Tech firms face office leasing challenges

By Tom Acitelli | June 01, 2013 07:00AM

In March, the three-year-old information analysis company DataDog signed a lease for 6,500 square feet at 286 Fifth Avenue, just north of the Flatiron District.

The space — with a 4,500-square-foot floor plate, as well as exclusive access to a roof deck and to a 2,000-square-foot penthouse — was the sort of airy, open office space that tech firms crave.

“They ended up with top-floor space with light on four sides,” said DataDog’s broker, Daniel Schwartz of Winslow & Company. “Mission accomplished.”

But the search process wasn’t easy. DataDog had looked at as many as 15 spaces during its search for a new office, which began in earnest late last year. Negotiations fizzled at a few places in Soho and Union Square — prime Silicon Alley territory — when landlords got offers from more established businesses. And DataDog only snagged the 286 Fifth space after a lease with another tenant fell through, Schwartz said.

DataDog, though, isn’t the only tech firm to struggle finding office space in Manhattan. Smaller companies in particular, especially those still in their start-up phase, confront a market often unwilling to embrace them because of their short (or sometimes nonexistent) financial track records. Many also need shorter-than-average leases and options that allow for fast expansion, both of which New York City landlords are often hesitant to provide.

“Landlords aren’t always ready for these kinds of tenants in terms of their credit profiles and personalities,” said Christopher Havens, commercial property director at the real estate brokerage, adding that tech firms also are having a tough time landing space in downtown Brooklyn.

That’s somewhat ironic, of course, since the Bloomberg administration has made high-profile attempts to lure more tech firms to New York. In February, for example, the administration launched its “We Are Made in New York” campaign, a multi-platform push to attract tech talent, especially entrepreneurs looking to start new firms.

Due in part to these efforts, tech firms account for a growing share of the city’s commercial leasing. The tech sector made up 28 percent of Manhattan office leases in 2011, up from 18 percent in 2010, according to data from the brokerage Cassidy Turley. In 2012’s first quarter, tech firms for the first time leased more square feet than financial services firms, according to Cushman & Wakefield.

But despite their increasing presence, tech firms often struggle to find space in New York City, brokers said. Many small tech firms start out in shared situations, renting space alongside other firms. That’s how DataDog started out in 2010 in the Flatiron, before leasing at 1140 Broadway the following year.

Tech start-ups tend to have a more variable life span than other types of companies, brokers said. Many go out of business quickly. But when they become successful, they often grow incredibly quickly.

A high-profile example of this phenomenon is the social media giant Facebook. In 2009, the company moved from 5,350 square feet of subleased space at 551 Fifth Avenue to more than 11,000 square feet at 340 Madison Avenue — only to move a couple of years later to 333-335 Madison, where the company has an option to expand by more than 150,000 square feet.

Lack of flexibility was a problem for the database company 10gen in its search for a new home, according to the firm’s brokers, Studley’s Greg Taubin and Gabe Marans.

The company had been looking to move to Midtown South or stay in Soho, where it had been subleasing space at 578 Broadway, but had trouble finding a space that would allow the shorter-than-normal lease it needed, Taubin said. The search was especially difficult in Midtown South, where tech-sector leasing has helped drive the vacancy rate to about 6 percent, the lowest in the nation, brokers said.

After a 10-month search, 10gen finally signed a five-year lease for about 29,400 square feet at 229 West 43rd Street, the revamped former Midtown headquarters of the New York Times. The landlord, private-equity giant Blackstone Group, included a lease option that allowed 10gen to expand into the remaining 30,000 feet on its floor.

“Many of the other landlords we were negotiating with throughout the process could not give us what we needed in terms of the flexibility,” said Taubin, executive managing director at Studley.

To accommodate tech tenants, landlords sometimes treat their agreements like apartment leases, looking at the founders’ personal credit, for instance, in lieu of business credit, and agreeing to shorter-than-normal leases, sometimes fewer than three years. And to prepare for the fact that some start-ups just don’t make it, landlords will often add a standard “good-guy clause” to the lease, which enables a landlord to go after a tenant’s personal finances should the firm stop paying rent or refuse to vacate.

Havens said he has seen similar challenges in downtown Brooklyn. Havens, who late last year represented 32 Court Street in a 3,100-square-foot lease with the cloud-computing firm MiMedia, compared the current rise of the Brooklyn tech sector to its rise in Midtown South in the last decade.

In the face of these challenges, Havens said, many tech tenants in both Manhattan and Brooklyn are continuing to share space with each other. But eventually, he said, landlords will have to better accommodate smaller tech tenants as they aim to become the next Facebook.

“These tenants are going to replace the old-time tenants in downtown Brooklyn,” Havens said. “It’s just a matter of time.”