The Real Deal New York

More sober in Silicon Alley

Tech companies are taking major spaces again, but the climate today is different

March 31, 2008
By David Jones

Years after the implosion of Silicon
Alley, as New York City’s tech scene was known in the 1990s, America Online and financial software firm SunGard Data Systems are taking major chunks of real estate in New York. The move — call it Tech Real Estate Investment 2.0 — has left some wondering if the local technology scene has learned its lessons from past indiscretions.

By the late 1990s, thousands of start-up firms had descended on Manhattan, with little more to show than wildly inflated stock prices. When the dot-com bubble burst in 2000, the wreckage was strewn around the city, with most of the impact felt in the downtown real estate market.

The memory of that implosion, along with the current credit crisis, has created a different environment in tech real estate today. Landlords are more wary about leasing to start-ups that have yet to prove themselves — though tech executives, by contrast, say their businesses are more seasoned now. Companies are signing leases based on real revenues and legitimate business models, and argue that they will not fall prey to the same exuberance that nearly destroyed the industry in the early part of the decade.

Silicon Alley was traditionally defined geographically as the area extending south and southeast of the Garment District that included the Flatiron area and Chelsea. Technology companies considered location — particularly access to mass transit, restaurants, nightlife and green space — a key to attracting the best employees. Today, however, due to high asking rents and conversion of office space into condominiums, it’s rare to find a start-up company that can find available space in the heart of the area. As a result, some firms are satisfying themselves with being on Silicon Alley’s fringe, in less edgy neighborhoods or in less cutting-edge spaces.

AOL comes to the Apple

After buying five advertising services companies in the past 12 months, AOL will officially relocate its Dulles, Va.-based headquarters this month to a prime 152,000-square-foot location at 770 Broadway (at Astor Place), where the Nielsen Company is currently headquartered.

“We’re focused on being an advertising-supported Web company,” said Anne Bentley, senior vice president at AOL. “When you’re focusing on advertising, it makes sense to be in the epicenter of the advertising universe in New York City.”

AOL will initially relocate 350 programmers and advertising executives for its new Platform A unit, and the company hopes to attract the best talent in the area with open architecture floor plans and so-called idea galleries that foster collaboration among its employees.

Staubach & Co., the lead broker on the deal, has remained silent since closing the agreement in September, but published reports show that AOL will pay $69 a square foot for the first five years of the 15-year lease.

SunGard, a Wayne, Pa.-based firm, is consolidating space it already has in Manhattan. The company signed an 11-year lease for a 120,000-square-foot space at 340 Madison Avenue, and the company will move into its new home in January 2009.

Officials at Broadway Partners, which acquired the building at 44th Street in 2006, said the lease represented a major coup as SunGard had been considering an alternate site near Penn Station, and that the Grand Central area is not the typical kind of space that technology companies desire.

“They’re trying to attract certain types of employees,” said Alan Rubenstein, director of asset management at Broadway Partners. “They’re used to being in more cutting-edge types of spaces.”

He said the firm decided to rent the space because of the price, and the location gave the company a high profile when potential investors visited the site. Asking rents at the building are about $78 per square foot. The company will be responsible for its own buildout.

Small stars

In contrast to the go-go atmosphere of the first Silicon Alley boom, today’s climate can be brutal for small companies without large amounts of cash and a demonstrated ability to deliver revenue.

“A new technology firm is going to have a tough time here in New York,” said Jeffrey Schwartz, senior managing director at Adams & Co.

He said he has leases out on a dot-com client with $14 million in the bank, but
negative retained earnings of $5 million.
He said the previous implosion of Silicon
Alley and the current credit crunch is
making landlords very particular about leasing to tenants without proven track
records.

“There was a big infiltration of product on the market that came straight from the dot-com era,” Schwartz recalled. “We saw a lot of brand-new chairs and brand-new furniture go back straight to the landlords.”

Still, smaller tech companies are eager to move to Silicon Alley, even to its fringes.

Michael Kaufman of the Kaufman Organization just closed a lease for Philadelphia-based Tel America Media to move into a 3,000-square-foot space at 499 Seventh Avenue. Tel America, which aggregates unsold advertising inventory and sells it to cable affiliate stations, was scheduled to move into its new offices March 1.

Kaufman said asking prices were about $47 a square foot.

Bond Art and Science signed a new lease for a 6,000-square-foot space at 38 West 21st Street in November after its previous location, 9 Desbrosses Street, was converted into condominiums. The company could have considered moving to the outer boroughs, but felt that Silicon Alley was a location that was close to its client base.

“Our product is our people,” said founder and senior partner Jeffrey Dachis, who was also the co-founder of the hot interactive marketing shop Razorfish in 1995. “Our product needs to be in a place where it can be deployed in a way that is beneficial to our clients.”

Bond is paying about $35 to $40 per square foot in rent, which is very favorable for the area. Dachis believes that small companies are often being charged well beyond the space they are actually using.

“The brokers and landlords are selling space for lease that is grossly marked up from the actual space you are renting,” he said.

Proclivity Systems, which forecasts online consumer purchasing behavior, relocated in January to a 4,500-square-foot space on the third floor of 134 Fifth Avenue. The company, originally founded in 2006, relocated from Midtown due to the need for additional space.

“There’s good mojo here,” said Sheldon Gilbert, founder and chief executive of Proclivity. “When we were down at Grand Central, it was a ghost town on the weekend.”

Azoogle.com, an online performance advertising firm, relocated to a 5,000-square-foot space at 512 Seventh Avenue after spending a year and a half at 55th Street and Park Avenue. The company was originally based in Toronto and opened its New York offices in 2005.

“New York City is appealing in general for a lot of companies,” said Mike Sprouse, chief marketing officer at Azoogle. “I know there are start-ups being hatched in the area, particularly in the online space.”

The new space is a sublease that had been occupied by Ivillage.com, the online women’s network; that company had been contracting its space requirements over time.

“From what I’m seeing, it’s a very good area for digital media firms,” said Ruth Colp- Haber, a broker at Wharton Properties. “Typically, they like to attract young people, so they want space that is peppy and has great transportation access.”

Cash upfront

The Garment District has been dominated by small manufacturers, but recent zoning changes have led many small firms to set up shop, mainly for the close proximity to Penn Station and the Port Authority Bus Terminal. Colp-Haber said that rents in the area have shot up more than 30 percent, averaging about $50 per square foot for a quality space.

One of her clients, Fog Creek Software, has operated for five years from 535 Eighth Avenue, where it has a 6,000-square-foot space. The firm has maxed out of its current quarters and is currently negotiating a 10,000-square-foot lease in a Class A building in the Financial District for about $55 per square foot.

“Some of the difficulty for smaller companies is not just the dollars per square foot but the heavy cash upfront,” said CEO Joel Spolsky.

He said in some cases, landlords are asking for $400,000 security deposits for a 10,000-square-foot space; for a new company, that outlay is prohibitive.

Vumber.com, a company that sells disposable phone services, moved out of the Woolworth building into the 20th Street offices of one of its investors when it couldn’t find any affordable space.

“One of the things we kind of miss is affordable incubator space,” said Jodd Readick, co-founder of Vumber.com. “The landlords want a long-term commitment with huge down payments and buildouts.”

Readick said the company would like to find something in the $30 to $50 range and is working with the Lawrence Group to find an affordable location.

Nutopia Workspace, a Manhattan company, is trying to fill the incubator niche by offering a shared workspace environment with the services that a lot of technology companies need.

John McGann, founder of Nutopia Workspace, said that he’s seeing a lot of foreign companies looking for space in Manhattan who may be in a better position to afford the rents. The company has about 25 businesses that share a 10,000-square-foot workspace at 81 Franklin Street in Tribeca.

The firms range from technology to media to fashion companies, but they all share the same inability to afford down payments and asking rents.

McGann worries that the same dot-
com implosion that happened in the earlier part of the decade could happen again, and that as the economic downturn forces companies to contract, a lot of these start-up technology companies could suffer the consequences.

“There are striking parallels,” he said. “People don’t want to believe it. A bubble is a bubble.”

However, most technology executives said that companies today are more sober and mature than their predecessors.

“There definitely are more robust, more revenue-driven companies that are successful,” said Proclivity’s Gilbert.

“You’re not seeing some kid who knows how to spell the word HTML and can
raise $10 million as soon as he sneezes,” he said.

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