Ten years ago, if you mentioned “models & bottles” Downtown, people would assume that you were a status obsessed Ivy-League graduate baby banker working in a Class A office building in Midtown. Today, people assume that you’re a python programmer working in a hip Class C building in the Flatiron District. This has led to an inversion in the office leasing market, where minimalist offices in amenity-free buildings located in newly hip neighborhoods now command rents that are nearly as high as the traditional Avenue of the Americas modernist masterpieces.
In visiting 30-plus start-up companies over the past few months, I’ve noticed key tenant demands that are not well served by larger Class A landlords; these were echoed in a recent report produced by the New York City Economic Development Corporation. The key features that tenants were looking for were:
– Hardwood floors with high ceilings and open-plan layouts: Headphones, lack of paper documents and space-saving flat-screen monitors enable most lower-level employees to function while sitting at giant banquet tables. These allow natural light to filter through the offices, eliminating the traditional hierarchy where only senior employees get an office with a window, in turn attracting the young and cheap talent necessary to supercharge corporate growth.
– Flexible and short lease terms with the ability to subdivide and combine adjacent spaces: Many of the newer start-up corporations attempt to grow quickly using venture capital; these investments are typically arranged to provide one to two years of financing before the company has to go raise another round. Because of this, start-ups (especially tech companies) cannot commit to long-term leases, and often either dissolve or double in size during the course of the lease. Very few Class A landlords are willing to lease to these tenants, pushing more into the Midtown South submarket.
– Proximity to newly constructed market-rate housing: Because most start-ups hire recent graduates at wages lower than what traditional finance, insurance and real estate firms offer, many of these employees have been pushed into newly constructed (or renovated) market-rate housing in neighborhoods such as Bed-Stuy, Bushwick, Sunset Park, Crown Heights and Clinton Hill, most of which offer much easier transit access to the Union-Square/Flatiron submarkets of Midtown South than to the more well-established Grand Central and Plaza districts further north.
A few amenities that these smaller tech tenants really did not find valuable were:
– Formal security with turnstiles, metal detectors and badges: Due to the rapid drop in computer hardware costs, and the totally minimal and open layouts of many modern offices, there isn’t really much to steal, and many such tenants don’t worry about disgruntled ex-employees going postal and looting the place. Paying multiple shifts of security guards, along with the associated access controls both wastes money, and makes it harder to bring potential clients, employees and investors to visit the firm’s offices.
– Lobbies and reception areas: A key space-saver in modern open-plan offices is the reduction in space allocated to lobbies and reception areas; newer tech companies don’t feel the need to convey security and exclusivity through architecture the way that older financial firms used to.
– Shared cafeterias: Many tech companies buy lunch for their employees, and simply designate one of their giant tables as the lunch table; once lunch is completed, it goes back to being a collaboration workspace. This has the dual advantage of saving rent on a multi-tenant cafeteria, and encouraging the employees to collaborate and bond over meals; for larger tech companies such as Google, gourmet meals are a key recruiting advantage.
Because Class C buildings in Midtown South now have the amenities that rapidly growing companies want, their demand has grown faster than those of Midtown/Downtown Class A buildings. As one COO of a tech company put it: “I could get Class A space in the Financial District for about the same price, but my 23-year-old brogrammers would quit if we weren’t within eight blocks of Union Square.”
Craig Roche is a pseudonym for a New York City landlord. Follow him @MrCraigRoche.
