We talk a lot here at AEC Labs about construction tech startups, of course, so we thought this article about commercial leasing pitfalls and possibilities (based on one I wrote for a prior blog several years ago, and now updated here) would be of interest to those of you whose startup has outgrown your garage or co-working space, and you’re ready to take the plunge into looking for office space of your own.
Leasing commercial office space is tricky. It’s different from heading into an apartment office and leaving an hour later with your keys. It’s particularly challenging for high-growth, fledgling tech startups that may not have the balance sheet and track record that an established tenant can offer a landlord.
With that in mind, here is a list of 5 key issues for startups to think about as they begin their search for a new home. While some of these issues are specific to commercial office leasing in Manhattan, tenants in any high-demand urban location – from Seattle and San Francisco to smaller markets between there and NYC – should find it of import, too.
1. Maintain your flexibility.
Technology is changing rapidly, and so can the needs of tech firms or any startup, for that matter. What works today might not work next week, so the ability to expand and/or reorganize office space is paramount when a company is negotiating the terms of an office lease.
Critical questions to ask are how much additional space is available in the building? Are there expansion rights that can be negotiated? What about restrictions on subletting if the company simply outgrows the space and is ready to move on? Is your landlord big enough to accommodate relocating you into a more suitable space in another building if you scale and grow more rapidly than you anticipated?
All of these are vitally important to understand when thinking about how a commercial office lease may – or may not – restrict a tech tenant’s ability to adapt to the changing requirements of its business.
2. Understand the kind of security you will need to provide the landlord.
The flipside for landlords is the inherent volatility of the tech sector; the early 2000s’ dot com bust is still a raw memory for many business folks. So it’s not uncommon for a landlord to demand somewhat onerous security requirements – letters of credit, for example, or significant lease payments up front. An excellent broker and vigorous representation during lease negotiations, coupled with strong financials demonstrating the that your company has a stable history and steady cash flow, can help mitigate a landlord’s concerns.
Note that many landlords, in this context, and at least in New York City, will insist on something called a “good guy” clause from a company’s principal. Essentially this type of clause is a limited form of personal guarantee, where the principal agrees that – in the event of a default allowing the landlord to terminate the lease – the principal will be personally responsible for paying the rent until the company vacates the premises.
This is where the rubber will meet the road. If you’re not sure whether you’re ready to move on from that co-working location, the financial requirements that will underpin an office lease may help make that decision much easier for you.
3. Don’t forget: location, location, location.
Rents in prime urban office locations frequently targeted by tech firms have increased over the past few years – from New York City’s Flatiron District and the rest of Midtown South’s Silicon Alley, to Seattle’s Pioneer Square and San Francisco’s SoMa. But for startups willing to poke around, there are always excellent opportunities for companies that need loft-like, creative space with easy access to transportation and amenities in other locations that will satisfy the cravings of the tech industry’s Millennial workforce who want to live, work, and play in the same general vicinity.
In Manhattan, for example, many Midtown South neighborhoods offer small (100,000 square feet or less) loft-like pre-war office buildings that are a far cry from the stuffy Midtown office towers that most technology companies have shunned. Even larger buildings below 34th Street have engaged in aggressive capital improvement programs that have not only improved their operational performance, but also included lobby, elevator, and common corridor upgrades that make them desirable places to come to work.
Bottom line: do some due diligence on what makes your employees tick and find an office location that will keep them energized and engaged.
4. Don’t get caught in the headlights when negotiating price and term.
Pricing, of course, is always the elephant in the corner of the room. With rents inexorably churning higher, particularly for well-maintained buildings in desirable neighborhoods all across the country, you might get sticker shock when trying to identify new office space. For smaller tenants (1000 square feet or less) this is why communal working arrangements like WeWork, AlleyNYC, and others make sense. The price is lower and generally all-inclusive in terms of utilities, internet access, and so forth.
But when a company is ready to spread its wings and take on its own space, it is imperative that it engages a tenant representative to help it secure the best deal. Asking rents are always negotiable, and so are concessions, including the term of the deal. While most office leases, particularly in Manhattan, will run between 3 and 5 years, some landlords are willing to be flexible, particularly for the right kind of tenant that may expand down the line and, of course, has strong financials.
5. Remember that millennials care about corporate social responsibility, including environmental impact.
This ties in with issue three above and why millennials in general want to work in dense, walkable, urban cores. Consider the shift from Microsoft’s 1990s-era suburban Redmond campus to Expedia and Amazon’s commitment to downtown Seattle and South Lake Union as a paradigmatic shift in how the Fortune 500 thinks about locating its corporate headquarters moving forward.
Indeed, the young age of the technology industry’s workforce – coupled with its general awareness of environmental issues – has placed LEED-certified and Energy Star-rated office space squarely on the radar screen for many technology companies. Although the cost premium associated with performing LEED for Commercial Interiors build outs themselves for their spaces may be beyond the reach of many young tech companies, locating in a building that boasts some type of third-party environmental certification certainly is not, particularly if it can help in attracting the type of talent that tech companies crave.
What do you think of our list? Did we miss anything?