Could WeWork become an economic risk in a downturn?

The initial public offering for the We Co. was already effectively dead when one of the Federal Reserve's worriers, Boston Fed President Eric Rosengren, wondered out loud if the kind of flexible office space We Co. provides would someday become a big problem for the broader economy.

At first this seemed like piling on, as We Co. had already been pounded for its shoddy corporate governance, unproven model and unintentionally funny marketing claims. And its CEO and co-founder just lost his job. Yet there is clearly something to Rosengren's worries.

He is not forecasting a recession, by the way, just pointing out that it is past time to pay attention to business models or market conditions that didn't exist the last go-around, and how much trouble they could cause.

Of course, traditional ways of derailing the economy, like overbuilding inventory and speculating in real estate with borrowed money, have not gone completely out of style.

It seemed clear after the IPO fiasco that the We Co. is not worth anything close to $47 billion, the eye-popping valuation as of the last financing round, but the company might be a bigger company than some skeptics realize. Operating as WeWork, it is the largest user of private-sector office space in some very big cities, with more than 7 million square feet in Manhattan alone.

Here in the Twin Cities, WeWork has leased three big spaces. It took nearly a third of a new United Properties-developed building in the North Loop neighborhood of Minneapolis, about half of a new building in Minneapolis developed by the Ackerberg Group and a few floors in Capella Tower in downtown Minneapolis.

Flexible spaces leased by the likes of We Co. account for only roughly 2% of total U.S. office inventory, according to the global real estate firm CBRE. The potential for trouble, though, is that it is a much higher percentage of the market in some cities with very pricey real estate.

All Rosengren was doing was identifying risks in parts of the economy vulnerable to a run, a term usually associated with banks. You might remember what a bank run looks like from the classic movie "It's a Wonderful Life," which is all over cable around the holidays.

Banks used to be very vulnerable to runs, in which depositors are suddenly gripped by fear and go to the bank to pull out their money. If enough depositors rush to the bank all at once, the bank won't have nearly enough money on hand.

Bank runs do not really happen anymore, not with deposit insurance and other government support. And yet, a version of this old bank-run story is pretty much what happened at Lehman Bros. Holdings in September 2008, the start of the most terrifying stretch of that decade's financial crisis.

Part of the headache for bankers is that they have a mismatch problem. The depositors want their money now, but the bankers can't call up their borrowers and expect to get all the loans repaid by the end of a business day.

Companies like the parent of WeWork have a mismatch problem, too. The leases the company is obligated to pay with the big landlords extend for maybe 15 years, while it basically sublets to the "members" for far shorter periods.

It seems much more likely that the Fed's Rosengren has it right, that the co-working spaces are particularly vulnerable in an economic downturn. These places could empty out, with the upstarts moving back home and the corporate users bringing their work teams back into buildings they either own or have leased for a long time themselves.

There is another wrinkle to this that Rosengren also identified, and that is who is actually on the hook for these leases in the big buildings. The co-working operators may have used special-purpose entities, little affiliated companies created just to execute one lease, instead of guaranteeing the lease as a corporate parent.

That means the legal tenant could tip over without the ability of the landlord to go after unpaid rent from the We Co. or another corporate parent, which would presumably still have money.

Why would a sophisticated landlord accept that kind of risk? Well, they are "reaching for yield" by trying to get a little more rent money, and one way to do that is to take on more credit risk. Smart people make that kind of deal in a low-interest-rate, low-investment-yield environment like the current one.

There is only one reason to care about the details of leases between big landlords and big companies, and that is because of what would happen in a sharp downturn as building cash flow slips and values sink.

That is when people with money get even more cautious with it.

We do not have to be finance pros to know what happens next. Whatever problems there are in the broader economy, they just got worse. It might not be long before some of the pain even reaches Main Street.