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.

San Francisco’s Mid Market and the “Twitter Effect”

twitterSo who’s to thank for surging rents in San Francisco’s Mid Market corridor? The technology sector, naturally, whose epicenter has steadily been migrating from Silicon Valley to downtown San Francisco.  Operating the business to be closer to the tech talent pool is a trend that represents a shift in the thinking behind where a company decides to set up shop.

The Bay Area’s talented engineering and programming labor pool doesn’t live in suburbia – they live in San Francisco.  So to attract and retain this highly sought after demographic companies have been migrating to or launching in SoMa, Mid Market, Yerba Buena and the Financial District.  Now the City is in the throws of a commercial real estate boom that’s being fueled by technology tenants (who were single-handedly responsible for leasing over 1/2 of the 10.9 million square feet leased in 2012).

As SoMa quickly began filling up, developers and landlords set their sights on the short stretch of Market Street from 5th to Van Ness, and began to buy.  What kicked off “The Twitter Effect”, however, was Shorenstein’s purchase of 1355 Market and their following announcement of Twitter’s relocation to their new acquisition.  The eponymous technology company also took advantage of an attractive rental rate and the Board of Supervisors’ 6-year payroll tax exemption.  They now call 215,000 SF at Market Center their home and have invoked “The Twitter Effect” by attracting many other notable tenants to the area such as Square, Call Socket, Dolby, Pinterest, One King’s Lane and Yammer (who signed a 79,000 SF lease at $48.00 per foot – 60% higher than Twitter’s $30.00).

Other  San Francisco tech leases tightening the market include:

  • Salesforce.com – 440,000 SF at the upcoming 350 Mission St.
  • Square – 327,432 SF at 1455 Market St.
  • Meraki – 110,000 SF at 500 Terry Francois Blvd.
  • Yelp.com – 98,144 SF at 140 New Montgomery St.
  • Splunk – 92,000 SF at 250 Brannan

So what’s an existing San Francisco tenant to do when their occupancy costs could potentially double upon their lease renewal?

Read: “Help! My Landlord Wants to Double My Rent!”

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?

Smart Office Leasing Strategies are Inherently Green

A skillful commercial real estate advisor approaches each transaction with the goal of obtaining the best deal and terms possible for their client, while also identifying a space that will maximize employee comfort and productivity. The advisor also plays a key role in influencing how the new office is built out and constructed, as well as where the office is located.

Sustainable business practices just happen to exist within the intersection of all of these goals; and if they do not, they should.

There are many opportunities throughout a commercial lease transaction to save the client money, and many of them also have the added benefit of being more responsible decisions, environmentally. Here are few examples of leasing strategies that easily align to accomplish both smart business and environmental goals:

THE LOCATION OF THE OFFICE

Having an office located within a high-density area makes a lot of business sense; it makes a company more accessible to a wider and deeper labor and customer pool, and associated car parking costs can be reduced by simply being connected to multiple mass transit options. The positive environmental impact of removing single-passenger cars from the road are many, and employees who bike or walk to the office are not only happier and healthier, but more productive while at work.

Giving preference to LEED Certified buildings is a great start to any office search, as the ownership has already taken the necessary steps to reduce energy, waste and water consumption, and improve indoor air quality.

THE OFFICE BUILD-OUT

By identifying an office that most closely matches the client’s desired configuration, a better rental rate can be negotiated since the landlord’s cost of construction will be lower. However, scaling back the scope of the tenant improvements also helps to reduce added pressure on new resources as well as minimizing construction waste that would have otherwise been sent to a landfill.

Boosting employee health and comfort also increases productivity, and one of the most effective ways to do that is to increase access to natural daylight. This is most easily accomplished in an open office plan along a window line, however if private offices are necessary, then utilizing glass will allow sunlight to permeate the office. If the tenant is located on the top floor of the building, skylights are often inexpensive and effective. Increasing the availability of natural sunlight simultaneously reduces the need for overhead lighting – and reducing energy consumption leads to cost savings.

FURNISHING THE OFFICE

With the sheer surplus of used and refurbished office furniture available today, purchasing new is most often a waste of money. The leasing broker has relationships with many furniture vendors who can provide an office tenant with quality used furniture, usually 30-50% below the cost of purchasing new. But in addition to saving the client money, the broker has again helped reduce pressure on raw materials and helped divert used furniture from a landfill. Additionally, new furniture can also be extremely toxic and can leach harmful VOC’s (volatile organic compounds), formaldehyde and other toxic chemicals into the air. Used office furniture will have already off-gassed these fumes and will therefore not negatively affect the indoor air quality of the office.

There are of course many, many opportunities to align sound commercial leasing strategies with sustainable business practices, especially when the real estate process begins with mindful focus and awareness. Identifying the intersection of these goals is not only SMART, but GREEN.

The Basics of an Office Sublease

Office subleasing can be an effective exit strategy for tenants who need to dispose of their office prior to the expiration of their master lease.  They also create opportunities for companies looking to pay a below-market rental rate within an office that many times will come already furnished and wired.  They of course come with their own nuances and can sometimes be tricky, so understanding the general mechanics of how a sublease works can save you valuable time and money.

Review the Master Lease.
Before a tenant decides they would like to put their space on the market as a sublease, they must first review their Master Lease and determine what rights and restrictions they have in regards to subleasing.  Many times the Landlord will prohibit the Sublandlord from advertising a rental rate below what is currently being offered for direct space in the building, or will prohibit subleasing to existing tenants or even yet, tenants who have toured the building within a certain recent time period.  The issue of sublease profits is also adddressed in the Master Lease and how they are handled.  Typically, but not always, the Sublandlord must share sublease profits with the landlord 50/50 after deducting reasonable expenses, such as marketing costs and brokerage commissions.

The Sublease Agreement is always subordinate to the Master Lease.
What this means is that the deal that’s cut between the Sublandlord and the Subtenant is going to be subject to the terms and conditions outlined in the agreement between the Master Landlord and Sublandlord.  Nothing within the Master Lease is malleable, and the Subtenant must conduct a careful review of the Master Lease as that’s the exact deal they’ll be inheriting. The only areas a Subtenant will have room to negotiate is in the (a) rental rate, (b) length of term (c) tenant improvements and (d) furniture use/purchase.  Also, rights that have been granted to the Sublandlord that extend beyond the Lease Expiration Date do not automatically transfer to the Subtenant.  A common example would be the Sublandlord’s Option to Extend; the Subtenant will need to negotiate a new, direct lease with the Master Landlord should they wish to remain in the suite beyond that date.

The Master Landlord must grant their consent.  
Even if a deal is consummated between the Sublandlord and Subtenant, the transaction will not be fully binding until the Master Landlord has reviewed the prospective Subtenant’s financial documents and proposed use.  Furthermore, sometimes the Master Lease will include language allowing for the Master Landlord’s “Recapture” of the office in the event of a proposed Sublease.  This clause is often exercised when the Sublandlord is paying substantially below market, as it creates an opportunity for the landlord to “take the space back”, and profit from re-letting the space at a much higher rental rate.

Sublease Term vs. New Direct Lease.
The Subtenant may have the option to simply take the Sublease for the entire term, a shorter portion thereof, or other times can negotiate with the Landlord to sign a new, direct deal thereby dissolving the agreement between the Master Landlord and Sublandlord.  If there is considerable work to be done on the space, then extending the term with the Landlord will open up the possibility of having the Tenant Improvements financed by the landlord.  Also, if the Subtenant wishes to stay in the space for longer than what the Sublease can offer, signing a direct deal can be an effective solution and can even help lower the rental rate during the additional term, as the lower sublease rental rate can be blended into the higher, direct lease rate.

Pay attention to what happens at the end of the term.
This is by far the biggest “problem area”, and where many Subtenants get into trouble by overlooking or neglecting some pretty important issues.

  1. Restoration:  If the Master Landlord requires the Sublandlord to restore the suite to its original condition prior to surrendering the space, then this must be addressed within the Sublease Agreement or the Subtenant could be left with a hefty bill at the end of the term.
  2. Furniture:  The cost of disassembling and moving furniture can be expensive, therefore clearly outline within the Sublease Agreement who is responsible for taking care of it at the end of the term.  Make a careful distinction between the right to use furniture during the term or a transfer of ownership.
  3. Staying after the term:  Since Options to Extend do not transfer to a Subtenant, dialogue with the Master Landlord should happen as soon as they’re willing to talk to you if decide you’d like to stay.  Typically, the Landlord will be receptive to allowing the Subtenant to stay since that’s their most economically beneficial option, however depending on the direction the market is trending the new rental rate could be substantially above the subrental rate.

This is of course an extremely general overview of the basic mechanics of an office sublease.  The benefits to the Sublandlord and Subtenant can be many, but there are also plenty of opportunities to get into trouble if you don’t have a strong, experienced tenant broker negotiating on your behalf and navigating you around the pitfalls.