiate their rental agreements.
Softbank, the Japanese investment firm, had promised to continue its support for WeWork but lost $12.7 billion in its fiscal year ending 31 March and has negated its commitment to buy $3 billion in WeWork shares from current stockholders. Foregoing the purchase also lets Softbank skip a promised $1.1-billion loan to the ailing company.
WeWork has expressed confidence it will be able to continue, saying it is negotiating with landlords “in a friendly way” and intends to eventually pay all rent obligations in full. Those landlords might find it difficult to find new tenants for so much space, especially in the immediate future, analysts point out.
Softbank, however, has expressed skepticism that WeWork’s business model – renting office space to insecure gig workers and young companies financed on a shoestring and putting strangers together in shared spaces – is still valid.
WeWork’s stock market valuation has plummeted from its $17 billion peak to $2.9 billion as of 18 May.
Mall of America Skips Two Consecutive Mortgage Payments
The U.S.’s biggest shopping mall skipped its April and May payments on its $1.4-billion mortgage.
The mall’s owner, Triple Five Group (TFG), notified Wells Fargo Bank, which services its mortgage, that the company is under “hardship.” Apparently, it has not yet asked the bank for “forbearance,” a formal process by which the bank would suspend or reduce the mall’s mortgage payments for a specific period of time.
The mall, which shut down on 17 March, plans to reopen its doors on 1 June.
TFG says some of the mall’s tenants have stopped paying rent.
“If tenants don’t want to pay rent, my response is ‘I have got to pay a mortgage,’” said Don Germhazian, a TFG executive. “I borrowed money. I have got to pay back my lenders.’”
If the federal government does not offer aid, many malls “will be headed into default because they won’t be able to make mortgage payments going forward,” he added.
TFG also owns the ill-fated American Dream Mall in New Jersey, which completed the second stage of its opening in early December. With just 8 percent of the three-million-square-foot mall open, more than 800,000 shoppers visited in its first three months. Now the water park and aquarium are idle and the shopping plazas empty.
Several malls have missed mortgage payments, according to Trepp, a research firm. The problem is particularly striking among mortgages that have been bundled into commercial mortgage-backed derivatives.
Among those mortgages, as of 18 May, 10 percent were 30 days or more overdue and 13.6 percent were in their grace period, meaning the due date had been missed but a payment could still be made in time to not be counted late, Trepp reported.
“We are starting to see forbearances come in,” said Manus Clancy, Trepp’s senior managing director.
Restaurant Chains Plead for Rent Relief
Rents and lease payments normally make up about 8 percent of restaurants’ expenses. Now, with social distancing enforced as restaurants reopen, eateries’ incomes will fall by half or more, meaning lease payments could take 20 percent or more of revenues.
As a result, many chains are pressing their landlords for lower base rents and other concessions. Some companies are offering to extend their leases in exchange for lower rents.
Several well-known brands have said they cannot continue with their present leases past June.
Starbucks, Shake Shack, and Chipotle’s Mexican Grill all are asking landlords to change the terms of their leases.
Applebee’s, Dunkin’ Brands Global, Ruth’s Hospitality Group, and Yum Brands – which owns KFC, Pizza Hut, and Taco Bell, among other chains – are negotiating with landlords. Dunkin’ executives even have become involved in negotiations on behalf of local franchisees.
Landlords’ reactions have been mixed. Some have deferred rents or agreed to other changes. Others have spurned the requests, saying national chains have access to rich capital markets and can borrow or that other tenants are in worse condition than the chain stores are.
Landlords are reluctant to reduce or forgive rents because accounting rules allow them to still book rent as income if it is deferred.
TREND FORCAST: Whether commercial or residential, as the “Greatest Depression” worsens, renters will be late on paying, will demand lower rents, or be evicted. Trends are born, they grow, mature, reach old age and die.
The rental wars have just been born and will continue to grow for several years. Particularly hard hit will be malls, which were already in decline, and commercial real estate in large cities as more companies realign work procedures by having employees work at home.
Again, we forecast a sharply declining commercial real estate market. And, as we have long pointed out, as evidenced by the high levels of unrented space in the hottest sections of New York City prior the COVID Panic, the prices for rentals were too high and there was more supply than demand.
