📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

WeWork to Rework Almost All Leases

Facing the threat of bankruptcy, WeWork (WE) intends to revisit and renegotiate the majority of its office leases as a strategic step to combat its persistent financial challenges and escalating losses.

WeWork to Rework Almost All Leases

Facing the threat of bankruptcy, WeWork (WE) intends to revisit and renegotiate the majority of its office leases as a strategic step to combat its persistent financial challenges and escalating losses.

Together with

Good morning. WeWork (WE) plans to renegotiate nearly all of its leases in an effort to remain viable. Regional banks find themselves in a precarious situation, with trillions of dollars in loans and investments posing a looming threat to the banking industry and the broader economy. Meanwhile, despite a recent slowdown in starts, construction is projecting a 6% YoY increase in spending, largely attributed to boosts from federal funding.

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Market Snapshot

S&P 500
GSPC
4,496.83
Pct Chg:
-0.4%
FTSE NAREIT
FNER
704.54
Pct Chg:
-1.2%
10Y Treasury
TNX
4.268%
Pct Chg:
2.3%
SOFR
1-month
5.31%
Pct Chg:
0.0%

*Data as of 9/4/2023 market close.

FLEXIBLE FUTURE

WeWork Plans to Renegotiate Almost All Leases to Stay Solvent

WeWork tells landlords it intends to renegotiate “nearly all” its leases

WeWork CEO David Tolley (Getty, WeWork)

In the face of potential bankruptcy, WeWork (WE) plans to renegotiate "nearly all" of its office leases, a significant move to address its ongoing financial struggles and mounting losses.

Lease restructuring: David Tolley, the interim CEO since May, recently released a public letter assuring stakeholders that WeWork is “here to stay. Tolley mentioned in his letter that WeWork is initiating global discussions with its landlords to renegotiate a majority of its leases. The goal of these negotiations is to abandon locations that aren't performing up to par and enhance their investments in their most valuable properties, aiming to refine their offerings further.

Landlord reactions: Landlords have reacted cautiously to the announcement, with some expressing surprise but also a willingness to engage in negotiations. The company aims to complete these negotiations within 45 days, adding a sense of urgency to the process.

Ongoing challenges: WeWork's financial struggles have been ongoing for some time, exacerbated by the COVID-19 pandemic and its aggressive lease agreements, resulting in substantial losses. It has renegotiated or exited numerous leases to cut costs and remains under scrutiny.

Commitment to survival: WeWork's new CEO, David Tolley, emphasized its commitment to survival and its intention to remain a global leader in flexible workspace solutions. This move is part of a broader restructuring strategy that involves the engagement of real estate advisors and legal experts.

➥ THE TAKEAWAY

Future stability: WeWork's decision to renegotiate most of its leases reflects its determination to address its financial challenges and continue providing flexible workspace solutions. The outcome of these negotiations will likely significantly impact the company's future stability in a rapidly evolving CRE landscape.

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DOOM LOOP

Bank Exposure to Commercial Real Estate Estimated at $3.6 Trillion

Developer RXR defaulted on a $240 million loan on 61 Broadway, its 33-story office tower in New York City. MICHAEL BUCHER/THE WALL STREET JOURNAL

As the CRE market faces a potential meltdown, regional banks in the US find themselves in a precarious situation, with trillions of dollars in loans and investments posing a looming threat to the banking industry and the broader economy.

Banking on a boom: Over the past decade, regional banks across the country aggressively expanded their exposure to CRE loans, contributing to a significant lending boom that pushed up property prices. Between 2015 and 2022, lending to landlords by both small and medium-sized banks surged to a total of $2.2T.

Hidden exposure: Banks' total exposure to CRE goes beyond traditional loans and includes indirect lending, foreclosed properties, trading portfolios, and other assets linked to commercial properties, amounting to a staggering $3.6T, or 20% of their deposits. Despite regulator warnings about the risks associated with CRE lending, many banks took measures to reduce individual loan risks but collectively expanded lending and relaxed underwriting standards in other ways.

Cumulative change in CRE exposure by banks since 2015

Doom loop: With rising rates and high vacancies, the current troubled real estate market is setting the stage for a potential doom loop scenario where loan losses lead to reduced lending, further property price drops, and additional losses, creating a vicious cycle. Real estate investors who can't refinance their debt are defaulting, while the lenders often have to write down the value of those mortgages.

Credit crunch: As CRE sales plummet and office vacancies soar, banks, private debt funds, mortgage REITs, and bond investors are all facing a severe credit crunch, potentially triggering losses for both property owners and lenders, with approximately $900B in real estate loans and securities due for payment or refinancing by the end of 2024. 1Q23 marked the first decline in bank CRE holdings since 2013. Overall securities holdings dropped nearly $400B in value, but actual losses are likely greater.

Maturing CRE loans by bank type

CMBS challenges: Banks have been actively selling CMBS with growing confidence in their safety thanks to stricter lending standards. However, concerns are emerging as CMBS issuance has declined in the first half of the year, raising worries about property owner debt loads, exemplified by a significant LA office building loan default.

➥ THE TAKEAWAY

Uncertain future: The risks posed by regional banks' exposure to CRE are a cause for concern, especially with the potential for a cascading series of defaults and financial instability looming over the banking sector. The outcome may depend on lower interest rates or investors purchasing distressed properties. When deals resume, they’re expected to be at much lower prices, posing challenges for banks, as higher rates and deposit withdrawals have reduced their capacity for CRE lending.

🌐 AROUND THE WEB

📖 Read: Debt troubles and inconsistent disclosure practices among Chinese property companies are causing international investors to lose confidence in China's corporate governance, potentially leading to restricted financing access and higher borrowing costs.

▶️ Watch: In this episode of Blockworks, CRE industry experts discuss the impact of the recent interest rate shock on property values, cash flows, interest expenses, and other key metrics while delving into where opportunities exist.

BUILDING BOOM

Positive Outlook for Construction Spending in 2H23

Despite a recent slowdown in construction starts due to rising interest rates and tighter lending standards, the construction industry is projected a 6% YoY increase in spending, largely attributed to boosts in federal funding.

avg monthly price index movement for construction commodities

Cost stabilization: The challenges posed by materials shortages and rising costs are beginning to ease, with JLL projecting an average growth of 4% in materials costs. Lead times have improved, and while some commodities like MEP components and concrete have seen double-digit price increases, overall stability is expected as demand eases.

Labor shortage looms: Labor shortages and the lack of skilled construction workers are emerging as a top concern for the industry. Despite wage increases of 17% since January 2010, the construction sector faces challenges in recruiting and retaining workers, with expectations of further wage hikes ranging from 5–7% YoY.

Incredible labor demand persists

Aging workforce: The construction industry's labor market issues stem from the aftermath of the 2008 Great Recession, which slowed worker recovery. With older workers retiring and insufficient replacements from younger generations, the industry faces a persistent labor shortage of 300K–500K workers, hindering its ability to handle the current project pipeline.

➥ THE TAKEAWAY

Poised for growth: Despite challenges such as labor shortages and rising materials costs, the construction industry is poised for growth in the second half of 2023, driven by federal funding initiatives and stabilized materials markets, while the looming labor crisis poses a long-term concern that requires long-term solutions.

✍️ DAILY PICKS

  • Surfside score: Kushner Companies acquired a distressed Surfside site for $40M from seller Shaya Boymelgreen and will assume the debt from lender Fuse Group.

  • Office demand: JPMorgan Asset Management (JPM) acquired a Santa Monica office property, housing tenants like Activision Blizzard (ATVI) and GoodRx (GDRX), for approximately $745 PSF.

  • Royal revival: Capitol Hill in DC is getting its first new hotel in 40 years with the debut of the Royal Sonesta, a $200M redevelopment project transforming an old office tower into a modern hotel and office space.

  • Debt dispute: Urbanite Capital has sued DigitalBridge, accusing the mezzanine lender of not disclosing a restructuring agreement with the Reuben bros., the senior lender of the Century Plaza project, leading to a mezzanine loan dispute.

  • Leadership shift: PGIM Real Estate's Eric Adler takes the helm of PGIM's innovative alternatives division, triggering a dynamic reshuffle in the real estate leadership landscape.

  • Dream team: Tesla (TSLA) and Hilton (HLT) are teaming up to install 20,000 EV charging stations at 2,000 Hilton properties in North America as business travel ramps up.

  • Fierce competition: US apartment rents are stagnating for the first time in decades as a surge in construction gives renters more options, leading to price competition among operators, even as demand remains robust.

  • Texas transformation: Researchers from NYU and Columbia identified numerous office properties across TX, particularly in DFW, Houston, and Austin, that could be converted into residential spaces. But is it financially feasible?

  • Surging losses: According to Trepp, August witnessed a dramatic spike in CMBS loan losses, totaling $218.2M with an average loss severity of 52.1%, significantly surpassing the previous month's losses of $112M.

📈 CHART OF THE DAY

Inside NYC Airbnb

Following the implementation of NYC’s Registration Law, the number of Airbnb (ABNB) short-term listings (STRs) in the city saw a significant decline. In August, there were 22,434 STRs available, but by September 5th, the number had plummeted to just 6,841, a 70% decrease.

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