20 % U.S. offices are unoccupied. WeWork's bankruptcy will exacerbate this problem.

America is facing a huge number of empty offices. Now some offices are at risk of losing WeWork, which has more than 600 branches in major cities.

WeWork filed for Chapter 11 bankruptcy Monday, and the future of this company is unpredictable.

WeWork said it plans to end its lease on some of its U.S. facilities. This WeWork bankruptcy will increase financial pressure on commercial landlords who have leased significant portions of their office buildings to this company, experts say.

Office landlords have rushed to lease space to WeWork for years, believing flexible workspaces were the future of office life. But those bets were unsuccessful, and some property owners had to take out loans to survive.

According to commercial real estate company Trepp, about $270 billion in commercial mortgages issued by banks are due to mature in 2023.

WeWork's bankruptcy comes at a time when more than a fifth of U.S. offices remain empty, according to a report from commercial real estate giant JLL. The loss of WeWork will lead to more vacant space, possibly leading to lower rents for tenants, which means less money for some property owners who are already struggling to pay off debt with high interest rates, commercial real estate experts say.

Worst case scenario, it could lead to landlords defaulting on loans or mortgages, which could affect the banking system more broadly and hurt cities' tax revenues.

"Office properties already experiencing financial distress and declining values will now face a potential new flood of unexpected vacancies," Moody's economist Ermengarda Jabir said Tuesday.

Bankruptcy could set off a chain reaction on smaller and medium-sized banks that have landlord debt, forcing them to tighten loans to homes and businesses and causing investors to worry about the health of the financial system. The collapse of Silicon Valley Bank and Signature Bank back earlier this year raised concerns about the banks' exposure to hard-hit commercial real estate. Goldman Sachs estimates that 55% of commercial mortgages in the U.S. are on bank balance sheets.

This could also affect municipal governments that rely on commercial property taxes to provide services, which could lead to budget cuts. In New York City, for example, office real estate accounts for 21% of tax revenue.

"WeWork's bankruptcy is a major blow to the office market, especially since the market was in deep trouble," said Columbia Business School real estate professor Stijn Van Nieuwerburgh.

He said no single tenant can determine the fate of the office market, but "if we're talking about the impact of one tenant, it would be WeWork. "

Offices in New York, San Francisco and Boston will be at their toughest after WeWork's bankruptcy, experts say. According to CoStar, a commercial real estate data firm, about 42% of WeWork's total occupied space is in these three cities. WeWork already plans to close 1.9 million square feet in these three markets, representing about 35% of its total space.

In New York City, where WeWork used to be the largest corporate office tenant, WeWork's active leases are concentrated in older "Class B" buildings. These offices were already considered less attractive to potential tenants compared to new "Class A" assets. On average, WeWork's "Class B" buildings are 96 years old, while "Class A" buildings are 48 years old. According to real-estate marketing firm CompStak, about 65% of WeWork's leases are in Class B properties, compared to 30% in Class A properties.

"WeWork's large exposure to Class B buildings is not ideal for the New York office market, as many market participants are worried about aging office space and declining demand in the same building class," said Eli Baumann, director of real estate intelligence at CompStak.

In New York City's Class B buildings, for example, the average purchase size for new deals is down 36% from 2019. WeWork's rents in these buildings were also higher than the rest of the deals, so landlords can't easily make up for lost rent from other tenants.

Commercial real estate was hit hard by the pandemic as fewer people returned to offices and spent money in inner city neighborhoods. Companies have reduced their office space and renegotiated rents. The sharp rise in interest rates over the past year has been painful for the sector, as commercial building purchases are typically financed with large loans.

"This is the latest setback after a year of rising interest rates and high debt levels," Baumann said.

Landlords will be looking for new tenants to replace WeWork, likely at lower rents, but some may not be able to fill WeWork's vacated space.

"Because many of their leases are in Class B buildings, where demand tends to be weaker, landlords may have difficulty filling that space," she said.

Other landlords will try to redevelop their buildings for alternative uses such as healthcare, higher education or apartments. But conversion is difficult because some buildings aren't suitable for new apartments or don't meet regulatory requirements.

"There aren't that many great options," said Van Nieuwerburgh of Columbia Business School. "I expect Class B and C buildings to be unusable until they go through bankruptcy and are bought out for pennies. "