The Boston Federal Reserve president think that co-working spaces could ultimately hurt the economy, and even worsen the next U.S. recession.
“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,” Eric Rosengren said in a speech at a credit markets conference at New York University’s Stern School of Business, according to Reuters. He did not mention WeWork or any other company by name.
Rosengren added that office-space-sharing companies often use special purpose entities to lease space as a way to protect themselves in case of bankruptcy. “The basic model provides you the opportunity to, in effect, not be required to pay your lease off,” he explained. “Eventually if there are enough vacancies in that building it means that banks are going to take losses.”
While this could put property owners under more stress, the option is still attractive since shared office space often comes with a higher rent than other types of commercial offices.
“It will not be until a recession that this evolving model will be truly tested,” said Rosengren, adding that “the fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession.”
His comments come just a few days after WeWork’s parent company decided to postpone its initial public offering (IPO).
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While the company had been valued at $47 billion in a fundraising exercise this year with SoftBank, sources revealed that in recent days, its executives and underwriters have lowered that valuation to between $15 billion and $20 billion or even lower. In addition, the New York-based company lost more than $900 million in the first half of 2019.
WeWork declined to comment on Rosengren’s remarks.
