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HOUSTON—WeWork's setback could lead to a number of landlords invarious US markets wrestling with how to fill space, according to anew Transwestern research report.

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There have been many measures of the impact coworking has had onthe office sector; Transwestern offers a new one in its study: whencomparing coworking expansion to the growth of top industriesnationally since 2015, coworking ranks ninth. Just prior toWeWork's IPO, momentum in the sector accelerated dramatically,improving its ranking to sixth among all industries through thethird quarter of 2019, and by itself accounting for nearly 8million square feet of absorption.

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Specifically, WeWork's US portfolio currently comprisesapproximately 27 million square feet in 35 US metros, with New Yorkaccounting for 10.3 million square feet, followed by Los Angeles(2.2 million square feet), San Francisco (1.8 million square feet),Washington, DC (1.6 million square feet), and Boston (1.5 millionsquare feet).

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To state the obvious, the success or failure of these locationshas the potential to affect availability, lease terms and otherreal estate fundamentals, impacting neighboring properties andentire submarkets, Transwestern says.

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The math on that point is clear: WeWork committed to more thanhalf the total space it has leased within the past two years at atime when rent was rising nationwide, according to Jimmy Hinton,senior managing director, investments and analytics. More than aquarter of that space remains 'unsold,' presenting a significantamount of financial liability for the company, he says in preparedcomments. Now WeWork finds itself in the position of having tomarket more than 7 million square feet of space as the economy isbeginning to slow and businesses are taking a cautious stance in anuncertain political environment, Hinton adds.

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Hinton explains that WeWork's business model, grounded in itsstrategy to build communities by saturating select markets, waspredicated on positive leasing spreads between its own base rentand that of its sublessees, an increasingly difficult balance asprevailing market rents increased over time.

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"As a result, risks inherent in WeWork's business plan wouldmost probably have played out in periods of adverse marketconditions," he says. "As we now know, such circumstances came inthe form of restrictive capital supply to WeWork, not from a dearthof tenant demand."

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As the company explained in its IPO, WeWork's workstationpipeline included five distinct phases—Find, Sign, Build, Fill andRun. The first three categories captured locations before opening,while the last two reflected open locations, Transwestern explains.As of November 2019, 66.6% of WeWork's Build space, 20% of Fillspace, and 6.5% of Run space was vacant nationwide, with Atlantaexhibiting the greatest percentage of availability, at 42.4%,compared to the total market portfolio.

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The report concludes that the overwhelming majority (90.5%) ofrisk is related to lease commitments still in the Build and Fillphases—in other words, where WeWork is constructing space itintends to sublease, or is currently subleasing, to corporations orindividual memberships.

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Of the top five metros as measured by WeWork total square feet,New York, Washington, DC, and Los Angeles have the greatestpercentage of available space classified in these phases.

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