Taking Big Bytes

High-tech tenants seek flexible, collaborative office space.

High-Tech Tenants Seek Flexible, Collaborative Office Space

By Paul Rosta, Senior Editor

11 Times Sq., where Microsoft leases 200 KSF

11 Times Sq., where Microsoft leases 200 KSF

Just as the technology sector is an increasingly potent economic force, the industry’s companies are playing a leading role in shaping office markets around the country. During the first quarter, technology companies accounted for nearly 23 percent of all new office leases in the West and 11 percent nationwide, CBRE Group Inc. reported. High-tech tenants are closely associated with markets like Silicon Valley, Seattle, Boston, San Diego, Austin and New York City. Yet as cities of all sizes strive to create hubs, property managers and owners will be called upon to meet their needs with a combination of innovation and flexibility.

High-tech firms are looking to office space as more than a place to create new products. “There’s such a demand for strong technology workers that technology companies are using their buildings and their space to recruit talent,” said Rob Arron, senior director of marketing and leasing for Vulcan Real Estate. Last year, Vulcan sold the 1.8 million-square-foot campus it developed for Amazon in Seattle’s South Lake Union district to the online retailer for almost $1.2 billion.

When it comes to using office space, high-tech startups and midsize companies share some basic priorities with giants like Amazon, Facebook and Google. Whatever the size of the space, they favor large open areas with plenty of light in buildings that offer environmentally friendly features. “They need that to have a pleasant, sustainable, healthy environment,” Arron said. The youthful nature of the technology sector shapes basic considerations about how technology companies use their space.

“These tech companies have a heavily Millennial workforce, so they have a young, very sharp workforce (that) works not only a lot of hours but unusual hours,” said Arron. It is not uncommon for office hours at technology companies to start at 7 a.m. and end at midnight. Even though the company’s entire workforce is not on duty all the time, the management team should take the extended schedule into consideration when it comes to operations issues like maintenance, security and energy use, experts say.

For technology firms, flexibility is a byword, with implications on multiple fronts. Lease terms offer a basic example. Particularly in their earliest stages, high-tech companies prefer leases that run only a few years. Most of these emerging firms “are not interested in taking on a piece of space for the long term, because they don’t have a vision of the future beyond 18 months,” said Ed Wartels, a New York City-based vice president for Cresa.

They also want the ability either to expand or leave after a few years, and are ready to pay more in exchange. And because speed of execution is critical, many emerging companies are likewise willing to pay premium prices for space they can occupy without time-consuming alterations.

“To the extent that they can inhabit built space that works for them, that is of great value,” Wartels added. “Not having space when you need it is a danger to the business.”

Strategies for managing properties for technology tenants emerge from their distinctively collaborative atmosphere, too. In this culture of collegiality, collaboration means comfortably bringing together as many employees as possible. That often translates into a desire for plenty of column-free space. “The more columns you have in a given area, the fewer desks you can put into the area,” Wartels noted. “They’re also looking for overall efficiency of the layout. Space with fewer zigs and zags is going to be more efficient.” Ramping up the number of workers per square foot also has a practical impact. Restrooms, for example, may need to be expanded.

Keeping Cool 24/7
The employees are not the only consideration. Because uninterrupted operation is expected, property managers must see to it that equipment never overheats. “Air conditioning needs to be 24/7,” said Grant Greenspan, a principal at the Kaufman Organization. “You need to be very proactive in terms of reliability.”
For that reason, the air conditioning contract should include preventive maintenance. In general, electric loads are no higher than they are for typical office users, although high-tech tenants may want extra surge protection.
Connectivity can pose a challenge, particularly in the vintage office and industrial stock that is frequently favored by emerging and mid-tier technology companies. These properties provide an appealing atmosphere but can also carry logistical complications. For older buildings, installing the conduits in advance is a way to steal a march on the competition, contends Jim Jacobson, founder & principal of Santa Monica, Calif.-based Industrial Partners.

“Everyone views that (upfront investment) as very risky,” said Jacobson, whose firm specializes in representing owners and tenants with creative space. “I say it’s the opposite—it’s insurance.”
If a technology company or other heavily tech-dependent occupant is considering a property as its new location, connective redundancy is a virtue. Owners and managers intending to draw technology to older properties may expect to invest in upgrades. That was the strategy Kaufman and Invesco Real Estate pursued two years ago, after the joint venture bought 100-104 Fifth Ave., a pair of adjacent century-old buildings in Manhattan’s Midtown South submarket. “Over the years, tenants typically were allowed to drill holes through the floor and pull their own cabling through the building,” Greenspan added.

Those installations took place largely at random rather than with an efficient design for the entire building. As part of a $9 million renovation of 100-104 Fifth Ave., Kaufman and Invesco installed a secure telecommunications riser that provided redundancy at the point of entry, Greenspan explained. Following the renovation and a marketing campaign that has fully leased the property, Clarion Partners L.L.C. bought it in June for $230 million. Kaufman continues to serve as the property’s manager and leasing agent.

Much as technology sets the pace for the economy at large, its users stand at the vanguard of ideas about office space. “We’re just seeing it in the technology area now, but I’m sure there’s going to be a shift, even when you get to such conservative fields as law and accounting,” said Jeff Green, a Phoenix-based real estate strategy consultant. He finds a common thread between today’s strategies for high-tech tenants and tomorrow’s office in other knowledge-based industries. “It is about sharing ideas,” he said. “It isn’t about who gets the corner office anymore.”

Read this article in its original format in the August 2013 issue of CPE.