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Weekly Market Report - August 21, 2019

Last week, Barney’s New York filed for bankruptcy protection, which is raising some red flags for their building 660 Madison. The company has over $100 million in debt and will be closing 15 stores around the country, only leaving five to stay open. As it looks for a new buyer, Barney’s secured $75 million in new capital. At this specific location, where Barney’s takes up nine floors with a total of 264,498 SF, rent spiked from $16 million a year to $30 million a year. People have now started to question the landlord Ashkenazy Acquisition Corporation on why the rent is so much. While Madison Avenue has had its ups and downs with the rents being aggressive, it should be coming down and stabilizing like it has been in other parts of the city. With filing for bankruptcy, Barney’s can’t negotiate a price with Ashkenazy and will be paying almost $6 million in back rent, unless they take the option of backing out of the lease. “Theoretically, Barney’s could cancel the lease and try to negotiate a new one with Ashkenazy”, but sources say that will be difficult. If Barney’s should vacate, all nine floors will be left behind, and Ashkenazy will be left to fill those spaces. Ashkenazy should lose this fight; these would be hard floors to back fill.

WeWork is currently heading towards an initial public offering (IPO), however, their losses are growing as fast as their revenue and profits are non-existent. Last week, its parent company, We Co., disclosed in the IPO filing that their operating losses “ballooned 102% to $1.37 billion” within the first six months of this year. If you double this for a full year, they are looking at a loss of $2.74 billion. This is suggesting that the company isn’t wringing out enough cost savings as it gets bigger. This has become a troubling sign for some potential investors. Last year, WeWork was valued at $47 billion, which made it the most highly valued venture-backed company in the U.S, however, people are starting to question this as their losses are doubling. In 2017, WeWork’s losses were $1.69 billion, while their revenue was $1.82 billion. The company would need to collect large sums of cash for a few years as it continues to build out offices. It was noted that WeWork spends more money on sales and marketing to find the next company to rent a floor, which has doubled since 2016 and make up about 21% of revenue. Also, the company has given a $362 million loan to the owner, Mr. Neumann, at an interest rate of 2.89%, even though UBS, JPMorgan Chase, and Credit Suisse have issued their own line of credit to Mr. Neumann for up to $500 million. WeWork is targeting to open shares in September, but investors are saying that this isn’t going to happen. “This is the worst investment I have seen in my life,” Norman Bobrow says.

WeWork and Knotel are the two biggest co-working space providers in the city. It was last September when WeWork became the city’s largest tenant with more than 5.2 million SF. Co-working companies made a huge splash in leasing activity within the past year by having a 200% jump from 2017 to 2018. Co-working firms are accounted for 18% of all Manhattan deals in 2018, which has risen from 6% in 2017. While WeWork is the biggest, some say they aren’t easy to work with. And compared to Knotel, some prefer the latter because of how they present the deals. According to a source, “WeWork was often extremely aggressive when they made offers, which we found to be a turnoff”. Even though they are less aggressive, Knotel still asks for a generous amount of concessions from owners. With Knotel, they tend lease space “on a flexible basis to more established companies and offers them more private offices”. Some people like how Knotel creates deeper relationships with their clients rather than WeWork just selling them the space. Another thing that Knotel has over WeWork is that when they lease a space, it’s for the client and the client only. The offices are branded and marketed towards them and not Knotel itself. WeWork, on the other hand, is known for large glass offices with their branding all over it. This will not work when the market turns down. “These companies will probably be wiped out because of the overexposure,” according to Norman Bobrow.


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