The rise of co-working has created the potential for a run-on-the-bank style crisis in commercial real estate, Boston Federal Reserve Bank President Eric Rosengren said on Friday.
“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,” Rosengren said in a speech delivered at New York University.
Rosengren described the business model of WeWork and other co-working companies, although he did not name any company in particular, as risky. The co-working companies typically enter into long-term leases with property owners that they release to smaller companies on a short-term basis. This mismatch in the maturity of the co-working company’s liabilities and its assets creates risk, Rosengren explained.
“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,” Rosengren said.
What’s more, the small and often new companies that lease from WeWork are very likely particularly vulnerable to an economic downturn. Start-ups could lose access to funding and a contraction of consumer spending could dry up their revenue stream.
“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 said. “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 blamed what he sees as an unnecessarily accommodative monetary policy for creating a “reach for yield” that has encouraged investment in riskier assets like co-working companies.
“The combination of reaching for yield with runnable liabilities is a common problem in financial stability situations,” Rosengren said.
WeWork said this week it would delay its planned initial public offering after investors balked at the company’s valuation and objected to its management structure. The company’s founder and chief executive, Adam Neumann, recently returned $5.9 million the company had paid him for the right to use the trademark “We.”