Recent financial woes at WeWork, America’s largest provider of shared office space, raise questions about how banks’ commercial real estate portfolios might fare if the coworking industry implodes.
While risks to banks now appear minimal, the rapid expansion of shared office space has alarmed at least one banking regulator, who is concerned that the short-term nature of coworking leases will leave some commercial properties with low rates. high vacancies if the economy weakens. and the leases are not renewed.
“It also raises the question of whether bank lending to property owners in cities with significant penetration of coworking models could experience a higher incidence of default and greater losses given default,” said the Boston Federal Reserve Chairman Eric Rosengren in a speech last month. .
Investors and banking analysts are also starting to pay close attention to coworking trends. They are fairly convinced that banks ‘commercial real estate portfolios are diversified enough to withstand a sudden increase in coworking vacancies, but they would like more information on banks’ level of exposure and intend to question them. leaders on this in upcoming earnings calls, said David Chiaverini. , analyst at Wedbush Securities.
Banks will begin reporting their third quarter results next week.
Coworking spaces only make up about 2% of the total U.S. office market, according to commercial real estate data provider CoStar. It’s more prevalent in large cities with many high-tech employers, but still only accounts for 3-4% of office markets in New York and San Francisco, CoStar said.
Market share is likely to grow, however, as coworking properties continue to proliferate. Since 2010, coworking space has grown an average of 29.2% per year, according to CoStar. At this rate, its market share would double in three years.
Office space occupied by coworking tenants has increased tenfold since late 2010 to reach 54.2 million square feet, according to CoStar.
The popularity of coworking is spreading. The office supplies retailer Office Depot started offering coworking space. Even the banks have rented coworking spaces; Capital One Financial and Wells Fargo are both clients of Washington, DC-based Carr Workplaces, an owner who offers monthly leases.
WeWork is the largest flexible space provider and seemed to be flying high until last month, when it abruptly canceled its planned initial public offering and said it was looking for funding to avoid running out of cash later. This year.
JPMorgan Chase provided commercial loans to WeWork, personal loans to its founder and former CEO, Adam Neumann, and was the underwriter of its now canceled IPO, the Wall Street Journal reported on September 24. A spokesperson for JPMorgan said the bank’s relationship with WeWork is not financially significant. He declined to elaborate on the bank’s broader exposure to the coworking sector.
Analysts say WeWork’s struggles are a result of its own business model and shouldn’t be taken as an indicator for the coworking industry.
WeWork pays all expenses to renovate buildings to its specifications and takes financial responsibility for its tenants’ long-term leases.
In contrast, some of WeWork’s biggest competitors, including Convene, Industrious, and Knotel, are teaming up with owners to share financial responsibilities. Coworking companies pay only a fraction of the renovation costs, and owners have to pay the leases.
“WeWork needs to contribute 100% of the capital,” said Ryan Tomasello, analyst at Keefe, Bruyette & Woods. “Companies like Industrious tend not to invest more than 5% of the capital. “
Executives at major banks and regional banks have said next to nothing on recent earnings conference calls and investor conferences in the coworking market, and that’s probably because they don’t see the industry. as being so risky, Chiaverini said.
“Banks have diversified well [commercial real estate] portfolios in construction, land, offices, retail and multi-family buildings, ”said Chiaverini. “Any negative spillover effects of the challenges coworking businesses face should be manageable by banks. “
Yet what worries the Boston Fed’s Rosengren is the coworking space rental model. Many businesses in coworking spaces are on short-term leases, which increases the possibility of multiple tenants moving out quickly and causing cash flow problems for landlords who have loans to repay.
The coworking model “could ultimately make errands and vacations more likely,” Rosengren said.
Coworking is also heavily dependent on the high-tech sector, so if funding for tech startups slows lenders could suffer, said Jade Rahmani, analyst at KBW.
“There has been a very liquid funding environment for tech startups,” said Rahmani. “The growth of coworking has been fueled by the same thing that drives technological growth. “
Brian Foran, analyst at Autonomous Research, compared the situation to banks’ loan arrangements with mall owners and operators.
“A retailer is bad, that’s the mall owner’s problem,” Foran said. “Ten traders are doing badly and that’s the bank’s problem.”