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Boston Fed President Eric Rosengren warned on Friday that co-working businesses, like WeWork, are at danger during the next economic slump.
Rosengren said during a speech at New York University’s Stern School of Business that “This segment of the economy is likely to be particularly susceptible to an economic downturn, potentially resulting in office vacancies rising more quickly than they have historically.”
The company signs long-term leases and then subleases them to tenants through a shorter contract “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 that these businesses might utilise bankruptcy-remote special purpose entities for leases, possibly letting them escape from unprofitable lease contracts during a slump.
He went on to say that now is a key time to be thinking about “structures and situations that could challenge financial stability in a downturn” and 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.”
WeWork on Monday halted its plans for its initial public offering, until November at the earliest, because of concerns investors have over its business model, valuation, and governance standards, which permit CEO Adam Neumann’s shares to have 20 times the voting power of ordinary investors.
The office-space provider last week was reported to be seeking a valuation of 10 to 12 billion USD, as indicated by Reuters, a massive discount from the 47 billion USD valuation it achieved in January.
Barry Oxford, senior vice president, and senior research expert at DA Davidson wrote on the 17th of September that “The growth model is heavily dependent on an expanding economy along with positive job growth. Given the shorter-term leases, the vacancy can move rather dramatically based on an expanding or contracting economy.”
Oxford believes a valuation of 8 billion USD is a more reasonable value and suggests investors look at Regus as a case study.
“IWG’s Regus, which we believe is The We Company’s closest comparable, experienced a significant decline in profits during the last downturn, going from $140M in 2008 to $22M in 2010. We would also point out that publicly-traded IWG is bigger, more profitable, and has a market capitalization lower than $4B.”
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