The head of the Federal Reserve Bank of Boston warned the surge in coworking spaces in major urban office markets could lead to significant commercial real estate losses during the next economic downturn.
Eric Rosengren, president of the Boston Federal Reserve, said the flexible workspaces are “creating a new type of potential financial stability risk in commercial real estate.” Rosengren did not name any coworking companies, such as WeWork, which last week delayed its initial public offering, during his remarks.
“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 in a speech Friday.
Rosengren said coworking companies enter into long-term leases with property owners, but re-lease the space to smaller, less established companies that represent a segment of the economy that is “likely to be particularly susceptible to an economic downturn.”
“Thus, in a downturn the coworking 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.
Additionally, some coworking companies use special purpose entities for leases to protect themselves from bankruptcy, which allow them to walk away from lease agreements during an economic downturn.
“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,” Rosengren said.
It will be during a recession, he said, “that this evolving model will be truly tested.”
Rosengren was among the three officials who dissented from the Federal Reserve’s decision last week to lower interest rates for the second consecutive time and in his remarks, he explained his reason for opposing the rate cut. Economic data, he said, indicates the economy is healthy and robust.
“While risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless,” Rosengren said. “In my view, there are clearly risks of headwinds hitting the economy, but the stance of monetary policy is already accommodative. There are also risks of tailwinds and costs to monetary policy being too accommodative.”
