“The space will all get digested in time, but this adds to negative sentiment. With another corporate failure, no one is going to be in a mood to expand, and as leases come up, tenants are going to be giving up space.” —Ross Moore, Colliers International

Telecommunications giant WorldCom’s well–publicized financial troubles have had a ripple effect on many industries, including real estate. WorldCom spent a reported $517 million on rent annually, and after filing for bankruptcy the company has left several REITs scrambling to fill major pieces in their tenant portfolio. WorldCom’s struggles leave another burden for the commercial real estate community to bear on the heels of Enron’s collapse and other corporate financial troubles.

“WorldCom occupies a lot of space, primarily in suburban [markets],” says Ross Moore, director of research at Colliers International. “The space will all get digested in time, but this adds to negative sentiment. With another corporate failure, no one is going to be in a mood to expand, and as leases come up, tenants are going to be giving up space.”

WorldCom has a vast presence in several U.S. markets after its expansion in the 1990s, including Dallas, northern Virginia and Mississippi, where it is headquartered.

The big worry is what will come of WorldCom’s further downsizing as a result of the bankruptcy filing, which could push millions of square feet of office and industrial space onto the market, driving down already soft occupancy rates and rents.

Highwoods Properties, Inc.’s (NYSE: HIW) largest tenant is WorldCom, leasing 986,082 square feet in 13 locations. The majority of the space is located in the Highwoods Preserve business park in Tampa, FL. “In terms of the number of leases and square footage, the big question mark for Highwoods is going to be related to the Tampa business park,” says Louis Forbes, director at Merrill Lynch & Co. “Some of the space leased to WorldCom has never yet been occupied by WorldCom. In fact, some of it has not yet been finished.”

Other real estate companies have similar worries. Reckson Associates Realty Corporation (NYSE: RA) counts WorldCom as its second–largest tenant, collecting $12.4 million a year in rent from the company. However, that only amounts to 2.5 percent of Reckson’s total revenues, and the company says it should be able to release some of the space vacated by WorldCom at higher rents. Other companies that lease space to WorldCom include: Carr America Realty Corporation (NYSE: CRE), Mack-Cali Realty Corporation (NYSE: CLI), Parkway Properties, Inc. (NYSE: PKY), Prentiss Properties Trust (NYSE: PP), PS Business Parks, Inc. (NYSE: PSB) and SL Green Realty Corporation (NYSE: SLG).

Although trouble could be looming for those companies that have exposure to WorldCom, the companies have remained optimistic, and have been quick to reassure investors. They are shielded in part because of their long-term contracts with WorldCom, which mandates that the company must pay its landlords through the expiration date of the contract. As Forbes points out, “We have to ask ourselves the question; what will WorldCom be when it comes out of reorganization, and where are they going to see themselves using space? Also, is there a chance that they will consolidate their space needs to one location, or will they go to other markets?”

A Sampling of WorldCom’s Impact
Ticker	Name	# Leases	WorldCom Square Footage	% of Total SF	Annualized WorldCom NOI Revenue	% of Total NOI Revenue
CLI	Mack-Cali	2	138,544	0.49%	na	na
CRE	CarrAmerica	1	67,390	0.27%	na	na
HIW	Highwoods Properties	13	986,082	2.60%	$4,711,000	1.00%
PKY	Parkway Properties	5	232,580	2.68%	$4,043,000	2.53%
PP	Prentiss Properties	8	255,000	2.00%	$5,667,000	2.00%
PSB	PS Business Parks	na	121,000	0.66%	$1,702,000	0.80%
Source: Company data, Morgan Stanley Research