The Coronavirus has abruptly stopped the rapid growth of many tech companies, and 84% of start-ups are having financial difficulties, according to a survey by Techleap. And that creates a problem, because the rent simply has to be paid. Or, as in the retail sector, can we expect landlords to accommodate these companies?

Fundraising and company profits tech start-ups

To answer that question, it is firstly necessary to look at the business model of tech companies. Emerging tech companies often don't make a profit. Turnover is immediately reinvested in the company; the focus is more on exponential growth than on profit. The tech companies therefore take a certain risk, as they therefore have no buffer and are dependent on the investments of external parties.

These investments often come  from venture capital. The Savills Tech Cities report calculated that an average of 2.2 billion dollars a year is invested in the Amsterdam tech sector. This venture capital therefore took a certain risk, compared to investment opportunities with a relatively lower initial motivation (such as real estate). They took this risk on the basis of belief in business plans, more than hard figures of a positive cash flow.

Corona force majeure versus entrepreneurial risk

In 2019, approximately 15-17% of office space in Amsterdam was taken up by the tech sector (source: Savills Research*). Some of them rent flexibly, around 10% (source: Workthere Research), and are therefore able to respond quickly to the changing situation. A large proportion, however, are long-term conventional leases, which a landlord has entered into to insure itself of a long-term stable income stream in order to mitigate risks. How much of the responsibility can be placed with these landlords to accommodate the tenants? And what could be the motivation to do so?

We see that the market often looks at the root cause of the problem. In the tech sector, many companies are based on a traditional sector, e.g. ticket sales for cafes, restaurants and events, or platforms for the tourist sector and hotels. These companies are mainly affected because the underlying sector is hit hard, not necessarily because they are a tech start-up, but really because the government - temporarily - shuts down a sector. It could be assumed that this sector will be picked up again after the COVID-19 crisis.

Other tech companies have recently needed huge rounds of investment in order to grow and thereby bring the business model to life. In the coming period, for example, more investments will be needed for these organisations before the product will make a profit. These problems are of a completely different calibre and can be regarded more as business risks. It depends on the landlord's belief and trust in his tenant's business plan.

Our advice to tenants is to properly prepare and engage in conversation with their landlords. Landlords are aware that they too will be affected by this crisis, but they will not invest in tenants they do not believe in in the long term. So in the conversation with your landlord, make it clear for what reasons you are a good tenant, or will become one again! Each case will be assessed separately. Be open; including cash flows, past turnover and expectations of the future.

Office buildings are sometimes heavily financed by their owners. In that case, the rent also serves to pay off this financing. This can certainly affect the space a landlord has to accommodate a tenant. We have been able to help many tenants in recent weeks by providing insight into the ownership and financing situation of office buildings. We also advise tenants to look into this before entering into a conversation.

How could a landlord accommodate a tech tenant?

Firstly, in the form of rent suspension. In this case, the rent will be paid at a later date. A second option is a loan, with which the landlord settles the rent in the form of a loan, which is repaid with interest by the tenant.

Cost savings

Many office users will need less space in the coming period. This can be alleviated by looking for a temporary alternative use of space. Tech companies that have leased condominium office space may be able to save costs by temporarily subletting part of that space flexibly. Through our online platform for flexible office space Workthere, we receive questions daily from office users looking for flexible office space.

If the situation becomes worse, there is the possibility of substitution whereby the lease obligation can be taken over by another company. Whilst part of the tech sector is currently hit hard, other businesses, such as online retail and internet services – are experiencing accelerated growth. We expect this trend to be permanent as people rapidly adapt to a new (digital) way of shopping and working (the latter will also have an impact on the general use of office space, about which I could write an entire separate blog). Companies in this part of the sector will eventually need more office space and that could take over the lease contracts from companies in need.

* In this case, by tech companies we mean the entire TMT sector (Technology, Media and Telecommunications)