The Real Deal New York

NYC and Boston duke it out for tech

The Big Apple and Beantown step up efforts to become the next Silicon Valley
By Tom Acitelli | April 01, 2012 07:00AM

To many New Yorkers, Boston is a punch line, usually delivered during baseball season. But New England’s biggest city — along with Cambridge, its neighbor across the Charles River — is going head-to-head with the Big Apple to woo technology companies, not only fill office space, but also provide a boon to the local economy.

Indeed, all three cities are stepping up efforts to become the No. 2 tech magnet behind California’s Silicon Valley — if not No. 1.

When introducing the new leadership of the city’s soon-to-be-built tech and engineering school on Roosevelt Island in February, Mayor Michael Bloomberg drove the point home.

“It is our hope and expectation that these new companies will join the Tumblrs and Foursquares of our city,” he said at the time, “bolstering our reputation as a center of innovation and propelling us past Silicon Valley as the capital of digital technology.”

Some in real estate think the city’s already gotten near there.

“People used to have to go out to Silicon Valley to start a company, and I don’t think they feel that way anymore,” said Michael Mandel, a broker with Grubb & Ellis’s New York office who’s been following the city’s tech scene since late 2006. “There’s a lot of venture capital activity here.”

It helps that New York has plenty of tech-friendly office space — with properly hard-wired buildings along with open floor plans — and that mini tech hubs have sprouted in different parts of the city like Union Square, Soho and, now, Downtown Brooklyn.

Indeed, according to CBRE, the tech/media sector accounted for 13 percent of Manhattan leasing overall in 2011, up from 11 percent in 2005.

The actual amount of space tech firms have leased has also jumped in the last couple of years, according to data on office leases of at least 10,000 square feet from commercial firm Cassidy Turley. For example, in 2010, the media/information and computers/tech sectors leased about 3.84 million square feet of Manhattan space. In 2011, tech companies nearly doubled that, gobbling up about 6 million square feet.

But Doug Perlson, cofounder and president of RealDirect.com — an online residential brokerage and listings consultant funded by New York investors that recently took 2,000 square feet at 22 West 21st Street — noted that many tech companies are still in touch with Boston firms to raise capital.

“There’s a good chance that if you’re raising money in New York, you’re probably having conversations with Boston VCs,” he said. He added that, given the competition for talent between Boston-Cambridge and New York, office space can be a major tool in wooing employees.

“Recruiting is very competitive,” Perlson said. “If someone’s in a great spot and they have a great office, then that makes them all the more attractive.”

A critical mass

Not surprisingly, leasing office space in Boston and Cambridge can be cheaper than it is in New York, especially for the Class B space that tech companies, especially start-ups, have flocked to.

Boston’s Class B space averaged $25 to $35 per square foot at the end of 2011, and Cambridge averaged $35 to $40. Midtown South — home to Google’s New York headquarters at 111 Eighth Avenue and a slew of other tech firms — averaged $45.34 per square foot at the end of 2011, according to the CBRE Group.

And tech companies, of course, feed off their proximity to each other.

For instance, Twitter took more than 11,000 square feet from Facebook at 340 Madison Avenue as Facebook moved to a larger space at 335 Madison.

Mashable, a social media company that follows the tech industry, took 17,485 square feet at 304 Park Avenue South. Eight blocks away, test-prep software firm Knewton took 16,000 square feet and venture capital firm FirstMark, which has backed tech companies, took 10,600 at 100 Fifth Avenue, already home to Yelp, which signed for more than 9,000 square feet last summer and just recently went public. (Yelp may expand there soon, sources said.)

Both Knewton and FirstMark “wanted to be in the mix of Union Square, the whole Silicon Alley tenant mix,” said Grant Greenspan, a principal of the Kaufman Organization, which owns 100 Fifth.

The desirability of Midtown South pockets like Union Square and the Flatiron District among tech firms has helped drive the submarket’s vacancy rate to 8.8 percent, the second lowest in the nation behind only Honolulu’s 6.7 percent, according to Cassidy Turley.

Political forces

New York has almost double the number of tech companies and employees as Boston. The Big Apple has 230 tech firms, which employ 19,600 people, according to a survey released this winter of companies with at least 10 employees each by consultancy Cook Associates. Boston, by comparison, has 116 companies with 10,900 people. (Cambridge was not covered in the survey, which was released in January and looked at social networking, advertising, mobile media/commerce, e-commerce, video, analytics and marketing software firms.)

But the political forces in both locations have zeroed in on expanding their tech industries.

Boston Mayor Thomas Menino’s administration set up, in 2010, what it called the “Innovation District” on 1,000 acres of once-gritty South Boston waterfront. The area was dominated by rehabbed warehouses. Since the launch, more than 90 businesses have moved there.

Menino, who famously eschews e-mail, also endorsed the idea of hundreds of “micro apartments” that developers want to build in South Boston. The small units — which have been compared, not always favorably, to Manhattan apartments — would cater to techies and run no more than 400 square feet each.

In New York, the effort to entice tech companies is being spearheaded by Bloomberg, who founded what’s now a multibillion-dollar media company and who proudly unveiled the city’s new Twitter handle and Facebook page in February.

The city most recently flexed its tech muscle in December, when it announced that Cornell University, along with Technion-Israel Institute of Technology, was selected to create a 2 million-square-foot applied sciences and engineering campus on Roosevelt Island. The city is making a $100 million capital contribution to the project. The first phase of the estimated $2 billion campus is slated to be completed in 2017.

Shortly before that announcement, Bloomberg also announced that Facebook would open its engineering office — its de facto East Coast headquarters — in New York. That came as a blow to Boston and especially Cambridge, where speculation had raged that the headquarters would be located there, after Facebook cofounder Mark Zuckerberg visited Harvard, his Cambridge-based alma mater, in November.

On a smaller scale, last month, city council speaker Christine Quinn announced $100,000 in funding for a study of the Brooklyn Technology Triangle, which touches Dumbo, the Navy Yard and Downtown Brooklyn. A main goal of the study is to find ways to attract more companies to the triangle, which already has as many as 100 tech firms.

Foes with benefits

Massachusetts techies readily acknowledge that the Roosevelt Island campus will have a significant impact on the dynamics of the technology sector.

But rather than being concerned, they seem to think it could help the Boston-Cambridge market. With New York only a short plane or train ride away, any boost that it sees will also be felt a few hours north, said Travis McCready, executive director of the Kendall Square Association, a nonprofit business booster for Cambridge’s main tech hub.

The proximity allows for more regional collaboration. Plus, the Boston-Cambridge market already has a critical mass of tech companies and venture capitalists, which keeps the tech industry strong, he said. McCready noted that the tri-state area and Massachusetts are actually geographically smaller than the California tech market, which stretches from San Diego to Silicon Valley.

If McCready’s theory is right, the current tech war may be a rising tide that ends up lifting both locations. And many larger brand-name tech firms already have offices in both.

Amazon, for instance, has a roughly 60,000-square-foot office at 1350 Sixth Avenue, and plans to open its first Massachusetts outpost in Cambridge’s Kendall Square this spring. And, of course, Google bought the 2.9 million-square-foot 111 Eighth Avenue in late 2010 for nearly $1.8 billion for its East Coast headquarters. The search engine has increased its employee head count in Kendall Square from around 40 five years ago to around 800 today. But Boston and Cambridge were recently battling to be Google’s New England hub — Cambridge won.

In the end, though, given New York’s size and the aggressive government push here, Boston-Cambridge may have to content itself with drawing 25,000-square-foot satellite offices while Manhattan claims mega headquarters.

“I would say now that New York is No. 2 [in the U.S.],” said Grubb & Ellis’s Mandel. “New York was a threat to Boston [a few years ago], and now I think New York has overtaken Boston.”