(Bloomberg)—The rise of co-working spaces like WeWork may be creating new financial-stability risks, according to Federal Reserve Bank of Boston President Eric Rosengren.
“Evolving market models, along with low interest rates, are creating a new type of potential financial-stability risk in commercial real estate,” Rosengren said Friday in remarks prepared for a speech in New York. “One such market model is the development of co-working spaces in many major urban office markets,” he said, without mentioning WeWork by name.
WeWork, one of the world’s largest co-working company, delayed its highly anticipated initial public offering this week in the wake of criticism of the company’s corporate governance and a proposed valuation much lower than its last private market value of $47 billion.
The New York-based company is still planning to IPO this year, it said. WeWork has long been dogged by arguments that its often 15-year leases far outweigh the short-term sublease agreements it strikes with its customers, putting the whole business at risk if the market takes a turn.
Rosengren dissented Wednesday from a Fed decision to cut interest rates for a second time this year. He’s been a leading voice on the U.S. central bank’s rate-setting Federal Open Market Committee in advocating for higher rates in recent years and has often cited what he sees as overheating real-estate markets in Boston and elsewhere.
“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,” Rosengren said.
“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,” he said. “This also raises the issue of whether bank loans to property owners in cities with major penetration by co-working models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically.”
Ellen Huet in San Francisco at [email protected].
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