On the last day of the third quarter, WeWork withdrew its IPO filing and kicked off a desperate race to find fresh capital to keep the business afloat. At the same time, the company was wrapping up a period of breakneck expansion, signing up big facilities in cities like New York, Los Angeles and Boston.
According to data just released by real estate firm CBRE and provided to CNBC, WeWork leased a total of about 2.8 million square feet in the U.S. in the quarter and was the No. 1 leaser in 9 of the top 10 markets for flexible space growth. The company accounted for 69% of flex lease activity in the quarter, up from 68% in the second quarter and 60% in the same period a year earlier, CBRE said.
The new report shows that even as WeWork was struggling to sell skeptical Wall Street investors on its future prospects, the company was taking full advantage of the billions of dollars it had raised from SoftBank to bulk up in the country's most expensive real estate markets. Far from slowing down after losing more than $900 million in the first half of the year, WeWork's ambitions were only growing.
Julie Whelan, senior director of research at CBRE, said these numbers reflect deals that were signed before the headlines turned negative.
"Real estate generally lags sentiment in the market," Whelan said. "It is not surprising that flexible office space transactions in Q3 remained strong despite the recent developments in the market. A slowdown in activity can be expected as we end the year."
WeWork became New York's top office space tenant last year and continued expanding in the third quarter, leasing close to 700,000 square feet worth of space in Manhattan out of a total of 846,000 square feet. That includes more than 350,000 square feet at 437 Madison Ave., where it took 12 floors of the 40-story tower. In Los Angeles, WeWork added 355,000 square feet, including four floors at a tower on Miracle Mile, near some of the city's most famous museums.
WeWork's third-biggest market in the latest quarter was Boston, followed by Orange County, California, and Dallas/Ft. Worth, where it signed a lease covering two floors and 53,000 square feet at a building in the neighboring city of Plano.
Under co-founder Adam Neumann, who was ousted as CEO in September, WeWork sucked up space by signing long-term leases and then renting out offices to early stage start-ups as well as large enterprises, which typically pay monthly memberships. At the end of the second quarter, WeWork had $17.9 billion in long-term lease obligations and, according to CBRE, controlled one-third of the entire flexible space market, making it almost twice the size of Regus (IWG), its closest rival.
Everything changed for WeWork after the company pulled its IPO plans on Sept. 30. Three weeks later, SoftBank took control of 80% of the company with a $5 billion bailout plan and announced that layoffs are coming.
CBRE isn't predicting what will happen to any existing WeWork locations, but the firm is dramatically reducing its forecast for total market growth now that it expects "very minimal" increased activity from the biggest leaser, Whelan said.
The coworking space market has been growing about 26% a year since 2010, and CBRE was expecting that number to reach 36% this year. The firm now is projecting growth of 23% for 2019, falling next year to between 10% and 15%, Whelan said.
According to CBRE's data, some of the much smaller players have been growing more rapidly than WeWork on a percentage basis, with Venture X expanding 435% in the past year, followed by Office Evolution at 321%, Bond Collective at 211% and Knotel at 153%. WeWork grew 72% in the past year, though its square footage increase was more than five times greater than any of its smaller competitors.
"Some flex space operators are going to be a little more opportunistic and lease a little more on top of what they were doing," Whelan said.
She said that the structure of leases is likely to change amid the WeWork fallout. Up to this point, owners have typically leased the property to coworking operators and handed over complete control of the space. Going forward, property owners are more likely to partner with the leaser, to get more transparency into the clientele and to participate in the underlying economics.
"Landlords are going to share in the reward scenario and the risk scenario," Whelan said. They'll be able to "adjust accordingly" as conditions change, she said.