The Real Deal New York

NYC vs. silicon valley

Google’s Chelsea Market deal might be just the tip of the iceberg when it comes to tech tenants growing their footprints in the city
By Erin Hudson | April 01, 2018 01:00PM

In the grind of New York real estate, it can be a struggle to recognize what’s right in front of you. But the reality of technology companies moving in the city is undeniable — and Google’s $2.4 billion acquisition of Chelsea Market isn’t the only sign of growing demand for space. In 2017, tech firms signed leases for roughly 3.6 million square feet of space in Manhattan, accounting for almost 10 percent of leasing activity in the borough, according to Craig Caggiano, an executive director at Colliers International. The deals included two that were for more than 250,000 square feet; until last year, there had been only four “mega-deals” of that size in the past 15 years.

Kicking off in February 2017, Spotify inked a 15-year lease worth more than $370 million for about 378,000 square feet at Silverstein Properties’ 4 World Trade Center (the deal came with $11 million in rent subsidies from the state). Then, in September — alongside the opening of former mayor Michael Bloomberg’s pet project, Cornell Tech — Amazon signed a nearly $430 million lease for about 350,000 square feet at Brookfield’s 5 Manhattan West, locking itself in for 15 years.

Of course, major players have called the city home, in a sense, for years. Facebook has been working out of Vornado Realty Trust’s 770 Broadway since 2013. Google first bought into Chelsea at 111 Eighth Avenue in 2010 for $1.77 billion and in 2015 signed a lease to anchor RXR Realty and Youngwoo & Associates’ Pier 57, among other expansions. To get a better idea of what’s drawing tech companies to New York City and how landlords are luring these tenants to their properties, we spoke to three insiders who have been involved in some of these headline-grabbing deals.

Scott Rechler

Scott Rechler
CEO and chairman, RXR Realty

It never seemed realistic that New York’s so-called Silicon Alley could surpass Silicon Valley. Do you think that could change? I think so. Tech companies have matured their businesses from just creating new technologies and need to have industry expertise to convert those technologies into products that customers want to use. Because of the diversity of industries in New York — whether it’s finance or advertising — we have the expertise to take technology and make it applicable and usable.

What does that mean for you as a landlord when you have a tenant like Google? Tech merges itself with a lot of industries: Amazon is a retail company even though it’s a tech company, and Google is a marketing company as well as a search [engine]. But the common denominator is a war for talent. Our job is to create a product that helps them attract the best. You’re really not just creating space. You’re creating a sense of place —where people can come together to collaborate and innovate. So, not only do you need to have the physical space right, you have to have the right curation of activities and amenities that create a sense of energy and excitement.

What parts of the city are ripe for those kinds of projects? There are clearly pockets where you have amenities, restaurants and lifestyle that are clearly valuable. I think having locations near public transportation are critical, because many of the people in the workforce use public transportation. I think buildings that have character is something important because the type of client, the millennial generation, likes authenticity. There’s a sense of “What is classic New York?”

What do you think the next five years look like? We have seen the shift where media and tech companies have recognized New York as a place where they need to have a meaningful base, so I would expect the absorption of the new space that’s being built at Hudson Yards and downtown. What then happens is that these tech companies choose a building that they want to be in and replace other tenants that will backfill other buildings. For example, Facebook is taking more space on the West Side, and J. Crew is being pushed out, so now there’s talk of [the retailer] going down to the Financial Center. I think it creates a continued sustainable level of demand.

Jeremy Moss

Jeremy Moss
Director of Leasing, Silverstein Properties

What’s your takeaway on Google’s play for Chelsea Market? The key thing is growth. They’re committing themselves to that neighborhood. But they were forced to look outside the building and sacrifice their desire to keep everybody together. What we see in a lot of tech companies is a desire to keep all of their people together in order to reinforce their corporate culture and support the free-flowing exchange of ideas. The beauty of a new building, unlike an existing building, is you have lots of room for growth.

Was that key to the Spotify deal at 4 World Trade Center last year? Spotify was starting fresh, so they didn’t have to make that sacrifice [of trying to combine pre-existing properties]. They have all the growth space that they’ll ever need, and for them, that was probably one of the top three reasons that they selected the WTC to be their global headquarters.

How do you create the ubiquitous tech campus in a vertical tower like 4 WTC? Creating column-free buildings was one of Larry Silverstein’s original directives to the architects, because column-free floor plates allow companies to build out any kind of space that they can imagine. Real estate is a lot like fashion. Everyone’s tastes are very different, so we also need to be able to offer a variety of space, sizes and price points.

For the churn of a growing startup culture, are there gaps between small and large companies in the office market? There’s a lot of pre-built space out there that can meet that demand. The key is landlords have to continue to listen to the needs of their customer, particularly tech companies. Landlords need to be a little more flexible in terms of the lease term and granting a company the ability to get out of a lease early if they want to expand in the building or within the portfolio.

Do you see tech companies becoming more interested in Brooklyn? Brooklyn is a double-edged sword; it may put you closer to where some of those employees are coming from, but then you’re putting all your chips in the Brooklyn basket. You’ve made it more difficult for perhaps some of the talent that you’re trying to attract from Chelsea, the West Village or from Jersey, and some areas of Brooklyn are challenged in terms of transportation access.

Alexander Chudnoff

Alexander Chudnoff
Vice Chairman, JLL

In 2017, you represented Spotify and Uber in deals for long-term leases. What’s your experience representing tech clients? Uber has been a client for going on almost 10 years, and we’ve done a multitude of transactions for them. Way before Uber, in the dot-com era — which is a whole other lifetime — we had done close to 3 million square feet of transactions on behalf of companies like iVillage, LivePerson, Bolt and Woman.com.

What did you learn from working in real estate during the dot-com bubble? We learned a lot about what to do and what not to do. A vast majority of technology tenants wanted to have loft-like buildings —creative feelings, high ceilings, etc. The lesson learned over time was that, though there was hesitancy towards new construction, there were tremendous advantages. You can take an older asset and you can put lipstick on it, but you’re going to still have a lot of headaches and a lot of capital that needs to be spent on older product. The lesson learned is the “cool” component of being in a certain type of asset is outweighed by having much better product; it’s better for the business.

What differentiates tech tenants from tenants in other sectors? The number one thing is speed. They move at a very different pace than the rest of our tenancy. When you represent them, the expectation is you move very quickly, but they want exactly the same results as if you put years into the project. From start to finish, deals like Spotify — which in years past might take a year or two — happen in a very short time. It is a very hands-on, 24-hours-a-day, seven-days-a-week mentality.

Having represented multiple tech companies, do you think brokers and their firms are ready for what’s coming as more tech companies look for office space? Anybody and everybody is capable. Once you’ve succeeded with one or two, it gives you a little bit of a head start, but it does not mean anybody is really the tech king. I think the industry as a whole is catching up. Each firm is getting smarter at how they provide for this type of tenancy. A perfect example is that each and every tenant wants to have the ability to play with floor plans on their iPad or iPhone. They like to get their feet wet and touch and be a part of everything. So, all these businesses, including JLL, are either building or buying companies to help deliver that to their client base, specifically in the technology sector.