Brokers scramble for tech tenants

Big commercial firms dominate in the sector, but the competition is fierce

Nov.November 01, 2012 07:00 AM

The robust growth of Internet companies in Manhattan has spurred a feeding frenzy of pitching, cold-calling and client poaching among brokers hoping to profit from one of the city’s few expanding industries.

Yet dependable figures on this difficult-to-define market remain elusive; the brokerage firms have not even come up with a consistent system for classifying which companies actually fall into the tech sphere. (See “Is the tech boom being overblown?”)

To put the technology sector in perspective, this month The Real Deal analyzed which brokers and firms represented the tech companies in nearly 70 leases, all of which were signed over the past two years. To come up with that sample, we relied on the Bloomberg administration’s so-called “Digital 100” list, a compendium of what the city calls the biggest consumer Internet companies, based on employees, hiring, valuation, funding and traffic. We supplemented that with significant leases signed by high-profile Internet firms that the city did not include. And we excluded computer hardware firms and supporting software companies that are not traditionally viewed as part of the tech sphere.

Jim Wenk, an executive vice president at Jones Lang LaSalle, said his firm began aggressively going after the tech sector about three years ago, when the overall market was cool.

“[Tech companies] were getting venture capital funding, they were hiring people and investing in technology, and hence they would need more space,” he said.

In addition, TRD found that, for the most part, it’s not the city’s senior commercial leasing brokers who’ve risen to the top of the tech-leasing game. In fact, there were only a few top-level executives among the more than 90 agents who brokered the tech leases that TRD analyzed. They included CBRE Group’s Kenneth Rapp and Stephen Siegel, and Newmark Grubb Knight Frank’s David Falk.

While the global services firms like CBRE and JLL dominated the list, there was a surprising level of diversity among the brokerages, and there was no shortage of agents at smaller firms representing some of the city’s top tech companies.

“[A broker] with extensive knowledge is more key than the brand of the real estate company,” said Michael Rouzenrouch, president of the six-person, Soho-based brokerage Miyad Realty, who’s represented the blog-hosting website Tumblr in the past.

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The churn

The high churn rate of leases in the tech industry creates a unique dynamic among brokers. Indeed, according to TRD’s analysis, lease lengths in the tech industry are on average about half as long as the 10 or 15 years that are standard in the rest of Manhattan’s office-leasing sector.

With such frequent turnover, there’s more opportunity for brokers to poach accounts; indeed, in some cases, leases are coming up for renewal every two or three years.

Sometimes the poaching (or attempts at poaching) can get especially ugly.

Ruth Colp-Haber, a partner with Midtown boutique brokerage Wharton Property Advisors, said a competing landlord broker attempted to wrest an Israeli tech firm from her.

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“The agent wanted to steal them away. I explained [to the client that he] had an inherent conflict of interest,” she said, pointing out that the agent could have ended up representing both the tenant and the landlord. She held onto the account. “It is more competitive than ever,” Colp-Haber noted, “and harder to get an exclusive.”

Adding intensity to the battle for tenants is the overall slowdown in the leasing market. That has been especially pronounced in the larger deals, a report from CBRE last month showed. So tech, while not the only game in town, is the one with the most potential.

“Everybody wants [their tech tenant] to be the next whale,” said Glenn Markman, an executive vice president at Cushman & Wakefield. He represented the vintage clothing and crafts website Etsy when it took space in Brooklyn. (Etsy has since moved to CBRE, according to a source.)

Still, the Etsy case is just one example of how the large firms dominate when it comes to representing the big tech firms.

CBRE did more tenant rep deals than any other firm in the 69 deals TRD analyzed. The firm brokered 12 deals totaling 448,329 square feet during the past two years. JLL ranked second, with 10 deals totaling 287,076 feet. The next four firms in order were Cushman, Newmark, Studley and CresaPartners New York. Those firms handled 48 out of the 69 deals.

According to the survey, some of the most active tech brokers (considering both square feet and number of deals) are CBRE’s Sacha Zarba, JLL’s Sean Black and Martin Horner, Cushman’s Frank Coco and Studley’s Greg Taubin.

Other smaller firms represented top tenants in top deals, too. For example, Byrnam Wood, a six-person shop based in Midtown, represented the online resource site, and Vicus Partners, a four-broker firm, represented tech education firm General Assembly in two recent deals.


A different world 

The shorter-term deals generate more activity over time — even as they represent a small slice of the broader Manhattan office-leasing market.

While brokers like the steady turnover they create, the short deals yield a much lower commission for those brokers because the fee is based in large part on the length of the lease.

The standard commission on a 10-year deal is about 32 percent of the first year’s rent. That’s about $250,000 on a 20,000-square-foot deal at $40 per foot.

That money gets split, with about 50 percent going to the brokerage and the rest divided among the team of tenant brokers on the deal.

But the commission is much lower on a short deal. For instance, on a two-year lease, the broker will get approximately a third of what’s earned on a standard deal. In the short lease, the tenant broker collects about 10 percent of the first year, or in the above example about $80,000.

There are some advantages for brokers who close shorter leases. Unlike a megadeal, which can involve a half-dozen people or more, a smaller deal is often managed by just one or two brokers, allowing them to keep more of the fee.

Still, for landlords, the shorter leases can be unsettling. That’s because many of them like to have tenants locked in for long periods of time.

Bonnie Shapiro, director of commercial leasing at Allied Partners, the landlord for location-based social networking site Foursquare and medical appointment booking site ZocDoc in Soho, said landlords “want to keep some diversification” in the tenant mix.

In addition, she said while the tech sector is stronger this time around than it was during the dot-com boom in the 1990s, there are still some concerns about whether firms in this sector can sustain the amount of office space they’re taking.

“The tech people seem to want a lot of space, and I don’t know if they really need that much,” she said.

Winning business

While brokers obviously compete fiercely to win clients in other large sectors like finance and apparel, today sources say they are most aggressively pushing to get tech firms as clients.

That is partly because other industries such as finance are retrenching rather than expanding.

“With so much action with the tech firms, now larger companies are trying to do deals [in Midtown South],” said Joseph McLaughlin, principal with Capstone Realty Advisors, who represented online wine retailer Lot18 and YouTube challenger Dailymotion.

But brokers also say there is a different culture among the tech firms that encourages this degree of aggressive courting. For one, the owners are younger, and so younger brokers — who are on the hunt for accounts and to prove themselves — feverishly network to get business or make cold calls and hope that they strike gold. The fast turnover of leases, meanwhile, creates more opportunities for brokers to pitch business.

Many brokers follow changes in management like hawks as well as funding news out of the venture capital world in order to find out which tech companies are newly flush with cash. That, of course, gives them an idea of which firms to target in their pitches. (New York metro venture capital funding fell over the past year by 20 percent to $1.8 billion, compared with the prior 12-month period. Still, funding is at higher levels than it’s been at since 2001, figures from PricewaterhouseCoopers showed.)

“In the downturn, I started tracking venture capital money investment and identifying firms in the rapid growth mode,” said Jack Petrie, president of the brokerage Office Leasing Center and former president of Cresa. In his role at Cresa, Petrie represented Amazon in 2009 in its 20,100-square-foot renewal and expansion at 1350 Sixth Avenue, data from the CoStar Group shows. Cresa also represented designer clothing site Gilt Groupe.

A new way of thinking

The smaller tech firms tend to crowd more people into open spaces, averaging as little as 100 square feet per person. The companies are also open to sharing space, not only with foosball tables and bean bags, but with other companies.

“The coworking space, the coworking concept five years ago that did not exist,” Petrie said. “Now shared environments are very common.”

In some instances, changes in funding and changes in corporate leadership lead to a shift in business.

Miyad’s Rouzenrouch represented Tumblr in its 10,000-square-foot lease at 35 East 21st Street in 2010. But when the company renewed in 2012, it turned to CBRE. Rouzenrouch speculated that new VC funders might have pushed Tumblr to switch to the larger firm.

Miyad isn’t the only firm that’s lost business in this cutthroat universe of tech leasing.

Newmark CEO Barry Gosin and broker John Lizzul represented video-gaming firm Take-Two Interactive Software in 2002 when the public company leased 48,000 square feet at 622 Broadway, starting at about $31 per foot, lease records filed with the U.S. Securities and Exchange Commission showed. But when the company renewed in 2012 — taking a total of 64,000 square feet — it was under new management, which had hired CBRE instead. Meanwhile, JLL won Foursquare from Studley.

Brokers will undoubtedly continue to fight for tech tenants, and those tenants will likely be a rotating cast of characters.

“Over the next 24 to 36 months, some of the companies will remain on track,” said Taubin of Studley. But he added that not all the tech firms will make it for the long haul. “I don’t think some will be here.”


Tech firms on the prowl

The Internet companies that are in the market for Manhattan space

Even as top tech firms like Google and Microsoft have inked deals in recent weeks, others are still scouring the market for space. The Seattle, Wash.–based computer and software giant Microsoft, which owns search engine Bing among other websites, has leased a small, 22,000-square-foot space at 641 Sixth Avenue, on the corner of 20th Street. But it’s reportedly still in discussions to either stay at its current location, 1290 Sixth Avenue (where it now has about 175,000 square feet), or move to as much as 400,000 square feet at 11 Times Square.

The company is being represented by Jones Lang LaSalle’s Lisa Kiell, who keeps a low profile, but is a veteran dealmaker.

Networking site Twitter, also represented by JLL, is also on the hunt for space. Others in the market, however, are smaller, lesser-known firms like online game developer Arkadium, represented by CBRE Group, and Internet device integrator Usablenet, represented by Newmark Grubb Knight Frank.

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Even as Silicon Alley has broadened its boundaries, tech brokers say some neighborhoods remain in demand for certain types of industries.

The cutting edge of Internet technology is seen to be centered on mobile applications, and those tenants are sticking to the Union Square and Flatiron District areas, said Ashkán Zandieh, an associate at ABS Partners Real Estate who focuses on tech leasing.

Others said the size of the company is a major factor in determining where it looks for space.

“Start-ups prefer to be south of 34th Street, then as they grow, they are looking for more services and amenities,” and will look at the larger floor plates and more sophisticated air-conditioning and other services that Midtown buildings offer, said John Lizzul, managing director at Newmark.

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