We talk quite a bit here at BMO about New York City’s burgeoning technology sector as it relates to real estate. But there are important reasons behind our madness – the tech industry is intersecting green building and sustainability in some important ways, and many of the deals we’ve been tracking here at BMO have occurred in historic, LEED-certified, or otherwise “green” properties across the Midtown and Midtown South submarkets. (Just last week, in fact, the LEED Gold-hopeful 51 Astor Place secured its first lease with 1stdibs, the web-based auctioneer.) For these reasons, we’ve prepared the following list of issues that are generally most critical for technology industry companies when considering new office premises within New York City. (You’ll note how green components specifically weave their way into items 3 through 5.)
Technology is changing rapidly, and so can the needs of tech firms. 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 a lease. 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 the landlord big enough to accommodate relocating the tenant into a more suitable space in another building if it grows rapidly? All of these are key questions to ask 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.
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 businesspeople. 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 the company has a stable history and steady cash flow, can help mitigate a landlord’s concerns. Note that many landlords, in this context, will insist on 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.
New York City’s technology industry has boomed in neighborhoods like the Flatiron District and the rest of Midtown South. While rents in these locations have increased over the past few years, there are still excellent opportunities for companies that need loft-like, creative space with easy access to transportation and amenities in other locations that will satisfy the craving of the tech industry’s young workforce to live, work, and play in the same general vicinity. Many of these 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.
4. 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, some tech tenants may face 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 or AlleyNYC 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 Manhattan office leases 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 has strong financials.
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.