The Real Deal New York

NYC’s TAMI tenants grow up, move out

The hip firms that have dominated office leasing in Manhattan for the last five years are getting wiser and more creative when it comes to finding space

September 01, 2016
By Marynia Kruk

From left: Dennis Someck, Kathe Chase and Jamie Katcher

From left: Dennis Someck, Kathe Chase and Jamie Katcher

In 2014, the leasing activity of TAMI (technology, advertising, media and information) tenants surpassed for the first time Manhattan’s traditionally dominant category — that of finance, insurance and real estate firms — 31.4 percent to 28.8 percent. In commercial districts like  Midtown South, where start-ups initially flocked in search of value, overall average asking rents rose to $69 per square foot from $47 per square foot  — a 45 percent hike — between 2009 and 2016. While many start-ups are willing to stretch their budgets to capitalize on Midtown South’s cachet, others are now looking further afield. It’s not only about money: As companies mature, they may find that the charming industrial buildings that housed them during their early days don’t have the infrastructure and size to support their growing workforces. Pre-built, move-in-ready space is in demand, and there’s a lot available, as firms that warehoused space in the hopes of growing into it dial back their expectations. Some companies, like Mediamath, a digital ad buying firm, are decamping to the Financial District, convinced that their culture can still thrive in a traditional office building. “You’d be surprised what interior designers can do in glass-and-steel office buildings, like the Empire State Building, 4 World Trade Center or Brookfield Place,” said Eric Thomas of tenant brokerage Cresa New York. For more on the next wave of tech districts and the relationships between landlords and TAMI tenants, we turn to the experts.

Kathe Chase
Director of leasing, Industry City

Where do you see the office market headed in the next six months, and how will that play out in Sunset Park at Industry City?

I see some softening, but it’s not yet a tenant’s market, and the softening won’t apply to us. We’re offering a distinct value proposition — a campus in the middle of New York City with food, retail, outdoor space, pop-ups, tenant events and so much more for an already below-market rent.

What is Industry City doing to lure tech tenants?

What’s changed over the past several years is that the ultimate end-user — the workforce — is very much driving the leasing decisions. In 2014, 150,000 of the 291,000 total tech jobs in New York City were in non-tech companies. Non-tech companies have become tech companies. There aren’t enough techies to fill those jobs. Companies use their physical spaces as a recruiting tool. Because of our scale, 6 million square feet, we can offer things that other landlords can’t. We have a tenant lounge with shuffleboard, pool tables and a bar, as well as a private dining room. We also have a private gym, event spaces, acres of landscaped outdoor spaces, rooftop spaces and 15 restaurants. But connectivity is king in terms of attracting tech tenants, which, frankly, means almost all tenants. In 2015, Industry City became the first existing property in the outer boroughs to be Platinum-certified by WiredScore, the same as Google’s 111 Eighth Avenue.

Do you think Moynihan Station will turn into a tech hub if GE, which is now billing itself as a tech company, moves there?

New York City, as a whole, is a tech hub. There will never be a part of New York City that is the tech hub. NYC’s density and connectivity, in terms of mass transit, means that businesses and people are very, very close to one another. Google is in Chelsea; IBM is in Soho; Facebook is in Greenwich Village; Etsy is in Dumbo. Certain buildings will become micro-hubs — the ones with the best fiber connectivity [and] the best accessibility.

How do you size up the economic potential of start-ups that have little to no earnings history?

For most owners, newer tech companies give pause. But by virtue of our scale, the risk we take on start-ups is worthwhile. Part of our development strategy is geared toward supporting the continued growth of our many small business tenants. And our six million square feet allow us to do short-term deals in small spaces with optionality for larger spaces, so that companies can scale up responsibly, with low risk for both us and them.

Enrique Alonso
Executive vice president, SJP Properties

Are TAMI tenants looking for different amenities and locations than they once did?

Despite their preference for pre-war aesthetics, we have seen some of the larger tenants choose new construction. At our Eleven Times Square building in Midtown West [at 640 Eighth Avenue], we have Microsoft, eMarketer, Answers.com and Ullink headquartered. The larger the tenant, the more focused they will be on infrastructure economics and transportation because their employees will be more geographically and demographically diverse.

Manhattan will almost always be the preferred location for tenants that can afford it. Much of the new supply coming to Brooklyn does not appear to be priced at much of a discount from Manhattan. The larger tenants are less likely to relocate to Brooklyn given the influence that the CFO and purchasing agents have in their real estate decisions. It’s a somewhat different story for smaller players that have most of their employees already living in Brooklyn, or for those that are making a branding play by relocating to a hip neighborhood. Some of the more unique Brooklyn developments — Empire Stores comes to mind — will compete, but we don’t see this as a major threat to the Manhattan leasing market.

Are there any markets tech tenants are looking at outside of Brooklyn and Manhattan?

Given the ease of transportation, state incentives and lower rents, we like the New Jersey urban transit markets. In Hoboken, we signed a 60,000-square-foot lease with NICE Systems and another 60,000-square-foot lease with start-up Jet.com. In Newark, we signed a 337,000-square-foot net lease with Panasonic, which relocated its North American headquarters to a facility that we built. We think Jersey City presents another great opportunity given the extraordinary amount of residential product being built there, the efficient access to Manhattan and the unique work/live/play environment. At 95 Greene Street in Jersey City, we converted an old toothpaste factory to office space and are now planning a major redesign targeting the needs of the tech community.

Daniel Bodner
Vice president of leasing, Kushner Companies

What types of TAMI tenants are in the market right now? And how do factors like rent, space, location and amenities rank when it comes to those tenants’ leasing decisions?

The market is active with tenants of all sizes, and they’re being opportunistic — whether ahead of lease expirations or in search of expansion spaces. Talent retention and recruiting remain important factors — with a high percentage of the creative talent living in Brooklyn, companies continue to open their eyes to the borough. Companies want to be located in buildings and neighborhoods that offer a variety of amenities, including restaurants, fitness options and outdoor spaces. At Dumbo Heights we’ve worked closely with Jon Krieger at RKF to handpick just the right mix of retailers. We’ve also included a common roof deck, outdoor seating areas and first-class internet connectivity.

Brooklyn has made a big push for tech tenants. How do you see Manhattan competing with places like Dumbo or Downtown Brooklyn as they get more offices on line?

The market has evolved so much recently that I’m now noticing that people ask how Manhattan will compete with Brooklyn. Brooklyn is just scratching the surface in terms of its potential and ability to attract big-name companies to the borough. With rising costs of real estate, higher wages and a booming innovation-economy workforce, Brooklyn’s tech market will continue to grow.

Larry Silverstein has said that one of the reasons he stuck with Bjarke Ingels’ design for 2 WTC was because of its significant amount of outdoor space, which appeals to tech tenants. What other building trends do you see being dictated by the needs of the tech sector?

The demand for outdoor spaces isn’t specific to the tech tenant. With Dumbo Heights, we recognized this from the outset, and that’s why we’ve made public space such a focal point. Specifically, sidewalks widened through the city Street Seats program will provide both space for the neighborhood as well as a venue for our tenants to take the collaborative environment down to the street. To that end, we’ve also built out a shared rooftop. I think the market is finding a happy medium between closed offices and open floor plans, with the addition of breakout rooms, quiet rooms, phone booths, lounge areas, game rooms and other similar spaces.

Eric Thomas
Principal, Cresa New York

As a tenant’s broker, what do you make of the fact that leasing activity in Manhattan by tech, advertising, media and information tenants dropped 43 percent from the first quarter to the second quarter, according to Cushman & Wakefield?

There seems to be a slowdown in deal velocity for TAMI tenants across the board that I would attribute to a general cyclical flow in that sector. Venture- capital investors are waiting to see if there is a return on their investment. So there’s going to be a pause before they commit to additional space.

Where do see the office leasing market headed in the next six months?

In New York, I represent Twitter, Oracle and Akamai Technologies, and I have subleases on the market for all three of those tenants. We are achieving 85 percent or 100 percent recovery, including transaction costs, on all of our clients’ subleases, in locations like Park Avenue South, the Flatiron District or Silicon Alley. However, I expect that recovery for subleases will be less as more come on the market and that there will be increased concessions. On Park Avenue South, there are more subleases than there have ever been, and they are on the market for longer than they have ever been, with asking rents in the $55-$58 a foot range. If this trend continues, you’ll see significant softening in the Park Avenue South area from Union Square to 34th Street, Chelsea and Flatiron District. I’m getting multiple calls and emails a day from leasing agents asking “can we get tours” with your tenants — more than I’ve ever gotten in my 16 years in the business. Tenants can be Downtown, or near Penn Station, and pay around $50 a foot. In the past, this happened at Hudson Square, which had a huge run-up in rents, after which tenants started to look elsewhere.

If leasing demand from TAMI continues to weaken, which neighborhoods are the best-positioned to withstand a slowdown?

Every client I represent is looking Downtown. Look at Mediamath at 4 World Trade Center, Condé Nast at 1 World Trade Center. Rents are 15 percent to 20 percent cheaper Downtown versus Midtown South. Downtown is not inconvenient in terms of commute, and it is more convenient if you live in Jersey City, Hoboken, Brooklyn or Staten Island. But we still have pushback from the high-level executives living in Westchester and Connecticut, because for them, working Downtown adds 15 minutes to 20 minutes of commute time.

What types of TAMI tenants are looking for space right now, and what kind of space are they looking for?

The mature TAMI tenants are doing better — there’s weakness in the mid-market firms who have only done Series A and Series B rounds of fundraising. Facebook is in the market. Samsung is in the market. Spotify will be in the market. As tech companies mature, they graduate from the loft buildings because of their drawbacks and constraints: the inefficiency of the many columns, low floor loads, antiquated base building heat, air conditioning and power systems, weird shapes, no good lobby, not enough bathrooms, not enough water.

How do you see Manhattan competing with places like Dumbo or Downtown Brooklyn as they get more offices on line?

Downtown Brooklyn looks like it is priced correctly, but other parts of Brooklyn are overheated. A lot of landlords in Dumbo are going to have trouble filling these buildings, which are more expensive than Downtown Manhattan. Unless it’s a specific type of company with a specific type of employee, like Etsy, which was born and bred in Brooklyn, you are going to have a hard time convincing a tenant to consider a move to Brooklyn. The price structure can be comparable to many parts of Manhattan, but once you go Brooklyn, you remove part of your pool of potential employees and increase total commute time by 25 percent. If it’s 400 people, that’s a lot of minutes cumulatively.

How do landlords size up the economic potential of start-ups that have little to no earnings history?

A landlord like Empire State Realty Trust, the owner of the Empire State Building, isn’t going to take on an unknown entity. They will not lease to a tenant who does not have some type of track record. Other landlords are willing to take on that type of tenant. WeWork works for companies that need to either grow quickly or shrink quickly. I’ve sent them several clients recently.

Dennis Someck
Executive managing director and principal, Lee & Associates

With the recent dip in leasing activity for TAMI tenants, do you think it’s becoming a tenant’s market?

I wouldn’t call it a tenant’s market, but tenants have the luxury of time. They don’t need to be as concerned that if they see a space on Monday morning that it will be gone by Tuesday, or that the price will go higher. Tenants can scour the market and negotiate better rents than they could three months or four months ago. We’re seeing some TAMI tenants shut down. When they’re out of business, the space goes back to the landlord, who puts it on the market and is even willing to offer it for a few dollars less [per square foot]. That means tenants have more opportunities without having to go through full construction. A year and a half ago, we were seeing a lot of old, recycled spaces that weren’t TAMI spaces.

If leasing demand from TAMI continues to weaken, which neighborhoods and projects will be hardest hit?

Brooklyn might get hit as prices in Manhattan start to come down. Brooklyn companies attract Brooklyn employees, while Manhattan companies get employees from Brooklyn, Queens, New Jersey, Manhattan. In Manhattan, unlike in Brooklyn, there’s a lot of properties that can be recycled for TAMI tenants at a lesser cost: office buildings, light manufacturing buildings, showrooms, that haven’t been fully updated with lobbies, elevators.

Where do you see the best leasing opportunities right now for start-ups? How has that changed from a year ago?

One of the best options for start-ups is still the Financial District, although prices have gone up. The most favorable opportunities are in the West 30s, in old garment buildings. Start-ups resisted that area, but now you’re seeing a flurry of TAMI tenants going between 35th and 39th and Fifth Avenue and Ninth Avenue — the Penn Plaza neighborhood. Landlords used to get $30 a foot there, and now they can get $40 or $45 a foot.

What are more mature TAMI tenants looking for?

Whereas start-ups are looking less at quality of building than the cachet of the area, mature tenants are looking at other factors. Elevators, for example. Some NoMad buildings, showroom or accessories buildings, light manufacturing buildings, have two elevators that used to serve 12 people on a floor. Now a TAMI tenant comes in and puts 40 people to 60 people on a floor. At lunchtime, you see a line of employees out the building waiting to get into the space because those two old elevators can’t support that amount of traffic. Same thing with the bathrooms. An attended lobby, or a landlord who is willing to put in more bathrooms with more stalls. You can’t add more elevators, but you can make them electronically timed and faster.

Outside of Manhattan and Brooklyn, are there any other markets that tech tenants are looking at? Like Queens or the Bronx?

Long Island City has potential, because it has much better transportation than Brooklyn and bigger floor plates. Parts of Brooklyn only have one subway line going through them, while Long Island City has 7, N, Q, R, E, M, the Long Island Rail Road. You can go from Grand Central to the heart of LIC in 7 minutes. And they are building 22,000 apartments there. But services are lacking. The tech world isn’t going to run there just yet.

How do landlords mitigate the risk of renting to start-ups that have little to no earnings history?

Some ask for eight to 12 months of security. Others will not do a deal with a company unless it’s revenue-producing and profitable. Years ago, during the first wave [dotcom bubble], landlords took shares of stock in the companies. After most of them collapsed, you don’t see that as much. They just want a tenant that will pay the rent.

Jamie Katcher
Senior Director, Cushman & Wakefield

If leasing demand from TAMI continues to weaken, which neighborhoods and projects will be hardest hit?

We actually feel that reports of a TAMI slowdown have been exaggerated. TAMI tenants accounted for 33 percent of Manhattan leasing activity in the first half of the year, and over 53 percent of all Midtown South activity. On an aggregate level, the TAMI sector is on pace for nearly 6.8 million square feet, which would be the second most active leasing year since 2011.

New York City is currently in the midst of a commercial construction surge, with some 30 million square feet of space planned or under way. How much do you see being filled by the TAMI sector?

The types of TAMI tenants most likely to lease space in new developments are the more mature companies that already have a substantial New York City footprint and are looking to lease an additional 100,000 square feet, 200,000 square feet, even half a million square feet to keep up with their growth. Companies that have grown their NYC footprints over time and now cannot find the amount of space they need in the Midtown South market.

What types of TAMI tenants are out there in the market right now? How many — and which ones — are big enough to anchor a building?

We are currently tracking 7.4 million square feet of active requirements from 129 TAMI tenants. Of those tenants, 14 are looking for 100,000 square feet or more, making them large enough to anchor most NYC buildings. Technology and media companies are leading the way, accounting for 44 percent and 27 percent of all TAMI demand, respectively.

What are office landlords doing to lure those tenants?

It is becoming more and more common to see landlords offering bike rooms, signing retail leases to high-quality restaurants and maximizing outdoor space. These are all important, but for tech tenants specifically it is crucial that their space has the infrastructure necessary to do business. More landlords have begun to upgrade their internet and power capabilities. It’s not uncommon now to see landlords pre-building spaces to lure small and mid-sized tenants in hopes that they grow and stay within their building or portfolio. Covering the costs to build out a space is also extremely attractive.