© Reuters. FILE PHOTO: A WeWork logo is seen outside its offices in San Francisco, California, U.S. September 30, 2019. REUTERS/Kate Munsch/File Photo
By Sinead Cruise
LONDON (Reuters) -The troubles faced by co-working titan WeWork are darkening the outlook for the world’s largest business hubs, where rising office vacancies are already heaping pressure on investors set to refinance big-ticket mortgages next year.
Media reports on Wednesday suggested the New-York listed flexible workspace provider – once privately valued at $47 billion – was weighing a petition for bankruptcy next week.
Backed by Japan’s SoftBank (TYO:), WeWork aimed to revolutionise the office market by taking long leases on large properties and renting the space to multiple smaller businesses on more flexible, shorter arrangements.
But like other landlords, it has struggled to persuade some customers since the pandemic to swap working from home for the office at its 650-plus locations worldwide – a trend that has shaken confidence in the sector.
Global office vacancies are expected to climb, hurting rental prospects in cities like New York and London, eight industry executives, investors, lenders and analysts said.
Some leveraged property investors could struggle to earn enough rental income to service rising debt costs, they said.
“The loss of any tenant, especially during a time of relatively slow office leasing, will have a negative impact on office building cashflows and values,” said Moody’s (NYSE:) Analytics’ Commercial Real Estate Industry Practice Lead, Jeffrey Havsy.
“This will add to the negative sentiment in the marketplace and make financing harder, especially those buildings that need to refinance in the next 12-18 months,” he said.
A WeWork spokesperson told Reuters the firm was in talks with landlords to address “high-cost and inflexible lease terms” and was striving to remain in the majority of its locations and markets.
The number and volume of real estate loans due for refinancing in 2024 is unclear because many deals are struck privately between borrower and lender, Ed Daubeney, co-head, debt and structured finance, EMEA, at real estate services firm Jones Lang LaSalle, told Reuters.
Analysts estimate the global commercial property lending market is around $2 trillion in size, roughly split 50:50 between banks and alternative lenders in the United States and 85:15 in Europe.
Several experts contacted by Reuters predicted a year of reckoning for property investors and lenders in 2024, with time running out for those turning a blind eye to assets that would be in breach of key lending terms if revalued today.
The value of all global real estate – residential, commercial, and agricultural land – was $379.7 trillion in 2022, Savills said in a report in September, down 2.8% on 2021.
TRANSACTION SLUMP
Real-estate loan refinancings have already been complicated by a plunge in transactions, which are crucial in tracking changes in asset values.
MSCI’s Capital Trends report for Europe showed third quarter volumes down 57% on 2022 levels – the lowest since 2010.
What’s more, the gap between what investors believe assets are worth and what prospective buyers are willing to pay is between 20% and 35% in core office markets – “far worse than the height of the global financial crisis”, MSCI said.
MSCI said prices in Europe’s two largest office markets, Britain and Germany, would have to fall another 13%-15% to bring market liquidity back to its long-run average.
Global lenders to UK real estate holding and development companies, which supplied credit risk assessments to data provider Credit Benchmark in October, said those firms were now 9% more likely to default than they estimated 12 months ago.
U.S. industrial and office real estate investment trusts (REITs) were seen 35.8% more likely to default, versus expectations a year ago.
RE-LETTING
WeWork has 3.25 million square feet of space in central London, with a total annual rent roll of 192 million pounds ($234 million), Jefferies said in a September note. Its biggest U.S. markets are New York and California, where it operates 49 and 42 sites respectively, according to WeWork’s website.
Industry sources said some of its most popular locations could be taken over by rivals at similar rental rates, minimising cashflow issues for landlords.
But flexible workspace demand in Britain is still 11% below pre-pandemic levels, the Instant Group’s 2023 State of the UK Flex (NASDAQ:) Market report in September showed.
Lenders might view the WeWork debacle as a cautionary tale, sources said, potentially requiring borrowers to inject more equity into their properties to reduce the loan-to-value ratio.
But such a request could be problematic if the quantum and duration of rental income remain uncertain.
London office vacancies have surged to a 30-year high, Jefferies also said in September, with average lease lengths on central London offices sliding to six years from 11.6 years a decade ago, according to BNP Paribas (OTC:) Real Estate.
UK property company Helical said it was working on “next steps” for the space at one London property let to WeWork, after recouping rent it had failed to pay via a short-term licence arrangement.
Under-occupied urban offices are not only generating lower than expected rental income for owners but some are also ageing rapidly in a world increasingly sensitive to carbon consumption.
“We’re at a massive turning point in the real estate investment market globally,” Jose Pellicer, head of real estate strategy at M&G Real Estate, said.
“For the last 20 years, property yields have been higher than financing costs. But a far bigger percentage of a property return is going to have to come from growth in the 2020s.”
($1 = 0.9407 euros)
($1 = 0.8214 pounds)
Read the full article here
