WeLurk around offices with abandoned leases

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Commercial landlords have been preparing to deal with abandoned or renegotiated WeWork leases for months. At the very least, they got a heads-up from the office-space company’s August warning about its “ability to continue as a going concern”.

That helps explain why the market for commercial mortgage-backed securities, or CMBS, actually got a slight boost from the news, at least in terms of market-implied credit risk.

Spreads tightened for AA- and A-rated CMBS on the bankruptcy event, according to Barclays. (That means that the second- and third-highest rated sections of the market reflect less credit risk than before.) It isn’t really fair to say that anyone is optimistic about the commercial property market, but there is a view that because CMBS markets are more liquid, they’ve priced in much of the office-value collapse, while other parts of CRE markets have not.

The analysts also took a look at the longer-term effects of WeWork’s bankruptcy filing on commercial real-estate markets. The initial round of proposed rejections, totalling 69 leases, won’t be the end of it; WeWork listed 105 “never keep” locations in its business plan, as Barclays points out. The analysts continue:

WeWork’s actions are likely to have spill-over effects. In addition to lowering property cash flows at affected properties, it is also putting additional office space on the market, likely pressuring rents in the area. It would also negatively affect the owners of these properties.

For now, here’s a quick summary of some winners and losers, courtesy of Barclays unless stated otherwise:

WINNERS:

• Besides lawyers and bankruptcy advisers, there aren’t really “winners” in this situation, exactly. But along those lines . . .

• This post from Petition points out that WeWork’s banker PJT Partners is pretty upbeat these days. Its law firms are Kirkland & Ellis and Cole Schotz, and it’s hired Alvarez & Marsal as well.

• SL Green seems to have no exposure to WeWork at its properties, as Barclays points out in a separate note on office REITs.

LOSERS (and possible future losers):

• New York City’s commercial real estate market: 40 of the locations in the initial round of proposed lease rejections are in New York.

• About $2.5bn in loans are for WeWork locations that are either closed or on the chopping block

• WeWork was Boston Properties’ (BXP) tenth-largest tenant, totalling 1.2-per-cent of rental obligations.

• Cousins Properties (CUZ) has 1.1-per-cent exposure to WeWork, its 11th-biggest tenant.

• An additional $6.5bn of CMBS that has “probable” exposure to WeWork

And for New Yorkers, here are a few buildings where leases in CMBS deals are getting rejected: One Soho Square (WeWork takes up just 2 per cent of the space); 599 Broadway (25pc); 57 East 11th St (100pc); Dumbo Heights at 81 Prospect St (11pc); and 385 Fifth Avenue (21pc).