Whether you’re a startup or an established company with hundreds of employees, finding the perfect office space can be a daunting task. To make matters worse, competition for space in many of the country’s tech hubs (Bay Area, New York City, Austin, Chicago, etc.) is incredibly high as companies of all sizes continue to see rapid growth.
Sadly, the process is never as simple as you’d like it to be, and today’s tough real estate market means you may run into a few more roadblocks than anticipated, whether it’s picking a location that allows you to scale quickly; figuring out how to meet a landlord’s tough credit requirements; determining exactly how much space you need to accommodate future growth; or making sure your new office has the right infrastructure in place to support your business.
Having worked with a number of tech firms over the past several years, including MongoDB, Enigma Technologies and littleBits, here are nine tips all tech firm leaders should consider before beginning your next search for space.
- Lease flexibility is key.
Aligning your office needs around your business is vital. Think about what your headcount is today and what it will be in one to three years (if you can project out that far). This information is critical as you negotiate the complexity of your lease. Armed with these figures, your real estate advisor can fight for crucial lease options such as expansion rights, rights of first offer, rights of first refusal or early termination rights to protect you and/or allow your company to scale up quickly without moving.
2. Consider sublease space.
Anticipating rapid growth? Not sure? Saddling a growing business with a five- or ten-year lease can be tough if growth is unpredictable and resources are limited. Therefore, looking at sublet opportunities before direct leases isn’t frowned upon, it’s recommended. Predicting your space needs two years from now—let alone ten years from now—can be extremely difficult, especially at the startup level. Subletting a space with a two- or three-year term will allow you to maintain options, minimize upfront fixed costs and direct your savings elsewhere, such as providing additional perks to your staff.
3. Consider leasing a little more space than you immediately require and sublet the excess for growth.
CEOs should understand that since many tech companies continue to rapidly expand, the competition for space is at an all-time high. If you’re planning for future growth, don’t be afraid to sign a lease for a little more space than you currently need, here’s why…
I recently completed a lease for a growing tech company that required a customized office space for its existing and future headcount. We leased more space than initially required and subleased the extra growth space for a 12- to 18-month term with liberal sublet rights for this initial sublet including no profit sharing. Within one week of being on the market, we received multiple offers from other companies (not just technology) seeking short-term, turnkey spaces. Shortly thereafter, a sublease was executed and the sublease income and flexibility created a win-win for the client.
4. Follow your talent.
Perhaps the most important thing to consider when choosing a location is your workforce.
A key driver to growth, especially for start-ups, is the ability to recruit and retain talented employees. This is especially true if you need to recruit a large number of qualified people quickly, such as engineers, programmers or developers.
As part of a thorough real estate process, a demographic analysis determining where your current and future employees live is critical. Never sign a lease for what you believe is the perfect space if your talent pool cannot easily commute to the location.
Everyone wants their office to have a cool-factor—something that speaks to your brand, is near like-companies, offers amenities to your employees and allows you to tap into your talent pool. However, you should be open to alternative locations, especially if you’re on a tight budget or haven’t established credit yet, something we’ll cover later.
Don’t subscribe to the belief that you have to be in the trendiest neighborhood, or the stuffy CBD. Many of the most world’s most successful brands became trendsetters by setting up shop in non-traditional locations. If you are established, realize that your workers may be willing to travel a little further to get to work (within reason!).
Choosing an office location is often a compromise between your wants/needs and what you can afford.
5. Credit is king.
People say, “cash is king,” but in office leasing, credit is king.
Landlords want tenants with good credit. Just like your personal credit score, your company’s credit is like a financial report card of sorts. If you are a startup with no established credit, landlords may ask for certain guarantees from you order to protect themselves, so be prepared to pay up or provide additional financials in order to secure a lease.
For example, depending on the length of a lease and the landlord’s out of pocket transaction costs, you may be required to pay a hefty security deposit in excess of 12 months’ rent to get in the door. Creditworthy tenants can negotiate more favorable concessions and expansion options along with burn-downs in the security deposit over time. As a tech startup or growing business, obtaining strong credit may be a challenge, but there are ways to prove your stature as a stable organization and lease the space you want.
6. Get connected:
Fiber optic speed can make or break a lease negotiation; therefore it is crucial to understand the building’s capabilities. How many Internet/phone providers is the building wired for? How fast are the connections? Are there backup generators? Where are the points of entry for your phone/internet? Look for a building with multiple risers and entry points to your space so you don’t get stuck having to pay to run cables down to the basement. If you aren’t sure, discuss this with your real estate advisor. Or, or you can utilize resources such as WiredScore to find out how your local buildings are rated for connectivity.
7. Understand your out-of-pocket costs.
Beware of hidden costs. A landlord’s ‘asking rent’ and what you pay each month are not the only costs to consider. Additional costs include your build-out; furniture, fixtures and equipment (known as FF&E); supplemental AC; IT; and more. Understand how your electric bill will be billed and who will be responsible for HVAC, especially if you are in a loft space or converted building or need to keep a large server room cool all day—costs can easily exceed your budget. A good real estate advisor will work closely with your CFO to make sure you avoid any surprises that may hurt you down the line.
8. Leverage your brand for lower rent and concessions.
Tech companies are some of the most sought after and desirable tenants in the country; this is your opportunity to leverage your value and what you bring to the building.
Real estate owners are always looking for ways to maintain the most attractive building. As a tech tenant, especially if you are an established brand (think Facebook, Twitter, Tesla, etc.), you may be adding the cool factor the landlord is trying to secure in order to attract other tenants to the building. If so, your goal is to be their loss leader. How? Certain landlords may cover the majority of the build out costs or provide a rent abatement period in order to get you to sign on the dotted line. Don’t be afraid to negotiate.
9. Hire a top real estate advisor familiar with your business.
Make sure you hire a real estate advisor with experience representing tech companies and strong connections with building owners and/or landlords. Make the real estate advisor part of your team…think of them as a trusted advisor that is an extension of the c-suite; this will result in the best possible economics, lease flexibility and branding for your company. Strongly consider hiring a tenant representative; their ability to negotiate from a no-conflict platform will result in the best outcome for you.
Greg Taubin is Executive Managing Director of Savills-Studley, a commercial New York real estate firm specializing in tenant representation. Greg has closed over 10 million square feet of leasing transactions over the course of his career, with clients ranging from law and financial services firms to technology start-ups. His areas of expertise in strategic commercial real estate planning include early lease restructurings and renewals, relocations and the acquisition and disposition of facilities.