Tech Tenants: Build It, and They Will Come

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By: Carson Hopkins

CompStak talked to brokers and tenants about one of the fastest growing tenant industries in commercial real estate.

It’s no secret that the startup industry is booming. From major hubs such as San Francisco and New York to smaller cities like New Orleans and Providence, more and more internet-based companies are cropping up each year.

With this growth comes an expansion of startup culture. Marked by their laidback workspaces and innovative approach to office dynamics, these companies are transforming work environments across the country. Landlords and brokers are keeping tabs.

“It’s not just what tenants want that has changed,” said Benjamin Osgood, Senior VP of Tenant Representation Services at Dunhill Partners West in San Francisco. “It’s also work culture that has changed – it’s more fun. What it means to go into work is different nowadays. There’s more flavor, more style.” A few decades ago, offices looked identical from one corner of a city to the other. Today, companies’ personalities are coming out in their workspaces.

With high rents and high competition in major cities, the search for office space has grown increasingly difficult for these tenants. Yet the demand shows no signs of slowing down, in part because the right work environment is crucial in recruiting top talent. “There’s a tremendous amount of competition in tech,” Osgood said. “The space plays a big role in luring employees – all things being equal, that competitive edge that companies can offer is their space. Engineers talk; they know who has free lunch or the room dedicated to Corn Hole.”

Coleman Skeeter, founder and CEO of New York CRE advisory firm Truman James agrees that Tech comprises one of today’s hottest real estate niches. “Technology tenants are arguably the biggest driving force in the current climate of record-high rents and record-low vacancies” in New York City.

When searching for office space, tech startups often face challenges that long established companies in other fields avoid. Namely, they lack established, good standing credit. “Some owners are skeptical of startups,” said Kalin Kelly, Director at CM Commercial Real Estate in San Francisco. “They could do really great or they could walk away from the lease and have to terminate.” Skeeter adds that some landlords are wary of taking on tech tenants out of fear of another dot-com bust. “No matter how much forecasting you do, you can never know exactly how fast your company might grow, “which is why we prefer to work with landlords that are more friendly and flexible for our clients.”

Flexibility is certainly a strong preference among tech tenants, especially those in the high-growth phase. The more mature tenants have different needs – they are looking for a permanent headquarters – a place that Skeeter says “reflects the core ethos of their firm, while serving as a creative space for their staff.”

However, most tech tenants are far from that stage. “They need spaces that they can modify and/or grow into,” says Matt Currie, a Principal Broker at CM Commercial. “Most enticing are options that will help them a year or two later, pending growth of the operation.”

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Indeed’s office at the Champions development in Austin, TX

Derek Stewart, head of real estate at Indeed, a technology company that operates the world’s largest job listings website, said he and his team were initially wary of leases with long-term commitment because their company has grown at such an aggressive rate. In fact, Indeed has never been in one office for longer than two years, as they often outgrew the space. Stewart advises high growth tech companies to do one of two things: “Take super short term lease and make it work for your current needs, or take far more space than you’ll ever need just so you don’t have to move in a couple years.” He said growing out of an office and having to sublease it can be detrimental, since before long companies may be bogged down with two or three leases they’re still paying for.

In addition to lease term flexibility, there are many other factors that technology tenants consider. “Location, location, location. It’s a cliché, but it’s true,” said Osgood. “Proximity to good restaurants, bars, and coffee shops is a strong incentive.” Kelly added that aesthetics and easy access to public transit are also important to her San Francisco clients, while Currie adds: “overall vibe and energy” matter.

The cool factor that tech companies are searching for extends beyond the office’s neighboring establishments to the interior layout of the building. High ceilings, open floor plans, wood floors, exposed brick and HVAC, glass, and stained concrete are all in high demand. Osgood, however, said he sees a trend in scaling back the amount of open space. While open floor plans remain a favorite of tech companies, “There’s still a need for private space,” he explained. Companies are realizing that the demand for more meeting rooms and even server rooms is still there. “Being totally open doesn’t work,” Osgood said.

The balance between open and private is well-reflected in the choice that NYC-based startup Floored has made. David Eisenberg, founder and CEO of Floored, said he and his team hoped for a space of “collaboration yet peace.” They searched for a space that offered both an open floor plan with high ceilings, and glass-walled conference rooms. The lease term was also critical, as it’s “hard to predict more than a year or two in advance,” he said.

In spite of their success in finding a new space, Eisenberg still lamented, “how old school the search process is.” He credits his broker for speeding up the search so he and his coworkers didn’t have to spend the time and energy searching through “black and white 2D floor plans that may or may not be up-to-date.” Working with a broker who pre-walked floors and only showed them well-suited spaces made for a more efficient search. (Floored is actually assisting the CRE industry in this regard, with its 3D tour technology.)

Derek Stewart concurs that the space layout was also of paramount importance for Indeed. As the company is set to continue its tremendous growth in the months and years to come, they’re keeping in mind ways to interest those future employees. A great space is necessary in order to attract the number of people Indeed needs to bring onboard, Derek said. He added that while some startups may prefer playful workspaces, Indeed was hoping to find a balance, looking to create an environment that is modern and creative but also practical and mature.

There’s no denying the impact that tech tenants have had on the commercial real estate industry. As tech startups continue to grow and expand into new markets and cities, landlords and leasing brokers may want to pay more attention. In recent years, “velocity of transactions has accelerated, length of transactions has shortened, and volume has increased,” said Currie. The tech industry is growing, and despite the high turnover rate and associated risks, more landlords are catering to tech tenants. They’re “very accommodating because they want the highest rent possible,” said Kelly. “They’re willing to make spaces cool and creative by exposing concrete, putting in wooden floors, and adding other in-demand amenities.”

Skeeter adds, “landlords who want to attract the best companies, need to think like residential landlords and offer amenity packages.” Bike lockers, showers, gyms, common eating spaces, standing desks, soft seating areas, and Wi-Fi lounges have proven especially popular with tech companies.

“Build it,” Skeeter says, “and they will come.”


CompStak Exchange is a free platform for CRE brokers, appraisers and researchers to exchange verified commercial lease comps anonymously. CompStak Enterprise offers unlimited fee-based access to comp information to CRE landlords, lenders and investors.

The Evolution of the “Comp”

Remember the “telephone game” when you were a kid?

You’d whisper, “I had ham and eggs for breakfast this morning,” to the person to the right and by the time it made its way around the circle the last person would say, “Santa has ham for legs and just installed new flooring.”

telephone

Well the same thing happens when real estate comps are traded.

In commercial real estate brokerage the lease comparable or “comp” is a summary snapshot of a transaction that includes all the relevant deal points such as the rental rate, square footage, length of term and concessions. Simply put, it is one of the most accurate real-time indicators of what tenants are willing to pay to lease space in a market at a specific point in time.

Comps are traded predominantly amongst brokers, landlords, lenders and appraisers, however there is no central repository for this information.  Each party or their respective company or firm maintains their own proprietary database where this comparable information is kept; and this comes with its own challenges.

With such a fragmented method of assembling, compiling and maintaining this data it’s impossible to warrant its accuracy.  For example, I’ve received comps for the same transaction but from different brokerages, and they have all had conflicting information – inconsistencies in the lease expiration date, tenant improvement package, rental schedule,etc.

Also, there are severe limitations to only being able to search your own firm’s database.  What if the data you need existed somewhere out there but your firm didn’t have it?  Well then you’d just have to hunt around until you found it, which can be very time consuming.

CompStak is a new, crowd-sourced model that allows CRE professionals to contribute lease comps and then earn points for what they’ve submitted.  They can then trade the points that they’ve earned for details on other comps that are more relevant and important to them.

This is huge for a few reasons.  First, having a centralized database that everyone contributes to encourages data integrity and market transparency.  Simply put, verified, accurate data benefits everyone involved.  Second, being able to magnify the scope of a search by accessing a much larger, more robust database makes me a better-informed broker and ultimately, allows me to provide better service to my clients.

CompStak is currently available in San Francisco and Manhattan, with plans to eventually go national.  Personally, the service has already proven its worth in at least two recent transactions and I look forward to their continued success.

Hopefully now when I  say, “three months free with $25 per square foot in TI’s,” it doesn’t get translated into, “tree trunks free with $25 in bacon flavored toothpaste”.

Related news: Commercial Real Estate Tech Company CompStak Makes Bay Area Inroads

What I Learned While at 42Floors

Yesterday, I wrapped up a one-month consulting position with San Francisco-based 42Floors.com. As a tenant rep advisor that’s passionate about commercial real estate and technology, I jumped at the opportunity to join the team and get a feel for what it’s like to work within a fast paced startup in the midst of SoMa’s exciting technology boom.

The 42Floors Crew
The 42Floors Crew

In a nutshell, 42Floors is a free search engine for office listings in San Francisco and  New York, wrapped up in a gorgeous user interface.  The model itself isn’t exactly groundbreaking, except for the fact that their current focus is not on monetization, but on creating the absolute best user experience possible.

Here’s how it works.  The user searches active office space listings and when they find something they like, they submit their contact information and the handoff is made to the listing broker, who then follows up with them to schedule a tour of the space.  Nothing revolutionary there.  Where 42Floors really sets itself apart, however, is with their Concierge; a human being that uses a telephone to actually call you.  How many companies actually do that anymore, and for free?  Their only task is to make sure you’re happy, answer questions about the market and commercial real estate, and ultimately, that you’re successful in finding your new office space online through their website.

Don’t get me wrong, there are plenty of other great features that elevate the user experience, like robust filtering options, photo-intensive listings and rental estimates for properties that don’t publish their asking rents, but the Concierge addresses a gaping hole in the online listing arena: tenants not only need but deserve the advice of an expert that’s looking out for their interests.  This is something that gets lost when a tenant uses the internet to find an office space online and then cuts a direct deal with the landlord without being represented by an advisor.  With 42Floors Concierge, the tenant can receive guidance and assistance from a professional they can trust.

My big takeaway from my experience with helping 42Floors develop their concierge program, is that tenants will always need a human advocate, and 42Floors understands that.

Just like WebMD.com will never replace the role of the doctor, 42Floors.com will never replace the role of the tenant advisor – they exist to enhance and compliment the process, be it a trip to the hospital or signing a new office lease.

Help! My Landlord Wants to Double My Rent!

ScaredIf you’re an office tenant in San Francisco (or any other market where vacancy is plummeting), there’s no doubt you’ll probably face a substantial rent hike upon your upcoming lease expiration. Since 2010, rents in the City have risen 39% and in 2012 alone, 24%; representing the biggest gain of any market in the world.

Relocating your office can be expensive and disruptive to your business, so if your first choice is to stay and renew, here are a few strategies that can help mitigate the rental increase.  The days of passive negotiation are gone; you need to be proactive.

  1. Renew your lease as early as you can.  The sooner you renew, the lower your rate will be.  Unfortunately, your landlord is also aware of this and typically will not renew your lease if too much term is remaining.  They’d much rather have you come back to negotiate at a later date, when rents are higher.  Every ownership is motivated by different things, however, so it doesn’t hurt to begin the dialogue early. 
  2. Explore options outside of your building.  Even if you fully intend to stay, you need to get out in the market and see what else is available.  You cannot expect to have any negotiating leverage with your landlord if their property is your ONLY option.
  3. Explore options within your current landlord’s portfolio.  If you’re getting priced out of your current office space, perhaps there’s a less expensive option elsewhere in the building on a lower floor, or even within another building your landlord owns.
  4. Reduce your square footage.  One of the most effective ways to reduce your monthly operating expenses is to simply lease less space.  Identify inefficiencies within your current space and consider consolidation or reconfiguration.  Are there employees in private offices that could be just as effective in a workstation?  Could employees who are out of the office regularly share a common workspace? There also might be an opportunity to “give back” some space upon your renewal whereby the landlord carves out a section of your office and builds a demising wall, thus reducing your rentable square footage.
  5. Hire a commercial real estate advisor.  Your broker is the best source of market information, and when you’re well-represented, your landlord knows you have access to valuable market information and may potentially relocate if they don’t offer you a fair deal.  But your broker also knows something your landlord does: renewing existing tenants is cheaper for the landlord than signing leases with new ones. Should you leave the building, the landlord will temporarily lose rent while the space is unoccupied. Also, brokerage commissions and tenant improvement allowances are typically higher on new leases.  Your broker will quantify these costs, translate them into real numbers your landlord can understand and then make a business case as to why your renewal rate should be lower than their current asking rate.

Rental increases are a natural part of the cycle and being prepared and proactive is the best way to mitigate an inevitable rental hike.  Ultimately, you’ll need to weigh out the two options of either staying in your space and softening the blow, or relocating to a less expensive building or submarket.

See also: When is the Best Time to Renew an Office Lease?

Why I Exclusively Represent Office Tenants, and NOT Landlords

As a commercial real estate advisor who has built an entire career upon advocating on behalf of tenants, exclusively, the million dollar question I’m always asked is, “Why did you stop representing landlords when the money is so good doing both?”.

The easy answer is that I always felt like I was somehow representing the “bad guy” by representing landlords, and that I get much more satisfaction out of helping out the underdog, who is almost always the tenant.  Now, that’s not to say that all landlords are bad, but tenants are often the “Little Guy” at the negotiation table and need a strong ally in the ring with them.  While a commercial office tenant may only address their real estate needs once every 3 to 10 years, a landlord will conduct many, many more transactions in that same time and is tasked with maximizing shareholder/investor value – naturally, this typically runs counter to the economic goals of the tenant.

The second and longer answer, is that try and spin it as you might, there is an enormous amount of conflict when dual-agency exists – whereby the broker simultaneously represents both the landlord AND the tenant.  The only way to truly offer my clients the very best in service is to choose a side, and completely remove that bias altogether.

I think the best way to get my point across here is with a few examples:

Let’s say I’ve been hired by “ABC Tenant” to locate and negotiate terms for their new office relocation, however I also just happen to represent quite a few key landlords downtown.  Now consider this:  there is pressure from the landlord to tour the tenant through the buildings they own and to try and make a deal, even if it’s not the best fit for my client.  If the buildings I list don’t make the tour, I can forget about holding on to that listing for too long.

There’s also pressure from within the broker’s own firm, as the firm (and the broker) will earn a larger commission if the deal stays “in house”.  Again, the needs of the brokerage and broker are being placed above that of the clients’.  If the real estate broker is going to make more money if you lease space in a building that they list, rather than sign a deal at a competitor’s building, do you think that might affect the advice they give you?

Another valid scenario is explained in the following.  Let’s say I tour ABC Tenant through a building I do not currently list, but would like to win that landlord assignment in the future.  Well, I’ll probably do one transaction in the next 3-5 years with the tenant, but if I win the landlord assignment I could easily increase my volume twenty-fold.   How hard do you think I’m going to negotiate against that landlord and am I really going to go to bat for my tenant if I’m trying to create favor with the landlord?

There are plenty of hardworking, honest real estate brokers who offer dual representation and I am sure they outnumber the bad apples, however I firmly believe that the only way to truly offer conflict-free tenant representation is to completely remove any opportunity for bias from the equation; and the only way to do that is to simply NOT represent landlords, and focus solely on fighting hard for tenants.

How much office space should I REALLY lease?

Leasing too much (or too little) office space can be a costly mistake, however determining exactly how much space you require is one component of the leasing process that is often rushed or inaccurate.

Unfortunately, our industry is partially to blame for this.  Tenants often think they need more space than they actually do, and since a broker earns more when you lease more, they may be the last person to tell you that you could scale back.

Taking the time to identify the size, configuration and quantity of each element of your new office will not only save you time and money down the road, but chances are you’ll find that you require less space than you originally thought you did.

Old rules of thumb such as, “tech tenants require 150 square feet per employee, and law firms require 350” is an unreliable measure and nothing more than an insightful metric for spotting a gross irregularity; there are far too many variables involved in determining your space requirement to simplify it in this way.

A better and more accurate solution is to take an analytical approach by using a tried and true Excel spreadsheet.

First, calculate the quantity and size of all your desired offices, cubes, conference rooms and supporting spaces such as kitchens, server rooms, storage closets, reception area so as to arrive at your Net Square Footage.

Then factor the following into your spreadsheet as they’ll substantially affect your true space requirement.

  • Circulation Factor – this is simply “the space between” and takes into account all the interior space that hasn’t yet been accounted for such as hallways and walkways between cubes.
  • Load Factor – Buildings add a percentage on top of the actual square footage of your office to account for common areas such as lobbies, restrooms and hallways.  This is the difference between the Useable Square Footage (USF) and Rentable Square Footage (RSF). Properties can vary greatly in how efficient they are, and a good broker will not overlook this important factor.

Finally, this exercise will yield an accurate square footage of what you require today, but what about in the future?  Take time to consider factors that will affect your space requirement throughout the term of your lease such as hiring or consolidation, planned mergers and acquisitions and changing in funding schedules.