NEW YORK/SAN FRANCISCO – The surge in co-working leases that accompanied the rise of WeWork will take a pause in the aftermath of the startup’s abandoned IPO, a prominent New York developer said Thursday.
In recent quarters, as much as 25 percent of office leases in New York have gone toward flexible workspace. But a “precipitous drop” may come over the next six to nine months, said Scott Rechler, chief executive officer of RXR Realty, which owns buildings including 75 Rockefeller Plaza.
“WeWork, all their peers and landlords and users of flexible workspace, are all taking a pause to let the dust settle,” he said Thursday at a real estate conference in New York.
RXR has invested in Convene, a WeWork competitor that provides flexible work and meeting space. For Rechler, a key issue is what will happen when tenants’ short-term leases with WeWork and its rivals expire in coming years.
“Pricing may need to be adjusted, and the question when it adjusts is, ‘Does it adjust to a level where a user is willing to pay that higher price for the flexibility?'” he asked. “I’m not sure if we know where that market is.”
Echoing others in the real estate industry, Rechler argued that the concept of co-working is here to stay despite the problems at WeWork. He said that companies will continue to want flexible, curated space that can be procured quickly.
But not everyone is convinced. Stephen Ross, the billionaire founder and chairman of Related Cos., said co-working could struggle in an economic downtown.
“We’re going to have a recession at some point,” he said at the conference, which was hosted by the NYU School of Professional Studies. “We’ll see if these companies, that are in these short-term spaces — that are not very highly capitalized, to say the least — are able to survive and what will happen to that short-term space.”
William Rudin, CEO of Rudin Management Co., which has developed a WeWork project at the Brooklyn Navy Yard, said the New York market would survive if WeWork were to “evaporate overnight.” He’s estimated that the startup controls a little over 1 percent of the city’s office market.
“Are they going to pull back, are they going to slow their growth, are they going to give some space back? Probably,” he said. “I’m not worried.”
Marty Burger, CEO of Silverstein Properties, which owns office towers at the World Trade Center site, said the first question from prospective tenants is whether or not there’s co-working space in a building. That includes companies from law firms to advertising agencies looking for so-called swing space that is temporary and close to their permanent offices. “We never saw that three years ago,” he said.
Earlier this week, WeWork reported a net loss of $1.25 billion in the third quarter, eclipsing its sales and more than doubling its loss from the same period last year. The quarter coincided with a spending spree in anticipation of an initial public offering that veered off the rails, in a combination of events that nearly brought the company down.
Revenue in the quarter was $934 million, up from $482 million a year earlier but failing to keep pace with the steeper losses, according to a financial document that was presented to bondholders Wednesday. A spokeswoman for WeWork parent company We Co. declined to comment on the report.
In an email to staff Wednesday, WeWork’s co-chief executive officers, Artie Minson and Sebastian Gunningham, described the quarter as a “difficult chapter” for the company and said they’re developing a plan to “provide a clear path to profitability.” That will include selling assets and cutting jobs, they wrote. Dismissals have already begun, and are expected to number in the thousands.