Lender In Talks With WeWork To Drop Out Of 2 Major Developments

Embattled coworking giant WeWork is in talks to drop out of a West Midtown Atlanta development before its planned opening later this year.

Armada Hoffler Properties is in talks to either shrink or kill WeWork locations at two properties in which it has invested, at The Interlock in Atlanta and its planned location at the Wills Wharf development in Baltimore, CEO Louis Haddad said during the firm's Q1 earnings call last week.

“We opened discussions with WeWork early this year to reduce or eliminate their leases in these two locations in order to limit our exposure to this tenant. WeWork is also interested in reducing their exposure to us,” Haddad said. “We expect to announce the results of these discussions within the current quarter.”

Armada Hoffler agreed to invest up to $65M in The Interlock, which is being developed by S.J. Collins Enterprises, as part of a mezzanine loan in December 2018. A WeWork spokesperson declined to comment.

S.J. Collins partner Jeff Garrison said WeWork signed a lease in December 2018 to occupy 120K SF of the main office and retail building at the Interlock mixed-use project and is still on track to move in in the late third quarter.

“We are not having any conversations with WeWork about changing their lease at all,” Garrison told Bisnow. “We don't expect any change.”

The Interlock is located off Howell Mill Road in West Midtown, near the corner of 14th Street. The $750M project's first phase includes 200K SF of office, 100K SF of retail, 350 apartments, a 160-room hotel and a smattering of single-family houses and vacation rental homes.

Aside from WeWork, which Garrison expects to account for 30% of the project's total revenue, business incubator Georgia Tech VentureLab agreed to fill 50K SF in the office building, and Marriott International's boutique hotel chain Tribute Portfolio is slated to operate the hotel.

WeWork's location at Wills Wharf, being developed by Beatty Development Group, was set to become the company's first location in Baltimore. It signed a 60K SF anchor lease for a 330K SF office tower, a piece of a mixed-use project, and originally expected to open in the beginning of the year, the Baltimore Business Journal reported. WeWork's website now lists the location as due to open in October.

On Dec. 21, 2018, S.J. Collins secured a mezzanine loan with Armada Hoffler for The Interlock with a maximum principal of $67M, charging a 15% annual interest rate, according to filings with the Securities and Exchange Commission. Including collateral, the loan could fund up to $95M.

The loan matures at the end of this year, but S.J. Collins has the right to extend the maturity date for an additional five years, according to the filing.

Terwilliger Pappas, the developer of the apartment building at The Interlock, also received a mezzanine loan from Armada Hoffler for its piece of the project: $25.2M that charges a 13% interest rate and matures at the end of 2021, according to SEC filings.

Haddad said the risks of making these loans are low for Armada Hoffler, given the quality of the project.

“We believe in the long-term value of these assets, as we've said every quarter for the last several, we'd be happy to own them,” Haddad said. “We don't wish ill of our partners, but I mean, I think it's important to note, you don't build real estate for what you think is going to happen over the next few months. That's a fool's errand."

"We underwrite projects for the long haul, long-term value in good locations, which is why we decided to undertake those as well as our development projects," Haddad continued. "We've been right for 40 years. We expect to be right this time.”

WeWork is in the midst of renegotiating leases with landlords across the country. Columbia Property Trust leases three spaces to WeWork, including the entirety of an under-construction Manhattan development where the coworking giant is scheduled to open this summer. WeWork occupies 250K SF in CXP's buildings, according to the REIT's April 30 earnings call.

“They did pay 90% [of its rent] for the month of April. We are in discussions with them about the future and working with them just on various options,” CXP CEO Nelson Mills said on the call. “They paid that 90% in good faith as those discussions continue, so we're very optimistic that we'll maintain at least that number.”

Piedmont Office Realty Trust also has three WeWork locations in its portfolio, but the company is only paying rent for one of them. Another location is in its free-rent window and a third in Orlando, Florida, is still under construction, Piedmont Office Trust CEO Brent Smith said last week during an earnings call.

“We have been very pleased with their performance and working with them as a customer and tenant,” Smith said. "They continue to pay rent and meet all their obligations."

Office landlords in Metro Atlanta had a strong start to 2020, but few expect that momentum to continue in light of the coronavirus pandemic and the resulting economic fallout. While some deals that were close to being done did go through completion, most companies placed talks on ice until shelter-in-place orders are lifted and businesses are allowed to gear up again.

Georgia is among the very first states to do that with Gov. Brian Kemp lifting restrictions on many residents and a host of retailers, including restaurants, gyms and nail and hair salons.

But for Atlanta's office market, vast shelter-in-place orders have already impacted the brokerage business.

“The consensus from brokers was everything is on pause. Nothing's died. It's just a re-evaluation of what their world looks like and what the new world looks like,” Newmark Knight Frank Executive Vice President Sean Moynihan said. “I think we're a good 30 days away from knowing. But I also said that 30 days ago.”

Transwestern Vice President of Research Keith Pierce said the firm expects corporate office space searches to fully resume by the end of the year.

“If you're looking at delivering in '21 and '22, you're talking to your lenders and you're staying the course with your fingers crossed,” Pierce said.

But Pierce said he expects companies to focus more on renewals instead of moving to new projects.

“My hunch is that anybody who has a lease-up in the next six to nine months, maybe longer, is very interested in maybe a straight-up renewal or an extension so they don't have to contemplate the move,” he said. “They'd rather kind of keep their powder dry and wait until more data is available.”

Garrison said S.J. Collins is in talks with two other companies to lease the remaining 30K SF in the office building. At the same time, the firm has fielded interest from larger potential tenants and has been referring them to WeWork as possible enterprise customers, Garrison said.

Garrison also said he expects that the low interest rates will play in the firm's favor when it comes time to pay off the Armada Hoffler loan. That will come by either refinancing the loan or selling the project within the next three years, Garrison said.

“We are so substantially leased and in a good financial position, and we continue to get leasing interest in the office and the retail,” he said. "We see no concern at all going forward."