Consumer-facing tech companies in Boston accounted for a major increase in sublease listings during the second quarter.
Suddenly, the most serious threat since the Great Recession looms over the hitherto–booming downtown Boston office market.
With unnerving speed, the coronavirus has burst onto the world stage to ravage the financial markets and upend the global economy.
It’s eerily reminiscent of that other bolt from the blue that detonated the 2008 financial crisis, the overnight implosion of Lehman Brothers.
However, the coronavirus-driven market turmoil spells especially big trouble for the now–tech–company–laden towers across downtown Boston.
After explosive growth over the past few years, the tech sector is bearing the brunt from economic chaos and disruption the coronavirus is leaving in its wake.
And depending on how things shake out over the coming weeks and months, we could be looking at empty tower space hitting the market as tech companies slash expenses and ax workers.
Disaster Waiting to Happen?
Tech companies have emerged as the dominant player in the old Financial District, moving into space in the 1970s– and ’80s’–era bank towers as financial services and legal firms have moved out.
Over the last couple years, tech firms have driven much as 40 percent of new leasing activity, noted Aaron Jodka, managing director of client services at Colliers International in Boston.
By some estimates, tech companies now lease a third or more of the downtown Boston office market.
And leading the downtown tech company invasion have been two companies with explosive growth, but whose business models were already starting to wobble even before the emergence of the coronavirus.
Coworking startup WeWork and Wayfair, the home goods and furniture e-commerce giant, had in recent months put additional expansion on the back burner after veritably gorging themselves on 3 million square feet of downtown office space over the past few years.
But that restraint may be a too little, a little too late.
And that could mean serious trouble for the downtown market given the rapid downturn in the financial markets amid the relentless spread of COVID-19.
At the moment, WeWork is probably the most vulnerable of the two, having been forced, in humiliating fashion, to scrap plans last fall for an IPO after the company’s investors woke up to the reality that WeWork is not a tech company but a cold, hard real estate play, and a risky one at that.
WeWork Relies on Vulnerable Tenants
While WeWork is no Facebook or Google, it has played a key role as a major conduit in the tech company invasion of downtown Boston, playing host to lots of smaller tech firms.
It’s those smaller firms that are likely the first to jump ship should things go south, whether it’s the coronavirus slamming into Boston, the economy taking a dive or, more likely, a combination of the two.
WeWork likes to claim that 60 percent of its space in downtown Boston is occupied by the likes of Amazon and Liberty Mutual, with the remaining 40 percent home to smaller firms.
But it’s more likely the opposite, with 55 percent of that space rented out to smaller and more vulnerable companies, Colliers’ Jodka said.
“That is the million-dollar question: Will they leave and go work at Starbucks or the library? A section of that group will,” he said.
Simply put, WeWork is an office market bomb waiting to be detonated, with the fast-moving coronavirus starting to look like the trigger.
The company has axed hundreds of workers, with a new CEO, Sandeep Manthrani, now working furiously to right the ship.
But it may be a task beyond the ability of the most capable chief executive, with WeWork on the hook for tens of billions – that’s right, billions – of dollars for costly leases with tower owners around the country, including in Boston.
Roughly a quarter of the space it has gobbled up across the country is sitting empty, according to a Transwestern report issued a month ago.
And that was before anxiety over the spread of the coronavirus had escalated.
Headwinds for Wayfair
Now Wayfair is shaping up to the second big shoe ready to drop on the downtown Boston office market
Wayfair last month laid off 350 workers at its Back Bay headquarters – and 550 worldwide – as the tech company struggles to cut costs amid a relentless decline in its stock price.
Thanks to being publicly traded, Wayfair is under even more intense pressure than WeWork.
Investors were already growing impatient with the company’s astronomical losses as it worked to establish its market dominance, following a playbook written by Facebook and Amazon.
Shares of Wayfair were trading at more than $165 a share a year ago.
Scott Van Voorhis
As of last Wednesday, the company’s stock price had lost nearly two-thirds of its value, closing on March 4 at $61.33 a share.
“Wayfair ends its fiscal year on a downbeat note, proving once again that it is incapable of operating its business profitably,” Neil Saunders, managing director at GlobalData Retail, wrote in a column for retail trade publication Chain Store Age.
Hardly a vote of confidence in one the downtown market’s big pillars.
And with WeWork reeling as well, the only question now is when the you-know-what will hit the fan, not if.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
