WeWork's business model has created a new 'financial security risk' that could tank the economy, Boston Fed president says
REUTERS/ Keith Bedford
- The rise of the co-working business model employed by companies like WeWork poses "a new type of potential financial stability risk," Boston Federal Reserve president Eric Rosengren said in a speech at New York University on Friday.
- The office providers often serve smaller and more vulnerable companies, which could cause a mass exodus from commercial real estate should a recession hit, the president said.
- Co-working companies also use special business structures to avoid unprofitable tenants and offload losses on property owners. This practice could make vacancies more likely in a downturn, Rosengren added.
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The introduction of co-working companies like WeWork to major urban office markets could bring new risks when the next economic downturn strikes, Boston Federal Reserve president Eric Rosengren said in a Friday speech delivered at New York University.
Co-working businesses "are creating a new type of potential financial stability risk" and could bring massive commercial real estate losses in a recession, according to Rosengren. WeWork alone has more than $47 billion in lease liabilities and is the biggest tenant in New York City, central London, Denver, and Chicago.
The smaller businesses paying for co-working spaces are "likely to be particularly susceptible" in an economic downturn, and could lead office vacancies to rise faster than the historical norm, Rosengren said.
"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," Rosengren added, declining to mention WeWork by name.
The statement follows a delayed public offering for WeWork, the biggest player in the rapidly growing sector. The company received a $47 billion private valuation in January but saw its IPO value tank to $10 billion to $12 billion before calling the offering off. WeWork now says it plans to go public before the end of the year.
Rosengren also referred to bankruptcy-remote special purpose entities as a risky element of co-working businesses. These structures allow companies like WeWork to avoid unprofitable lease arrangements in times of economic contraction, and offload the losses on the property owner.
Such a tactic "could ultimately make runs and vacancies more likely" as commercial real estate losses hit property owners more directly, Rosengren said.
"This is an important time in the cycle to be thinking about structures and situations that could challenge financial stability in a downturn," he continued. "It's important to think about the potential for runs on commercial real estate stemming from a situation where short-term leases might not be renewed in recession, and long-term leases are no longer economically viable."
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