(Bloomberg) -- The collapse of WeWork Inc.’s second act is threatening to cause more pain for an embattled commercial-property market.

WeWork’s warning on Tuesday that there’s “substantial doubt” the firm will be able to stay in business is another potential blow for landlords and lenders, particularly in markets such as New York City. 

The coworking company occupies more than 6.8 million square feet (632,000 square meters) of real estate in Manhattan, according to first-quarter data from Savills Plc. That’s more than two times the amount of space in the Empire State Building.

“There’s going to be a lot of dislocation,” said Ruth Colp-Haber, chief executive officer of New York-based Wharton Property Advisors. “They have a lot of space still.”

Office investors have been dealing with the aftermath of WeWork’s implosion that started in 2019 when it struggled to go public. At the time, the company was the largest private-sector tenant in New York and London. Since then, the firm has pulled out of leases with landlords including SL Green Realty Corp. as it sought to restructure and cut costs under new leadership. 

WeWork’s latest news sent its stock falling nearly 40% as of 3:11 p.m. Wednesday in New York, widening the loss to 91% so far this year. 

Landlords may get hit either way. WeWork’s turnaround plan involves seeking to reduce rent and tenancy costs by negotiating more-favorable terms. If the coworking company struggles to survive, property owners could see empty offices flood the market.

The company is a major tenant in buildings including Dock 72, a Brooklyn office complex owned by landlords Boston Properties Inc. and Rudin Management.

Across the US, WeWork occupies roughly 16.8 million square feet of space, according to data from CoStar Group Inc. While WeWork’s total exposure represents just a slice of the overall US office market, issues with the company could complicate an already troubled sector, according to Victor Rodriguez, CoStar’s senior director of analytics.

“Its collapse will further muddle an already uncertain recovery timeline for the US office sector,” Rodriguez said in an email. 

Lender exposure to WeWork is extensive. Analysts at Barclays Plc estimate that there’s about $7.5 billion of commercial-mortgage backed securities that are potentially exposed to WeWork, according to a note Wednesday. Roughly 38% of that is concentrated in New York. 

“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,” Barclays analysts Lea Overby and Anuj Jain wrote. 

WeWork is seeking to turn around its business at a tough time for the commercial-property market. The rise in remote work has made offices less attractive for some tenants. Higher borrowing costs are making refinancing debt trickier, leading certain landlords to opt to default sometimes as a way to renegotiate terms.

Office Distress

In its statement Tuesday, WeWork said more customers were leaving and fewer members were signing up than anticipated. The company is still searching for a permanent CEO to replace Sandeep Mathrani, who suddenly stepped down in May for a new job at private equity firm Sycamore Partners.

“The coworking business model always struck us as one that didn’t make too much sense given the duration mismatch between assets and liabilities,” Dylan Burzinski, an analyst at research firm Green Street, said. “We always saw that as one that would struggle in times of distress for the office sector.”

There are competitors who could swoop in and take over its already built-out centers. IWG Plc shares rose Wednesday, as analysts including Peel Hunt’s Andrew Ells said the company is primed to win more market share if WeWork fails. Landlords have been building their own coworking offerings too. 

In the short-term, any lease negotiations or terminations by WeWork could still pressure landlords for buildings where the coworking company is a tenant, the Barclays analysts said.

“There’s going to be a period of chaos,” said Wharton Property Advisors’ Colp-Haber. “Inevitably, it’s going to mean more space coming on the market.”

--With assistance from John Gittelsohn.

©2023 Bloomberg L.P.