Startups and technology have been huge buzzwords in business, no less so in commercial real estate. But, what is the real estate lifecycle of these young companies? What is the transition from a founder’s apartment or garage to half of Chelsea Market?
I sat down with Cresa Vice President, Jonathan Buksbaum to get his take of the NYC tech market, how he guides these companies, and what trends he sees on the horizon in the intertwined world of startups and commercial real estate.
How would you break down the different types of start-up tenants?
I would say there are three different buckets of tech companies: the 5-12 person company that is in a shared office, the 12-25 person company that just leased their first dedicated space, and the 25+ person company that is looking to expand out of their first office.
The first bucket is the most difficult to engage since they don’t yet have any office needs. However once they grow to around 10-12 people, the cost structure dictates that they should start looking for their own space. In addition to their bottom line, these companies want to develop their own culture, their own secret sauce for recruitment, and their own space. The young tech user will grow in that first office, quickly transforming into a more mature user, and shifting into the second bucket.
The third bucket — with 25+ employees— is moving out of their first offices. These companies are still in their early stage and growing, but now they’re taking down a significant amount of space (usually from 7,500-30,000 ft). These companies might not need to be in the “cool” loft and since they have gone through the process once before, are more sophisticated in how they approach the leasing process.
Admittedly, there is probably a fourth bucket that is lightyears ahead of the others mentioned. These are the brand name companies, like a Salesforce, a Google, or a Facebook. These companies are already established and go where they want. These companies are effectively the market makers.
How do you get in front of those earlier-stage companies?
You really have to build personal relationships and be present in the community. Once news breaks about a company’s initial finance round, it is probably already too late. Everyone in real estate flocks to them because they know they’re flush with capital and expanding rapidly. It becomes very difficult, almost a bottleneck, to differentiate yourself at that point.
But if you have a strategic and tight-knit relationship with the VC community, that can be extremely valuable. They are seeing things 6-12 months out ahead of anyone else. Regular attendance at industry events (networking, pitch nights, panel discussions) is a great way to get more engaged and develop these relationships.
Many VCs actually rely on brokers to educate their portfolio companies on real estate and how they can grow in the city. Responsible spending is critical for both VCs and their young portfolio companies. We are helping these companies bargain for real estate, which is important because it’s the number one expense on their balance sheets after employee compensation.
What are tech tenants typically looking for?
Tech is very unique in that small and large tech companies are relatively similar to work with. They need high connectivity, vast power capabilities, good wiring, etc.
With that said, I’ve been hearing a lot of younger companies asking about Good Guy Guarantees (GGGs). Founders need to understand what a GGG really means. It is both a blessing and a curse. GGGs tend to be very important to landlords in NYC, especially those that have been burned with booms and busts in tech. They are equally important to growing technology companies as they allow startups to defer onerous upfront security deposit costs.
Are you seeing specific movements in neighborhoods?
It depends on the vertical but with digital media, for example, they need to be recruiting and in hip neighborhoods. Media has historically been located in Midtown around Bryant Park and Avenue of the Americas. Recently companies like Time, Droga5, Group M and Vice are moving in mass to Lower Manhattan and Brooklyn. I see this as a trend that is going to continue.
Irrespective of what business vertical in tech, everyone wants to be close to both their clients and their competitors. With the way New York City is going and growing, there are new frontiers. If you want to be less corporate, Brooklyn isn’t your only option — with WeWork moving to Astoria signifying the arrival of Queens / Long Island City, as well as the Garment Center where you can still find value (with starting rents in the $40s/ft instead of $60+/square feet in Soho / Union Square / Flatiron). For a $20 per square foot delta it might make sense to be in a less “cool” neighborhood.