Startup clients are the oddballs of commercial real estate. They generally don’t have a deep knowledge of the local real estate market since their specialty lies elsewhere, but they do have recently-earned venture cash to spend on a good work space. As we see in a survey by Share Your Office, flexibility is more important than price and lease fine-print; but flexibility isn’t the easiest thing to come by in the real estate business.
What’s a broker to do? To find the answer to this question, I interviewed a few CRE brokers about how they approach startups. Here’s what they had to say:
1) What do startups value the most in a commercial space?
Andrew Bermudez of Digsy says that location, image, and affordability are the most important factors. The space has to look and feel “right,” and it can’t put too big a dent in the budget. Meanwhile, Bertram Rosenblatt of Vicus Partners agrees that startups want “flexibility of lease terms and build space.”
Location, in particular, is difficult to compromise on. For one, it’s key to attracting top talent (the last thing you want to tell prospective talent is that they’ll have to deal with an hour-long commute). On top of that, location is crucial if you’re putting in the long hours that startups are known for. It’s a huge asset if you can “eat, run errands, and get entertained” without having to leave the neighborhood, says Andrew.
This is a big part of why coworking spaces have taken off in the past few years; they offer location and flexibility at a reasonable price. At the same time, Bertram argues that there are “a bunch of startups that coworking isn’t ideal for”, such as those in industries that require privacy like fintech.
2) What common mistake do startups make when searching for an office?
For Andrew, taking on the challenge of securing office space without any help is a mistake in itself. It’s a huge time sink, and you have to deal with busy landlords and convoluted paperwork. He says that “you spend a ton of time searching for space, when you should be spending it growing your business.” This is especially true for some internet listings that leave out key information and clog your search results.
Additionally, startups rarely realize how long the process takes. Even for a one-year sublease, there’s a lot of “nonsense” you have to go through, according to Bertram. The sublease could be “25, maybe 50 pages long”, and then you have to get a consent agreement. The whole process takes more effort than startups realize.
Conclusion? If you’re targeting startup clients, show them what the whole process entails and convince them that it’s not worth taking time away from their core business.
3) How do you convince landlords to sign with startup clients?
Landlords are used to seeing startups around, but the culture gap remains wide. Landlords generally want security and reliability over all else, and many startups don’t have the financial history to provide that peace of mind, according to Andrew. It can take some convincing to make the deal seem worthwhile for the property owner. Even so, it won’t come free: startups with no rent history can expect an increased security deposit of “about 4-6 months’ rent” to cover the extra risk. You’ll have to explain to startup clients that this is just how the business works.
Some landlords won’t be satisfied with the increased security deposit, and they still won’t want to rent to startups. The best way around this is to create a “story” around the tenant and sell their pedigree or entrepreneurial history, says Andrew.
One challenge is that the market is very competitive right now. In New York, says Bertram, vacancy rates in hot neighborhoods like Union Square and Flatiron are very low, usually <5%. As an experienced broker, people hire Bertram precisely because he’s a “known entity” to many of the city’s landlords, and he can help give startups an edge over the competition by essentially vouching for them. If VC funding isn’t enough to convince the landlord that you’ll be responsible with your rent, you can try hiring a broker to support you.
However big your personal network is, remember that you can leverage it when you’re talking to startups, not just when you’re trying to close a deal. Help them realize that personal connections might be the only thing differentiating them from the other startups vying for the same space.
4) What’s one common unrealistic expectation you’ve seen from startups and landlords?
For startups, the biggest unrealistic expectation is that renting an office will be like renting an apartment. Securing a commercial space takes a lot longer; Andrew recommends searching 3-6 months in advance. Similarly, Bertram says that “because startups move so fast in their business, they assume that everything can be done quickly.” Unfortunately, this is not true for renting an office space.
On the landlords’ end, there’s a big age disparity, according to Bertram. They often don’t understand the products that their startups tenants are working on, so it’s difficult to see the value of leasing to tech companies. To some degree, the broker has to translate what their startup client is all about to show that they’d make a reliable tenant.
In the end, remember that everything in real estate is negotiable. Andrew recommends looking at each space as a “blank canvas”, because landlords may be willing to knock down walls and renovate if it means securing the right tenant.
Negotiation is crucial, and that fact is your biggest selling point as a broker. If you can show startups how much time and money they can save by working with you, you’re sure to earn many a client.
About Share Your Office:
Share Your Office is a real estate tech startup that offers on-demand listings of offices, meeting rooms, and coworking spaces.