BOSTON - The growing popularity of co-working spaces like WeWork could pose a risk to the US economy in the next economic downturn, a Fed official warned on Friday.
Boston Federal Reserve Bank President Eric Rosengren, who has publicly dissented with the Fed's recent interest rate cuts, said lower rates will boost risk in "unexpected places."
"Evolving market models, along with low interest rates, are creating a new type of potential financial stability risk in commercial real estate," he said at an event in New York City. "One such market model is the development of co-working spaces in many major urban office markets."
Rosengren did not name WeWork or any other co-working company by name, but said he believes the model exposes property owners to the possibility of runs and vacancies. That's because co-working spaces tend to sign long-term leases with the landlord, and then re-lease the spaces to smaller, less-established companies that would be "particularly susceptible to an economic downturn."
"Thus, in a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building," he said.
The co-working companies also frequently use special purpose entities to enter leases that shield them from bankruptcy and may allow them to potentially walk away from unprofitable lease arrangements, he noted.
Meanwhile, banks could see a higher level of default on loans to property owners in cities with a high degree of co-working spaces, said Rosengren.
"I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model," he said.
The warning comes the same week that WeWork owner, The We Company, postponed its initial public offering. The company has racked up staggering losses and has faced criticism of its corporate governance structure. We Co. still plans to list its shares on the Nasdaq this year, even though it reportedly may be forced to slash its valuation by more than half to perhaps as low as $10 billion. Japanese tech company SoftBank, the largest investor in We Company, is also said to have urged the coworking space firm to delay its IPO.
A spokesperson for We Co. declined to comment, citing quiet period rules ahead of a public offering.
Rosengren was one of three Fed officials who dissented with the Federal Reserve's decision on Wednesday to cut interest rates by a quarter percentage point for the second time since July. He was one of two officials who dissented with the July rate cut. Current economic conditions did not warrant easing, he argued, pointing to low employment rates and inflation likely to inch higher to meet the central bank's 2% target, the level the Fed considers healthy.
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