WeWork leased more than a million square feet of office space in San Francisco during its peak. What does the company's Chapter 11 bankruptcy filing mean for local landlords and members and the bigger question of Downtown recovery?
In its initial bankruptcy filing on Monday, WeWork listed assets of around $15 billion against $18.6 billion in total debt. The company said creditors holding around 92% of the company’s secured debt had agreed on a restructuring plan that would mean cutting its lease holdings.
Still, to call it a surprise would be a stretch. The albatross of debt obligations from leases signed during its aggressive pre-pandemic expansion—including in San Francisco—has long hung around its neck.
Gary Kaplan, a partner at San Francisco law firm Farella Braun + Martel LLP who specializes in restructuring and bankruptcy issues, laid out the likely scenarios for customers and landlords as the company works its way through the bankruptcy process.
At the point of bankruptcy filing, WeWork has a choice for the scores of leases it holds for properties across the country. The company can either reject the lease and walk away or choose to assume the lease, which means hanging onto the property themselves or finding someone else to assume it.
In San Francisco, WeWork currently operates more than 500,000 square feet of space across six locations centered in the Financial District and SoMa. The bankruptcy filing is likely to pull down an office market already seeing record vacancies due to the shift to remote work.
According to court filings, WeWork is seeking to reject and vacate at least six San Francisco leases for locations that are currently inactive, including at 1455 Market St., 180 Geary St., 222 Kearny St., 25 Taylor St., 430 California St. and 800 Market St., equivalent to more than 350,000 square feet of space. Also on the list is a 37,000-square-foot space at 1814 Franklin St. in Oakland.
The biggest portion of that is 250,000 square feet at 430 California St., where it is currently being sued by its landlords Kennedy Wilson and Takenaka, who accused the co-working company of defaulting on its lease after five years.
WeWork has said it is using the bankruptcy process to rid itself of underperforming assets and will continue to do so. The company initially has 120 days to decide whether it will assume or reject its leases, with the potential for an additional 90-day extension. In order to assume the lease, WeWork is required to pay any back rent or payments owed pre-bankruptcy.
If a lease is rejected, WeWork owes damages to the landlord for lost income. However, the amount they owe is strongly limited by the bankruptcy code. Additionally, creditors are generally only paid a fraction of what they are nominally owed via the bankruptcy process.
Kaplan said parties like WeWork often hire consultants to find potential tenants to take over the leases and strike new deals with landlords. The consultants may also offer terms to the landlord to pay and sever the relationship with WeWork.
An email sent to WeWork members after the bankruptcy filing essentially urged them to stay calm and stated that their membership will not be impacted by the reorganization.
“Throughout this process, WeWork spaces will continue to be operated to the highest standard,” the email stated, adding, “We plan to remain in the vast majority of our buildings.”
“I think you’re going to hear a lot from these smaller companies that rent space from WeWork who are saying that it’s not fair to them that this whole process is going on without their control,” Kaplan said.
The company’s Member Hub said if a building is closing, WeWork will work with customers to relocate them to another building and provide relocation assistance to do so.
A former WeWork employee, who spoke on the condition of anonymity, described an environment filled with perk cutbacks and cost-cutting measures during former CEO Sandeep Mathrani’s tenure, which lasted from early 2020 until his resignation in May 2023.
Most WeWork locations in California, the worker said, were struggling. By this May, the worker alleged it became apparent the company’s runway was running out. By the end of the month, then-Chief Financial Officer Andre Fernandez tendered his resignation just days after Mathrani announced his own exit.
Founder and controversial former CEO Adam Neumann couldn’t help to weigh in on the company’s current troubles.
“It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before. I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully,” he said in a statement.
Rafi Sands is the CEO and founder of San Francisco’s Tandem, just one of the many startups attempting to peel away WeWork’s clients.
Last week, Sands was riding down the elevator in WeWork’s 650 California St. location and said he had his first-ever “real-life elevator pitch” for his startup to a current WeWork member.
“The immediate concern is [WeWork clients] just don’t know what’s going on. Obviously, not all the locations are going to close. Many will stay around, but there’s really no visibility at all,” he said.
He credits WeWork with helping to create the category of flexible office space, which has shown a growth in tenant demand amid a larger office downturn. WeWork could have survived in the current world where revenue-share models between landlords and operators predominate, Sands believes, instead of expanding during the pandemic, which tied the company to the costly and inflexible long-term leases that eventually led it into bankruptcy.
“There’s going to be so many business school cases that come out of this,” Sands said. “I think the losers are going to be the ones who see the headlines and don’t read to page 2.”
Sandeep Panda, a startup co-founder who splits his time between San Francisco and Bangalore, would often visit the 650 California St. WeWork location during his time in the city.
“It has been having a few rough years, but I never felt any degradation in quality,” Panda said.
But though he’ll miss the coworking space’s amenities and perks if the company closes up its office spaces, there are other free alternatives in the area he pointed to, such as the Capital One Cafe.
“I’ll miss WeWork, but it’s not the end of the world,” Panda said.