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?

Office Towers Made From … Wood?

I’m not going to lie; when I first heard about CREE Buildings and their efforts to erect skyscrapers made from wood, I was more than just a little skeptical. I couldn’t help but recall the story of the Three Little Pigs and the image of the wolf…huffing, puffing, and blowing down the house.

But, seeing is believing.  In November, 2012, CREE Buildings opened its doors to LCT ONE in Dornbirn, Austria – the world’s first 8-story timber hybrid building.  The office tower was built using glulam wood beams as the primary building material and combined with a limited amount of concrete, using a process called the LifeCycle Tower system.  (It took only 8 days to erect 8 stories – check out the time-lapse video below.)


Put simply, they’re scaling the already familiar pre-fab, modular construction model and applying it to industrial office construction to buildings as high as 30 stories.  The benefits of prefabricated construction are many – shorter construction times, reduced construction waste and fewer resources used throughout manufacturing, to name a few.

I caught up with CREE’s CEO, Michael Zangeri, at GreenBuild in San Francisco recently, where he converted me from skeptic to evangelist.

Cree LifeCycle Tower systems deliver tall commercial green buildings, up to 30 stories with 90% fewer C02 emissions, reduced costs, and 50% shorter construction time.

One of my first concerns was related to my perception of wood being more dangerous in a fire than steel.  Well, apparently wood is safer in a fire than its unpredictable counterpart, which can collapse instantly and without warning in high temperatures.  Wood on the other hand has a predictable burning rate.

From a sustainability perspective, wood is just about as an abundant and renewable raw material you can find.  Unfortunately, the same cannot be said of steel and many other building materials.

And what does a skyscraper made from wood look like?  Absolutely nothing like you’d expect.  Aesthetically, they’re gorgeous.  Check out the pics below and see for yourself.

Rose Begonia
rose@technicacommunications.com
(UK) +44 741-474-5238

The Death of the Cubicle, and Other Workplace Trends

Twitter’s San Francisco HQ, designed by Interior Architects

As tenants transition from hard-lined telephones to VOIP, abandon private offices for open areas and clamor for “brick and timber” creative spaces versus “view space”, demand for less traditional office space is on the rise.

Sure, it didn’t take a futurist to figure out that fax machines would soon be nothing more than an ancient office relic, but the cubicle?  Along with the coffee maker and printing room, cubes are the last bastion of the traditional office, and according to workplace strategist Mary Lee Duff of Interior Architects, who recently completed the design of Twitter’s new San Francisco headquarters, demand for them is waning.

The traditional concept of the high panel Dilbert cubicle has definitely been diminishing.  The drive today is for workplace settings to be more open and collaborative with a strong emphasis on flexibility.  For some clients that means going into benching systems, for others it is simply lowering the panel walls and being able to offer greater control over how to reconfigure one’s own space.

Configurability of the office space is paramount to tenants’ desires; something cubicles do not intrinsically lend themselves to.  Tenants are increasingly demanding fluidity and flexibility in almost a minimalist fashion.  Big clunky cubes that cannot be reconfigured or moved without contracting a furniture installer are more frequently being replaced with workbenches (sometimes on wheels) and demountable partitions so as to encourage collaboration.  Ms. Duff continues:

With the rise of open collaborative planning there is a need to evaluate the right balance of both focused, contemplative spaces alongside the energetic buzz of open teaming areas.  This is one of many challenges faced by design firms today in planning appropriate space that aligns workspace with the business, culture, and aspirations of each client.

But foregoing cubicles for more flexible furniture options do not come without their challenges.  Furniture on wheels can easily accommodate a quick reconfiguration due to a change in headcount or department consolidation, but where is the power and data going to come from?  Interior Architects overcame this hurdle during a recent assignment by utilizing a raised floor that could accommodate multiple power and data plan configurations in a myriad of locations.

Twitter Headquarters
San Francisco

External influences to workplace design such as globalization, increased demand for sustainability and a changing demographic are also altering the face of the modern office.  With employees regularly engaging customers and colleagues around the globe in different timezones, video conferencing and work/life slicing is gaining popularity.

Age, gender and ethnic diversity is also affecting the way offices are being built out and configured.  I know of at least one tenant that has a prayer room for their muslim employees, and a “wellness” or “mothers’ room” for new mothers is fast becoming the norm in newly-built offices.

Several other trends that appear to have sticking power are the “work anywhere” mentality, increased importance of having face-to-face meeting areas, highly configurable or “hackable” walls and partitions, small and agile workgroups, and increased transparency whereby an employee can do a 360° spin in their chair and literally see the entire office.

For further insight into workplace trends and to reach Ms. Duff:

Mary Lee Duff, Assoc. IIDA, LEED® AP | Principal
IA INTERIOR ARCHITECTS
m.duff@interiorarchitects.com