CREJ - Office Properties Quarterly - June 2016
A new breed of office tenant has emerged. This tenant views office space through a different lens. The lens is anticorporate, antistructure and, in a way, antilandlord. It’s been a love-hate relationship that at times has been rocky, to put it best. This new kid on the block is the technology industry, but the industry is starting to grow up, mature and play a little nicer with others. As with any new kid on the block, people aren’t always the most welcoming. Landlords started off despising tech companies and tech companies despising landlords. They were everything landlords were not looking for in a tenant. “There is plenty of uncertainty with startups, which can make it difficult for both sides to feel comfortable,” said Dan DeGolier, founder of Ascent CFO, a local fractional CFO firm. Many of the disagreements stemmed from traditional lease requirements. For example, financials. How can a tech company provide a landlord with two to three years of strong financials when they were two guys with an idea 12 months ago? And lease terms – a five-year lease? People in the industry joke that tech years are the equivalent to dog years; a full lifecycle of a startup can happen by the time normal businesses hit puberty. Full-floor or entire building leases?! Have you seen the Guinness Book of Records challenge of how many people can you fit in a Volkswagen Beetle? The record was set at 17 people (rules require all participants to be above the height of 5 feet, no cheating). The tech industry views office space as a VW bug. Instead of 250-plus square feet per person, try more like 90 sf per person. These companies can fit an entire office in a room originally designed for a single law firm partner. And what about expensive amenities like building conference rooms and marble lobbies? Hell no. Rip it out. They need lounge areas and bike storage. “I think I’ve spent more tenant improvement money tearing out private offices than adding additional finishes,” said Jim Franklin, former SendGrid CEO and board member to several Colorado-based tech companies. This antiview of traditional leasing practices has given landlords heartburn and the same can be said for tech tenants. Clients voice frustration trying to lease when landlords didn’t understand the company’s needs. “From the landlords perspective, it seems like the company is way out of their league,” said Matt Talbot, CEO of GoSpotCheck. “For the company, it seems like the landlord doesn’t ‘get it’ and must be insane for not feeling 100 percent confident that your little, unproven startup will be a market leader doing tens of millions in revenue in no time.” Going back to the new kid on the block analogy, both sides are finally starting to grow on each other. They’ve played the game of puffery and held strong that they didn’t have any desire to get to know the other. But overtime, after a few games of stick baseball and a few scabs from touch football, they realize the other one isn’t so bad. “Landlords are indeed still in the midst of an evolution when it comes to understanding and satisfying the needs of tech companies,” said Austin Kane, vice president at Unico Properties. Landlords are beginning to see the value in what a growing tech company can do for their occupancy numbers. “For us, it has gotten easier and easier as we have proven out our model and shown a strong track record of top-line growth,” said Talbot. In downtown Denver, 1801 California is an example of a building that is courting tech tenants. The most recent tech tenants, SendGrid, started in 2009 with three founders and no office space. Fast-forward 6½ years, they have raised $48 million in funding and leased enough office space to accommodate more than 450 employees. With the help of tenants like SendGrid, 1801 will have leased over 1 million sf of space. So what is next for the tech tenant and landlord relationship? How will landlords adjust to better understand and accommodate this not-so-new kid that seems to be here for the long haul? Some say co-working might help tenants and landlords bridge the gap in their relationship. Buildings such as The Lab and Triangle Building have used the co-working company WeWork to take advantage of the tech industry without directly having to deal with the growing pains. In this model, the building landlord gets his long-term lease and full-floor tenant, while the tech tenants get into the cool, hip building, can jam an entire company in a law partner-sized office, take a short-term lease and have all the kombucha they can drink. Other services like PivotDesk.com can help bridge the gap finding flexible, shared office space for these growing companies. “Real estate has been a key strategic issues for tech startups these last few years because of the scarcity of talent,” said Franklin. “Having the right type of office in the right location has become a ‘pay to play’ factor in hiring and retaining the right talent.” It’s now the responsibility of the landlord to make the changes and be open minded enough to prepare for the next SendGrid that comes knocking on his door.