WeWork’s Future in Doubt as Losses Mount and Demand Falls

Good morning,

WeWork’s future in doubt as losses mount and demand falls, bond market signals ongoing concerns for banks, office REITs continue falling, and CBRE’s midyear outlook highlights resilience despite uncertainty. Let’s delve into today’s topics.

📈 Market Update

☠️ WeWork’s Future in Doubt as Losses Mount and Demand Falls

WeWork warned in its latest quarterly report that “substantial doubts exist” about its ability to continue operations amid mounting losses. The company posted a net loss of $397M in Q2, compared to a $635M loss a year. EBITDA totaled a $36M loss, while $98M improvement from a year earlier, missed forecasts.

WeWork blamed the losses on lower demand due to increased competition in the flexible workspace market, excess supply in CRE, and economic uncertainty causing clients to cancel memberships. Physical occupancy rose to 72%, but total memberships fell 3% to 512k.

WeWork has $205M in cash, down from $625M one year earlier. The company completed a restructuring in May to cut debt, but said it may need additional capital through new debt, equity issuance, or asset sales to shore up its financing.

Turnaround Efforts Falling Short:
Despite its restructuring, WeWork continues to see deteriorating financials. The restructure involved swapping $1.6B in debt for equity with SoftBank, reducing WeWork’s debt burden. The deal also brought in $500M in new financing from SoftBank backed fund One Investment Management. Now just months later, WeWork says it needs more capital. The stock is down 95% since going public in 2021.

Future Relies on Cost Cutting and New Sales:
WeWork outlined plans to cut costs through lease renegotiations. It also aims to boost revenue by reducing membership cancellations and ramping up sales efforts.

With losses mounting and revenues shrinking, WeWork faces severe challenges to stabilize and survive. Its uncertain future depends on efforts to slash expenses and reignite sales growth. Stay tuned!

🏦 Bond Market Signals Ongoing Concerns for Banks

Credit rating agency Moody’s downgraded 10 regional banks on Monday and put several others under review, highlighting that risks for the banking sector are far from over. This comes despite bank stocks rallying recently, with some positive signs in Q2 earnings like slowing deposit outflows.

Moody’s cited ongoing issues like rising deposit costs and risks to CRE loans. The downgrades indicate the bond markets sees more risks than equity investors.

Bonds Show Less Relief Than Stocks:
While bank stocks have rebounded, their bonds are lagging. Spreads for A-rated regional banks remain 50% wider than before SVB’s collapse. This gap between debt and equity performance reflects how bonds are focused on existential risks. Moody’s noted key issues remain unaddressed by new bank capital rules proposed by the Fed.

For instance, interest rate risk is more complex than paper bond losses. There are also lower risks like lower mortgage values and deposit flight scenarios not fully captured.

The Takeaway:
While banks have taken steps to stabilize, downgrades and bond market signals show there is still concern. The credit crunch trend will only continue in real estate markets until banks shore up their creditworthiness and get comfortable lending.

🏢 Office REITs Continue Falling

As we all know, office REITs have been hit hard by work from home trends, high interest rates, and a slowing economy. REITs have fallen, giving us insight into implied cap rates.

SL Green, a major Manhattan landlord, stock has fallen 63% from its peak, a 31% increase in its implied market cap rate. Meanwhile, Cousins Properties, focused on the Sunbelt, saw its stock fall 43% over the same time period, a 46% increase in its implied cap rate.

🤲 CBRE Midyear Outlook Highlights Resilience Despite Uncertainty

According to CBRE’s 2023 Midyear Global Real Estate Market Outlook, economic growth is expected to slow through the end of 2023 before rebounding in 2024. Inflation shows signs of easing, but central banks are predicted to keep rates high through the rest of the year. This will dappen growth, however the conditions for a soft landing are improving.

Strong Fundamentals in Many Sectors:
The outlook highlighted resilient fundaments across industrial, multifamily, and data centers. These sectors have tailwinds that should counter economic softness. Prime office and top retail also remain strong.

While growth is slowing, industrial demand and rents remain positive. Tight supply supports continued rent growth. Multifamily is balanced in the US and remains undersupplied globally. Retail has limited new supply supporting low vacancy. Data centers boast strong appetite and constrained inventory. AI and renewable energy initiatives also support demand.

Prime Office Market Remains Resilient:
The flight to quality in office has driven performance over cost sensitivity, benefitting prime office assets. Younger, well-amenitized buildings have seen positive absorption despite remote trends. Vacancies in newer offices are 400 bps below average.

The Takeaway:
Despite near-term choppiness, CBRE sees prime assets across sectors poised for upside as economic certainty returns. Office demand is still depressed, and older offices are expected to underperform. However, prime office assets remain relatively robust.

✍️ Further Reading

• Financing Difficulties, Rising Costs Continue to Frustrate Developers (GS)

• Retail Centers Foot Traffic Poised for Better Performance in H2 (GS)

• 2 Groups Move Toward CRE Debt fund Standard (CPE)

• There Will Be a Lot of Office Spaces Converted into Residential Living (CNBC)

• Zoom, Symbol of Remote Work, Reflects US Office Use Shift in Calling Its Employees Back to Workplace (CS)

• Peachtree CEO Talks CRE Turning to Private Credit as Banks Pullback Lending (CNBC)

• Multifamily’s Rent Growth Slowdown Shows Signs of Leveling Off (GS)

• Mall of America Owner Walks Away from Deal to Buy Massive Los Angeles Property (CS)

📊 Chart of The Day