WeWork’s recent declaration that “substantial doubt exists” about its ability to continue as a going concern threatens to further pummel a U.S. office market already struggling with high vacancy and falling valuations.

Its collapse would have wide ripple effects. The coworking giant is a major office tenant in markets such as its home base of New York City and its lease payments back billions of dollars in property loans and commercial mortgage-backed securities.

In warning about its future, the provider of flexible office space said last week its memberships declined in the second quarter. Occupancy rates in the United States and Canada remained “sluggish” and dropped to 67% last quarter from 69% in the first quarter, interim Chief Executive David Tolley said on a call Wednesday, trailing other regions where it operates by well over 10 percentage points and where margins are stronger.

WeWork, like many office providers, has been hurt by the rise of hybrid work arrangements since the start of the pandemic, leading some companies to pare their space needs. But the decline in occupancy also came as members had more choices, including an “unprecedented amount of sublease space available” and heightened competition from other flexible space providers, Tolley said. He said WeWork is “oversupplied” in some markets.

It’s the latest problem for a company that gained a high profile with fast growth in the years following its 2010 founding. WeWork became a publicly traded company in October 2021 after corporate governance concerns led to a failed IPO attempt in 2019 and the ouster of co-founder and CEO Adam Neumann, a period in which its valuation tumbled to $9 billion from a $47 billion valuation by majority shareholder SoftBank. WeWork now seeks a permanent CEO after its former chief, Sandeep Mathrani, left in May.

WeWork is trying to work through its excess-capacity problem by shedding space. The company has exited or amended 590 leases since the fourth quarter of 2019 and cut $12.7 billion in future lease payments. It plans to cut more of its rent expenses, which represent 74% of its revenue and two-thirds of its operating expenses, Tolley said on the call.

“Cash rent and tenancy [costs] continue to be the primary challenge and obstacle to [WeWork’s] profitability and free cash flow,” Tolley said, adding that addressing the issue is “critical” to WeWork’s success.

The uncertainty facing WeWork threatens to send more of its members elsewhere, analysts say.

“When it comes to office tenants, everybody talks about flight to quality,” said Thomas Catherwood, a BTIG analyst who last week downgraded his rating on the stock. “But in many cases, it’s also about flight to stability … [Some] tenants say, ‘I don’t want to sign a one- or two-year lease with a company with the risk of bankruptcy.”

Indeed, one rival said that is already happening. Jamie Hodari, co-founder and chief executive of flexible office space provider Industrious, said his company has “signed a lot of deals” since WeWork’s announcement. The deals include some that had been on month-to-month contracts with WeWork and those that were originally “about to sign” with WeWork.

“I’ve been surprised by the volume of companies reaching out,” Hodari said in an interview. Companies “are trying to figure out what their options are and figure out what their plans would be. We are inundated with inbound applications from around the world. [Companies] were concerned that all of this would start a process that would … create a lot of uncertainty and disruption. They want to get ahead of it.”

A WeWork spokesperson said member growth and retention is a top priority and it still signs deals and renews memberships. “WeWork has a unique value proposition as we offer companies of all sizes flexible, turnkey workspaces that can be accessed through a variety of product offerings to fit all the ways members want to work,” the company said in a statement.

It must work quickly. Its cash and cash equivalents declined to $205 million from $625 million in the year-earlier second quarter.

According to credit risk monitoring firm Creditsafe, 72% of WeWork’s bills are paid late with nearly $800,000 in late bills, adding the company started slowing payments in April. WeWork called Creditsafe’s figures inaccurate. “Day-to-day operations are currently business as usual,” it said.

Many landlords are watching whether WeWork will have to abandon more leases. The firm has leased at least 10,000 square feet at more than 200 locations around the United States, according to CoStar data. Among the list of landlords: Private real estate investment firm Beacon Capital Partners; Affinius Capital, formerly known as USAA Real Estate; Boston Properties; Onni Group; and The Moinian Group.

“Our exposure with WeWork is negligible as part of our overall portfolio at just 1.8 percent,” Beacon said in an emailed statement to CoStar News. “We have a letter of credit from WeWork for all but one asset, and we can confirm that WeWork has paid August rent at every location in our portfolio. We’re continuing to monitor but can’t speculate on what may happen to the company.”

Beacon said on its website it has a portfolio spanning more than 29 million square feet across 14 U.S. markets. That would mean it has more than 500,000 square feet leased to WeWork, making it one of WeWork’s large landlords. A Beacon spokesperson declined to quantify WeWork’s footprint.

The Moinian Group declined to comment. Boston Properties didn’t immediately respond to a request seeking comment. Affinius Capital said its exposure was limited.

“We only have one modestly sized lease with them in a location that is performing very well,” Affinius spokesperson Samira Bitar told CoStar News in an email.

Duncan Wlodarczak, Onni’s chief of staff, said it’s not aware of any WeWork plans to break the lease.

“We do have WeWork occupying roughly 50,000 square feet in one [of] our properties, but that is the only lease we currently have with them,” Wlodarczak said.

More than properties, Catherwood, the BTIG analyst, said WeWork needs to attract and hang onto its tenants, or members.

“The brand is strong. The suite of services is strong. There’s demand for how and where they do it. What would need to change to make it a viable entity? It’s really their cost structure. They would need to right-size their balance sheet,” Catherwood said. “The No. 1 key for them to successfully turn around is occupancy gain. Without occupancy gain, the company is pretty much stuck.”

WeWork, like its rivals, has been seeking to move to the so-called asset-light strategy that involves management agreements in partnership with landlords instead of traditional leasing arrangements.

But WeWork looks to be trailing its rivals on that front. Industrious, for instance, has moved to management agreements with landlords and building operators since 2017, with about 90% of its North American locations in partnership agreements with landlords, Hodari said, adding that rent expenses make up just a percentage of its revenue in the “low 30s.”

Industry giant IWG, parent of Regus and Spaces, said last week it also has seen “rapid growth in capital-light centers” with 400 new locations signed in the first half and its net growth of capital spending declining 40%. IWG last week reported record revenue.

Industrious, which recently opened its 20^th location in New York among a total of nearly 150 it had globally, is expected to turn profitable by the end of the year amid “zero” burn rate and record revenue, Hodari told CoStar News, adding its revenue per physical member jumped to a record $800 plus from “low $700s” pre-pandemic. WeWork, in contrast, said last week its second-quarter average revenue per physical member rose 4% to $502.

While the whole commercial property sector can probably absorb a WeWork pullback, individual landlords and lenders — and current WeWork tenants and shareholders — could suffer.

WeWork’s trouble is “one more thing on the office market that it doesn’t need,” Chad Littell, CoStar’s national director of capital markets analytics, said in an interview. The office market has “already got beat up left and right. This is just another headwind for the office sector. … They are not big enough to move the market. … [But] there’s an unknown for current owners.”

The U.S. office market’s direct vacancy rate and sublet inventory have reached record highs with tenants leasing smaller spaces on average, Littell said, adding the average office lease has declined to 3,200 square feet from a pre-pandemic long-term average of 4,200 square feet.

WeWork, which had about 43.9 million rentable square feet globally at the end of last year, had 18.3 million rentable square feet in the United States and Canada, according to its annual filing with the U.S. Securities and Exchange Commission. While that is a sliver of the nation’s total office stock, WeWork has represented a sizable chunk of leasing activity in New York and some other cities.

For instance, while its office stock represented just about 1% of the market inventory in New York, San Francisco, Miami and Boston, its share as a percentage of traditional square feet leased in the first quarter was equivalent to 23%, 21%, 17% and 16% respectively in those cities, WeWork said in a first-quarter presentation. It didn’t give a similar breakdown when it reported its second-quarter results.

A search under New York City on its website yielded more than 70 locations, including some notable buildings such as Dock 72 in Brooklyn, owned by Boston Properties and the Rudin Management, and RXR Realty’s 75 Rockefeller Center in Manhattan, where Amazon recently signed a 90,000-square-foot deal with WeWork.

WeWork’s woes also could hurt the commercial mortgage-backed securities tied to the properties with exposure to the company as higher interest rates have made refinancing more expensive and led to a pickup in loan defaults.

WeWork is a tenant in 39 properties with $6.4 billion in outstanding CMBS loan balances, according to CoStar data. It is one of the five largest tenants in 33, leasing more than 2.7 million square feet.

About $1.8 billion of the loans on nine of the properties are in special servicing, according to CoStar data. Loans are sent to special servicing when a borrower defaults on payment or is seriously delinquent in making loan payments.

Another $1.8 billion in loans backing 12 other properties have been placed on servicers’ watchlists as having potential concerns.

The outcome of WeWork’s efforts to renegotiate and modify leases could pose additional risks for the affected office buildings that are already facing challenges, CMBS analysts said.

“The CMBS market has significant exposure to WeWork and will be pressured, as leases can be rejected in a potential bankruptcy,” Barclays analysts Lea Overby and Anuj Jain said in a report this month. “CMBS exposure to WeWork as a tenant is extensive. … New York exposure to the firm is very large.”

The Barclays study found among $7.5 billion of potential CMBS loan exposure to WeWork, New York accounted for $2.9 billion, or 38% of those loans.

“Given the current weak fundamentals of the office market in New York, we believe these locations might be at particular risk of closure due to overconcentration,” the Barclays analysts said.

Case in point: Credit-rating firm Fitch recently downgraded some commercial mortgage-backed securities loans tied to properties including 8 Times Square and 1460 Broadway, just south of Times Square. Fitch said its downgrade reflects the property’s “significant exposure to WeWork,” where it said WeWork makes up 83% of the net rentable area with a lease expiring in 2034 of the 214,341-square-foot high-end office property.

S&P Global Ratings on Monday downgraded WeWork’s already junk bond credit rating with a negative outlook, adding that “the company could face a payment default or pursue a debt restructuring in the next 12 months.”

Separately, the rating firm found 24 loans within 21 S&P-rated U.S. CMBS deals with exposure to WeWork at a time when it said U.S. CMBS office loan delinquency rates have seen a “sharp increase.” Fitch on Wednesday also lowered its rating on WeWork.

WeWork’s issues could lead to “heightened scrutiny” among investors when they consider investing in buildings with exposure to coworking spaces, leading them to study more closely how underlying deals are structured, such as whether it’s leased or in landlord partnerships, and how much existing “hard wall office” suites and infrastructure may be reusable if a coworking space closes, CoStar’s Littell said.

“WeWork is the face of the industry,” Littell said. “The greater [buildings’] exposure to coworking space, the greater scrutiny they are going to be under.”

Staff writer Mark Heschmeyer contributed to this report.