N
ew York City’s real estate market — or markets, if you consider Midtown and Downtown to be distinctive situations — is hot, any way you cut it. Too hot, for some, such as publisher John Wiley and Chase Manhattan Bank, which are moving across the Hudson River to new space in Hoboken and Jersey City, N.J., respectively. Class A rents are sailing over the $50 per sq. ft. mark in Midtown, trailing only San Francisco, where the same rate is hurtling toward $70 per sq. ft.
But the Big Apple apparently is just the right temperature for New Media and other high-tech tenants that find Manhattan’s 24/7 groove a good fit. Cushman & Wakefield (www.cushwake.com) recently produced a market research report called Hypergrowth 2000, which analyzes the substantial growth and space concerns of high-tech companies in the context of national commercial real estate trends.
The research reveals that:
- New York is the headquarters location for 18 of the top 100 Internet firms, more than any other city worldwide, and it is leading the way in the Media and I-building (Internet-wired) sectors.
- As of July 2000, when the report was released, 5 million sq. ft. (464,500 sq. m.) of office space had been leased by high-tech and telecom firms in Manhattan year-to-date.
- High-tech firms accounted for 32 percent of office leasing through May 2000, much less than in other MSAs (metropolitan statistical areas), such as Northern Virginia and San Francisco, where 55 percent to 65 percent of leasing is done by “New Economy” tenants.
- High-tech tenants need more space; 15 transactions in New York were for 80,000 sq. ft. (7,400 sq. m.) or more of space.
- And dot.coms are paying a premium to landlords, who increasingly view them as risky tenants.
Cushman & Wakefield’s research identifies several Hypergrowth needs, or requirements of the fast-growing, high-tech crowd. They include the ability to expand rapidly at an existing location to avoid relocation costs, flexible lease terms and options on additional space, high-speed Internet access and adequate power supplies at affordable rates, available labor and nontraditional space in hip Manhattan neighborhoods.
New Economy tenants face a host of challenges, too, the report maintains, such as the lowest vacancy rates in history; landlords having the upper hand in negotiating lease terms, future space options and sublease provisions; lack of a credit history and a negative market perception by many traditional landlords about the youth and perceived lack of experience in the management of many start-ups; and landlord-imposed limits of, say, 20 percent high-tech tenancy to cushion their asset against volatility.
How the Dot-Coms Do It
Three categories of solutions are put forth in the research — solutions that would likely apply to high-tech tenants seeking space in most other urban markets as well. The first is conversion of industrial and loft space for office and telecom use (see “Wire Your World,” Site Selection, September 2000). Millions of square feet of such space have been renovated and repositioned during the last decade. So-called emerging districts (West Chelsea and Hudson Square in New York City), or marginal neighborhoods, have a good supply of space that can accommodate high-tech tenants. And the large floorplates of older loft buildings offer expansion plenty of opportunities.
A second solution highlighted in the Hypergrowth 2000 report is finding hidden space. Large landlords, for instance, are shifting existing tenants elsewhere in their portfolio to make large blocks of space available to new users. Residential development sites are being rezoned for commercial use, and retail spaces in sub-prime shopping areas can be converted to office space. (This latter strategy is backfiring in some communities, such as San Mateo, Calif., where town center leaders are resisting the conversion of storefront property to office use.)
Some high-tech firms are becoming landlords themselves, the report points out. They lease more space than they need, and if their stock doesn’t appreciate as they thought it would, then they can sublease unneeded expansion space.
A third solution lies in the use of innovative negotiating tactics that create long-term flexibility on options, term and sublease provisions. Options to expand and renew within the same building should be part of any negotiation process, and early termination options can alleviate some pressure should a merger or acquisition occur. Additionally, adequate sublease provisions can eliminate extra carrying costs involved with expansions and relocations.
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