Last week, as Austin braced for a coronavirus lockdown, Scott Harmon heard about the latest tenant to flee. A 30-person startup packed up its rented office, joining a stream of deserters from coworking spaces and other "flexible" offices — a varied slice of the commercial real estate sector that has boomed in recent years.
"We've seen quite a few that have just basically moved out and broken their leases," said Harmon, whose company, Swivel, sells software for leasing office space with flexible terms. He declined to name the startup, but said there was no negotiating an amicable split: "They said, 'We're moving out. You can sue us. We're not paying.'"
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Just a few months ago, offices in Austin were renting for a record average of $44 a square foot. Behemoths like Facebook, Google and Apple were gobbling up more space in the Central Texas city. SXSW was set to once again bring the tech masses to town with its mid-March festival.
But in Austin and other tech hubs, once-cutthroat office markets have hit a brick wall. And the stakes of the COVID-19 crisis are particularly pressing for coworking and Airbnb-for-office-space companies that operate on thin margins, executives in the industry say. Leasing has ground to a halt as entire states shelter in place — "nuclear winter," as one industry publication put it.
Tenants are asking if they can delay rent payments, leaving landlords scrambling to cover their own mortgages and stave off cash-hungry banks. Coworking operators and real estate tech companies similar to Swivel worry that demand will flag, rents will fall and many will go under.
"It's just Armageddon," Harmon said. "There's no two ways around it."
The fallout from the virus is upending the real estate industry just months after another financial shock — the near-implosion of WeWork — brought the coworking sector to the brink. Even before coronavirus paralyzed the economy, some investors had soured on the idea of commercial real estate as a high-growth startup venture.
Now, many on the ground are consumed by whether the government will intervene to stave off looming evictions and foreclosures, issues that have so far taken a back seat in debate over a $2 trillion federal stimulus.
The survival of the flexible office market will depend only partially on companies' abilities to navigate what many economists believe will be a deep recession. Bigger questions must be answered about how people return to offices after prolonged periods of remote work. Executives in the industry say crammed open offices may give way to a blend of in-person and remote offerings, and falling demand may yield lower monthly rents — for those that survive.
"I think there's real peril for a lot of operators," said Mark Gilbreath, CEO of short-term office leasing site LiquidSpace, based in Palo Alto. "They're going to have to be enormously creative."
The types of unconventional offices available to startups and tech tenants today range widely, from scrappy neighborhood coworking spaces to offerings from aggregators like LiquidSpace whose portfolios of workspaces are rentable by the day, month or year. All-in-one services like WeWork rent and operate shared and private offices.
In the last decade, the flexible office category has mushroomed 600%, encompassing nearly 71 million square feet of space in 40 major cities tracked last year by brokerage CBRE. In the shadow of WeWork's aborted IPO, analysts at Colliers International had anticipated that 2020 would be a year of reckoning in an increasingly crowded market. More big companies, they predicted, would eat up flexible space instead of building their own offices.
In recent weeks, as COVID-19 paralyzed major U.S. cities, some workspace operators opted to stay open, notably WeWork, which asserted it was an "essential" business since it offered services like mail and security. The New York Times reported this week that the company offered $100-a-day bonuses to employees willing to go to work in person.
Scott Harmon is the co-founder and CEO of Swivel, which sells software for leasing office space with flexible terms.Photo: Courtesy of Swivel
Noelle Tassey took a different approach with Alley, her New York-based coworking company and tech accelerator. After careful deliberation, Tassey closed Alley's four-story coworking space in New York two weeks ago, along with smaller corporate innovation labs that Alley runs with Verizon in Boston and Washington, D.C.
"We went around and talked to our members," Tassey said. "They were like, 'Frankly, why are you guys still here?'"
Alley members retained keycard access to get mail or other belongings, but Tassey said she was paying the company's own employees and hourly workers to stay home. In the meantime, she's been lining up live-streamed workout classes, happy hours, business tutorials and other remote services during a time of high anxiety for customers still paying their membership dues. She expects to continue offering both digital and physical events once it's safe to go back to the office.
"The businesses in our community are some of the ones most at risk," Tassey said. "We're really focusing on a push to build digital community."
Around the world, Gilbreath said, nascent coworking industry groups like the Global Workspace Association are pooling information on how office providers that wish to stay open can comply with federal health guidelines for cleaning and social distancing. His team is also working to add updates for building closures to listings on LiquidSpace.
Gilbreath anticipates that a return to normalcy will play out in phases: from sheltering in place to a "semi-normal" period of heightened focus on office health and sanitation, and then an embrace of a new normal after employers have had to "violently accept that work from home is now the office."
A longer-term trend toward blending remote and in-person work could push corporate clients to reconsider the amount of office space they buy or lease, he said, while layoffs would also contribute to lower demand for space for the foreseeable future.
"It's reasonable for us to anticipate that you're going to have an increase in vacancy," Gilbreath said. "That puts some downward pressure on pricing. That will play itself out."
Before financial markets tanked in recent weeks, employers and workers were already questioning the shift to loud, often packed open offices. Brokerages in growing tech hubs recommend allotting as little as 36 square feet per workstation in an open office — less than the 50-square-foot recommended minimum for storage closets.
In Austin, Harmon expects a shift to more private and spacious offices to be a lasting impact of the pandemic. "The large communal shared space thing is going to have trouble reestablishing," he said. "I think people are gonna be freaked out."
Companies may also push for shorter leases in uncertain times, he said, which could conflict with landlords' mortgage arrangements.
Swivel, which was founded in 2016 and has 15 employees, raised an $8 million Series A round in January that Harmon says will help offset the "dramatic" loss of revenue he expects.
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This year was supposed to be about expanding Swivel's offerings to Denver, the Bay Area and other tech hubs. With those plans on hold, Harmon spent the last two weeks rolling out a new feature allowing office tenants to digitally renegotiate their leases with landlords. This week, Harmon, who previously rode out the dot-com bust as CEO of software company Motive, has been taking some solace in Zoom calls with other executives in crisis mode.
"Sometimes CEOs can be assholes as kind of a general rule," Harmon said. "But in this case, I think people are a lot more willing to help and collaborate."
