WeWork's problems are darkening the outlook for the struggling office market.

The turmoil facing co-working market leader WeWork (WE.N) is clouding the outlook for the world's largest business centers, where vacant office space is already on the rise, putting added pressure on investors who plan to refinance big mortgages next year.

According to media reports Wednesday, the New York Stock Exchange-listed flexible workspace provider once valued at $47 billion is considering filing for bankruptcy next week.

Backed by Japan's SoftBank, WeWork said it intends to revolutionize the office space market by signing long-term lease deals on large properties and leasing space to small companies on more flexible, short-term terms.

Like other landlords, however, WeWork is having trouble attracting customers back to the office after a period of pandemonium when they prefer to work from home. The trend has undermined confidence in the sector and will lead to a rise in office vacancies, affecting rental yields in cities such as New York and London, said eight market figures, investors, lenders and analysts.

Many investors who have taken out loans secured by real estate may have difficulty servicing rising debt obligations, they said. The loss of any tenant, especially in an environment of relatively low office leasing activity, will have a negative impact on the cash flow and value of office buildings, said Jeffrey Havsey, head of commercial real estate analytics at Moody's Analytics. "This will increase the negativity in the market and make it more difficult to obtain financing, especially for buildings that need to renew their financing in the next 12 to 18 months," he said.

A spokesman for WeWork told Reuters that the company is in talks with landlords over "expensive and inelastic lease terms" and aims to maintain its presence in most of its locations and markets.

The number and volume of commercial properties to be refinanced in 2024 is still unknown, as many deals are negotiated on a private basis between the borrower and lender, Ed Dobeny, co-head of EMEA debt financing and structured real estate transactions at real estate firm Jones Lang LaSalle, told Reuters.

Analysts estimate the global commercial real estate market to be around $2 trillion, with roughly equal shares (50:50) of this market being serviced by banks and alternative lenders in the U.S., and a ratio of 85:15 in Europe.

Numerous experts contacted by Reuters are predicting a challenging year for investors and lenders heading into 2024, and time is running out for those who ignore assets that don't meet key credit conditions when they are revalued today.

The value of all the world's real estate assets - residential, commercial and agricultural land - was $379.7 trillion in 2022, reported theThat's down 2.8% from 2021.

The number of refinances of real estate loans has already declined due to lower transaction volumes, which are key to tracking changes in asset values. MSCI's European market report showed that deal volumes in the third quarter were down 57% year-on-year to 2022, the lowest since 2010.

In addition, the gap between what investors believe asset values are and what potential buyers are willing to pay is between 20% and 35% in key office markets, which is "far worse than during the global financial crisis," MSCI noted.

In Europe's two largest office markets, the U.K. and Germany, prices would need to fall by an additional 13-15% to restore market liquidity to its long-term average, MSCI said.

Banks serving U.K. real estate and development companies reported in the October Data provider Credit Benchmark that the probability of default in such companies is now 9% higher than a year ago; the probability of default indicator for U.S. industrial and office investment properties (REITs) is up 35.8%, compared with expectations a year ago.

Wework occupies 3250000 square feet of space in central London with a total annual rent of 192 million pounds ($234 million), Jefferies said in a September note.

Industry officials said some competitors will be able to occupy WeWork's most popular locations at the same rental rate, minimizing cash flow problems for landlords.

Demand for flexible office space in the UK is still 11% below pre-pandemic levels, revealed the State of the UK Flexible Market 2023 report published by Instant Group in September. According to sources, lenders may see the WeWork example as a cautionary tale, and it could potentially lead to a higher requirement to put equity into the property to reduce the loan-to-value ratio of the asset. However, such a requirement could cause problems if the scope and duration of the lease remains uncertain.

The vacancy rate for office space in London has reached its highest level in 30 years, Jefferies also noted in September. According to BNP Paribas Real Estate, the average lease length for central London offices has fallen from 11.6 years to six years over the past decade.

British real estate company Helical said it is working on the "next steps" for London premises leased to WeWork, after it only received a reduced rent through an interim license agreement.

The underutilization of urban office space not only results in lower income for owners, but also causes it to age rapidly in a world increasingly focused on reducing carbon emissions. "We are standing at a huge turning point in the global real estate investment market," said Jose Pellicer, head of real estate strategy at M&G Real Estate. "For the past 20 years, real estate yields have been higher than financing costs. But a significant portion of real estate income in the 2020s will need to come from growth," he said.