The growing popularity of collaboration spaces like WeWork could pose a risk to the US economy in the next economic downturn, a Fed official warned on Friday.
Boston Federal Reserve Bank President Eric Rosengren, who has publicly disliked the Fed's recent interest rate cut, said lower interest rates would increase risk in "unexpected places."
"Developing market models, along with low interest rates, create a new type of potential financial stability risk in commercial real estate," he said at an event in New York City. "One such market model is the development of collaborations in many large urban office markets."
Rosengren did not name WeWork or any other cooperative company, but said he believes the model exposes property owners to opportunities for running and vacancies. That's because co-working spaces tend to sign long-term leases with the landlord, and then rent out the spaces to smaller, less established companies that will be "particularly prone to a financial downturn."
a decline the cooperating company would be subject to loss of tenant income, which puts both them and the property owner at risk if they cannot make rental payments to the owner of the building, ”he said.
[The Research Triangle region is home to a growing number of co-working spaces, including WeWork, HQ Raleigh, American Underground, and several others.]
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The cooperating companies often use special purpose entities to enter into leases that protect them from bankruptcy and can potentially allow them to move away from unprofitable leases, he said.
Meanwhile, banks could see a higher level of default on loans to property owners in cities with a high degree of cooperation, he said.
"I am concerned that the loss of commercial property will be greater in the next downturn because of this growing property market, which could eventually make running and vacancies more likely due to this new lease model," he said.  WeWorks NC range continues: New spaces in Durham, Raleigh and Charlotte
The warning comes the same week as WeWork owner, The We Company, postponed the initial offer. The company has suffered staggering losses and has faced criticism of the company's governance structure. Vi Co. is still planning to list its shares on Nasdaq this year, although it may be forced to reduce its valuation by more than half to perhaps as low as $ 10 billion. The Japanese technology company SoftBank, the largest investor in We Company, is also said to have encouraged the collegiate space company to postpone the IPO.
A spokesman for We Co. refused to comment, citing quiet period rules in front of a public offer.
Rosengren was one of three Fed officials who disliked the Federal Reserve's decision Wednesday to cut interest rates by a quarter of a percentage point for the second time since July. He was one of two officials who disliked the interest rate cut in July. The current economic conditions did not guarantee relief, he argued, pointing to low employment rates and inflation that are likely to be higher than meeting the central bank's 2% target, the level the Fed considers healthy.
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