Will The Cascade Of Bank Collapses Break The Coworking Industry?

Both SVB and Silvergate were victims of a classic bank run, with customers demanding the repayment of their deposits at a rate the banks could not sustain. The underlying causes of the two failures are quite different, however, Silvergate (and shortly there after Signature) was brought down by the turmoil in the cryptocurrency world after the collapse of FTX, whereas SVB’s fall was due to losses sustained on its holdings of Treasury bonds following the Federal Reserve repeatedly raising interest rates — making those bonds fall in value.

The purpose of this article is, however, not to examine why the three banks failed, but to look at the consequences of the failures for the flexible space sector.

As a cofounder of two tech start-ups, I know from personal experience that one of the most difficult challenges for such ventures is access to banking services. By that I don’t mean lending; who in their right mind would lend money to a tech startup?

I mean plain old current account business banking. A bank would open an account for our little start-up in London, but as soon as it realized that we were tangentially involved in the cryptosphere, a letter would arrive announcing the closure of the account. After the third repetition of this sequence of events, and after uncountable rejected applications from other banks, we gave up trying to get a U.K. bank account and settled for one in Lithuania, that was both clunky and expensive.

The real significance of the collapse of SVB last Friday is therefore not just that thousands of small tech start-ups lost a portion of their deposits, it is that they lost their access to banking services. To put it bluntly, if your bank closes its doors, how do you pay your employees at the end of the month? How do you pay your credit card or utility bills?

Newspapers over the weekend were full of stories of tech CEOs scrambling to find banks willing to open accounts for them and to find other firms willing to lend them emergency cash to meet payroll this month. Lots of favors are being asked of friends and colleagues. Some will succeed, but many will not.

If the US Government were capable of acting quickly, it would open an emergency line of credit for customers of SVB to keep these small tech firms alive in the short term in order to save the 100,000 or so jobs they represent, as well as the many millions of dollars of tech investment in them.

What the Fed has done instead, according to The New York Times, is to say that depositors would be paid back in full and that it will “set up an emergency lending program, with approval from the Treasury, to funnel funding to eligible banks and help ensure that they are able to ‘meet the needs of all their depositors.’” This isn’t quite the same, but the quick efforts are an attempt to stave off panic.

Perhaps a mainstream lender can be encouraged to take over SVB and reopen its doors? But if the Government and Federal Reserve cannot act quickly enough, or choose not to, what then?

The last time thousands of small businesses went bankrupt in a short period of time was in the dot.com crash of 2001, and it had a profound effect on the coworking industry. Business centers, which is what we called coworking centers in those days, had been the location of choice for internet start-ups all over the world.

The young entrepreneurs appreciated the ease, convenience, and flexibility of serviced space compared to the tediously slow process of dealing with conservative conventional landlords. So in the run up to the millennium, business centers had filled up with these start-up clients — so much so that the whole flexible space sector was seen by many as existing to serve start-ups.

That perception was never accurate, but nevertheless, dot.com companies did represent a material percentage of clients in many centers to the extent that when the easy money taps were turned off in late 2000, and those companies ran out of cash, the impact on business center occupancy was immediate and severe.

Older readers may well remember that what is now IWG’s Regus USA went bankrupt in 2001 and had to be rescued by a cash injection from its British parent, the latter raising the money to do so, by selling a portion of itself to a private equity firm.

Could the same happen again? As I see the industry, it could, but not in the same way. Today’s coworking center clients are a much more diverse mixture of businesses than they were 22 years ago, so today’s coworking companies are not as badly exposed as Regus was at that time.

IWG, Regus’ holding company, is much bigger than it was then, and its operations are spread over a much wider area so there is less concentration of risk. Having said that, any operator with significant space in California, particularly in the Bay Area, is bound to be adversely affected if the Federal Reserve fails to prevent a disorderly winding up of SVB.

Some London operations may also be affected as SVB UK was put into resolution by the Bank of England on Friday as well, acting in coordination with the Fed.

Coworking companies that are weak for other reasons may also be pushed over the edge by any significant downturn in occupancy. Mentioning no names, but WeWork would seem to be an obvious short as a result.

Away from California, coworking companies with few small tech company clients are unlikely to be affected by these events to any great degree. The industry as a whole is much bigger and stronger than it was in 2001, and today’s problems are unlikely to be more than blip in the long-term structural growth trend of coworking, but for those centers that are full of tech clients, life is going to be more interesting than usual for the next few weeks. Overall, we have to wait and see the impacts of what the Fed chooses to do. We will not have to wait long.