SoundCommerce employees, with CEO Eric Best on far left
On a Saturday in April, several executives from SoundCommerce rented a U-Haul, drove it to their office in Seattle and loaded up the truck with stand-up desks, 48-inch monitors and various other gadgets and personal belongings. For two days, they traversed town, dropping the items off at employees’ houses and apartments.
With the coronavirus forcing non-essential employees to shelter in place, it had been weeks since any the start-up’s 20 or so staffers had worked at the office. It was clear they wouldn’t be going back.
The lease expires July 31, and SoundCommerce CEO Eric Best said the company did not extend its contract.
“We polled the team and, for the vast majority, they prefer to remain at home,” said Best, who co-founded the software company in 2018. “We’re not making any decision for the long term right now. We’re thinking about what do we do for the next six to 12 months in terms of maximum safety of team and maximum flexibility of the company.”
In the tech hubs of Seattle, Silicon Valley, New York and elsewhere, many CEOs are coming to the same conclusion — real estate is not a worthwhile expense. Start-ups that never intended to be fully distributed are letting leases end or looking for ways to get out of longer deals, while bigger employers are closing facilities, consolidating space and exploring ways to provide workers with flexible arrangements and options closer to home to avoid long commutes.
In May, CBRE was predicting about a 7% drop in office rents per square foot from the first quarter to the fourth quarter. It expected vacancy rates to rise as high as 14.9% in the first quarter of 2021, up from 12.3% in first three months of 2020. Since then, the number of Covid-19 infections in the U.S. has skyrocketed, and states including Florida and Texas continue to see daily record highs.
Facebook, Twitter, Okta and Box are among the tech companies that have announced a more permanent shift to a hybrid approach. Many others are likely to follow as extended school closures or shortened days make remote options essential. Officials in Los Angeles and San Diego announced on Monday that schools will start online-only in the fall.
With that ominous backdrop and no vaccine expected anytime soon, office workers who can be productive at home are showing little desire to leave, and in many parts of the country they don’t even have the option.
At SoundCommerce, the office cost was equivalent to the salary for one to two full-time employees, Best said. His company, whose software provides real-time data to online retailers, raised a $6.5 million seed round about a year ago, and now has more options with how to spend its money.
“We could forego the space and either buy additional cash runway, which is important for a start-up,” Best said. “Or hire additional engineering capacity, which is even more important for a start-up.”
‘Pretty much everyone is doing it’
Across the country, Ian White is making a similar calculation at his early-stage start-up ChartHop, which develops software for human resources departments. On Jan. 15, White signed a six-month lease at a WeWork in Brooklyn for an office with about 15 desks.
A quarter of the way through the $1,200-a-month WeWork membership, White sent all nine employees home. The team quickly adapted to life on Zoom and Slack, and as they realized they’d be remote for an extended period, people started leaving New York for less cramped surroundings. White, along with his wife and eight-month-old baby, found an Airbnb by a lake in South Carolina, where they lived for two months.
Meanwhile, ChartHop’s WeWork space “just sat there gathering dust and we’re still on the hook for a six-month commitment,” White said.
ChartHop CEO Ian White
“I asked WeWork for any kind of concession, but they offered nothing, not even the slightest price break,” White said. “What they finally came back to me with was, if I was willing to enter another 12-month commitment, they’d give me a free month.”
Instead, White is letting the lease expire. With business still picking up, he’s continued to hire, adding seven employees since the company went remote. He’s given his staff the option of working from home forever and, for those who want to eventually return to in an office, the company will revisit that possibility when it makes sense, White said.
Scott Orn said he’s hearing these anecdotes from across his client base. His company, Kruze Consulting, helps about 250 start-ups with tax, accounting and HR services. Orn looked at the data of his clients and concluded that as of May, half of them had eliminated the amount they’re spending on WeWork, while 26% had reduced their WeWork expenses.
Orn said his company, which was based at a WeWork location in downtown San Francisco, also let its lease expire.
“Pretty much everyone is doing it, who can do it,” Orn said. “It was actually hard getting dates from WeWork where the elevators were not in use from others moving out.”
It’s an easy decision, Orn said, because “you’ll be able to pick up super-cheap subleases at the very least when people are ready to go back.”
A WeWork spokesperson declined to comment, but Chairman Marcelo Claure provided positive spin to the Financial Times recently.
Claure, SoftBank’s operating chief who joined WeWork last year when SoftBank took control of the company, said that large enterprises are seeking more flexibility and turning to the office-share provider for space. Mastercard, Microsoft and Citigroup are among companies that have signed new leases in the past month.
According to the FT’s report, Claure said revenue was “flat during the crisis,” and that the company is now poised to start generating positive cash flow next year, ahead of schedule.
Industrious CEO Jamie Hodari said his company, which competes with WeWork, is seeing a similar trend, with employers including Salesforce, Pivotal and ServiceNow moving to a more distributed model. Hodari said that the churn rate, or the percentage of companies deciding not to renew their memberships, spiked in late March and early April, but is now back to pre-Covid levels.
Over the last couple months, Industrious has started working with clients on an even more flexible model that would allow companies to rent fractional space and pay based on usage. For example, a company could rent space for two days a week in one location and three in another and have a set amount of desks for those times and days.
“About eight weeks ago, companies said to us that once things reopen, people will want to go to work but no one wants to go to work five days a week,” Hodari said. “There’s a level of flexibility that companies are anticipating that we’re working to try and provide. But it’s pretty out there. It hasn’t traditionally existed in the real estate market.”
Credit Karma, a financial-tech company Intuit is acquiring for about $7 billion, is in a complicated situation. The company, headquartered in San Francisco, signed a lease last year for 106,000 square feet across the Bay Bridge in downtown Oakland.
Some of Credit Karma’s 1,100 Bay Area employees were going to start moving to the Oakland office in 2020, but the full migration was expected to happen over several years. About 100 people who live in certain areas were going to be allowed to stay in the San Francisco office to keep their commutes manageable.
Those plans all changed shortly after the pandemic struck. The company closed the San Francisco headquarters for good, allowing employees to come in and pick up essentials like medicine, bicycles or valuable personal items. Whenever employees return to work, Oakland will be the lone office in the Bay Area, and those who would have stayed in San Francisco will instead be able to work from home.
“Covid hit and we started to have to make some harder decisions around financials in general,” said Colleen McCreary, Credit Karma’s chief people officer. “We decided to make the call now to consolidate into Oakland. It was going to be something over time we’d probably be getting to anyway, but this really expedited that.”
Still, Credit Karma has its six floors in San Francisco on the books, and the leases vary for each. The company is looking for ways to offload that space, which may mean having to subsidize some costs for new tenants, said people with knowledge of the matter who asked not to be named because the negotiations are confidential. McCreary said she hasn’t been involved with those talks and isn’t aware of the details.
‘We’ll play it by ear’
Elevate Security, a 30-person start-up with offices in Berkeley, California, and Montreal, let both leases expire in June, saving the company about $10,000 a month.
Robert Fly, Elevate’s co-founder and CEO, said there are challenges to managing a remote workforce. Trying to recreate the water cooler conversation and figuring out ways to properly show gratitude for jobs well done have become important, particularly for people who thrive in communal environments, he said.
“It was a little rough in the beginning but now that we’ve cleaned up a lot of communication and collaboration, I actually think it’s better,” Fly said. He said that every day around lunch, the team gets together on Zoom for a 15-minute stretching session.
Elevate Security video chat
When he decided not to renew the leases, Fly put the company’s belongings in storage and created a spreadsheet with all the available inventory, from computers and audio-visual equipment to couches, desks and chairs. Employees noted on the spreadsheet what they were taking, and let co-workers know in a Slack channel when they would pick up the items to maintain distancing.
The equipment and furniture may eventually find its way back into an Elevate office. Or not.
“We don’t have plans at the moment to actively search for real estate,” Fly said. “I can’t predict what the pandemic holds. The new reality might be we stay remote forever, or maybe we have two- to three-person office hubs. We’ll play it by ear.”
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