What Commercial Real Estate Doesn’t Understand About Startups

Between David Cumming’s post on Costs of an Initial Startup Office, the Atlanta Business Chronicle’s article on Buckhead startup real estate (mysterious contents hidden behind the paywall, [edit] at the time of writing, this article’s mysterious contents were hidden behind a paywall – apparently the best social conversations start 30 days after an article is published), and the swarms of CRE agents wooing startups at Venture Atlanta, it’s clear to me that most commercial real estate professionals in most markets have no clue about the needs of startups.

I’m speaking primarily for startups that haven’t yet raised a sizable Series B round or attained scalable profitability. I know because I’ve been on the executive team of 3 prior startups where I searched for office space, and now weigh these decisions now for Badgy.

Here’s what CRE doesn’t understand:

  • We WILL NOT sign a 2-5 year lease – a funded startup is betting on growth or extinction in a very short time frame. Most startups will vacate their initial office space in the first year, due to either growth or death. In growth, the remaining lease can significantly hurt the company. If you make the founders personally rep the lease, you harm them. If not, it’s your own illusion they’ll pay. 6-12 month leases are best. Month to month with a 60-day kickout provision is better and helps YOU while you wait for that big-ticket 5 YEAR lessee that DOES want to spend $10/sq ft on build out.
  • We don’t need a build-out allowance – Cummings cites $30k built into the lease to cover changing carpet and moving walls. Young startups evaluate space on a “take it or leave it” basis. Either the space is adequate, or it isn’t. Open team environments matter. Spending 3% of a $1 million seed round on office build-out is irresponsible. Maybe you want to force lessees to help you modernize the space. Startups don’t care. Now matters. Pretty doesn’t.
  • Flexibility Matters – longer leases CAN make sense for a startup IF you have a nice portfolio of space in the same building and nearby buildings that they can transfer to WITH NO PENALTY (other than larger square footage) if they need to expand. This flexibility can be an asset for owners AND startups. Fluidity is among the most important considerations for a startup.
  • Fiber connectivity IS important – maybe it blows your mind that a company of 10 people will accept old carpet and imperfect office configuration but won’t sign a lease on an office that tops out with a crummy Comcast DSL connection. Welcome to priorities. Startups don’t live or die by pretty offices. They live or die by delivering releases to customers and getting better leverage on their developers and designers. Bandwidth matters. Pretty glass conference rooms don’t.
  • PARKING – For startups, parking is not an allowable profit center. You have empty space in your building. We want to pay for it. We DON’T want to pay an extra 6% because we live in a car-centric city and our employees need to park cars. If your parking deck is nearly full, by all means, charge for it. If not, chill out and give a startup a break. We’ll ditch your parking and walk a few blocks from a surface lot if it’s REALLY that important to you to charge a premium. We see it as just another part of rent.
  • We’re not amused by your never-ending vacancies – some of our companies may not last a long time, but WE do. We know when we are looking for space for one company, are confronted with a 3 year lease, and our next company looks at the SAME space 3 years later. Nobody has occupied the space in that entire time, and you STILL ask for a 3 year lease. It’s a joke. We’re short term. Make money off of us for shorter seasons while you wait for your perfect tenant. Spaces sitting vacant mean we neither trust nor understand your multi-year leases.
  • We don’t often have ‘Sugar Daddies’ – We have had the privilege of setting up shop at Flashpoint and Hypepotamus. In both cases, we’ve benefitted from the benevolence of others willing to make an investment in building startup communities. Commercial brokers have remarked to me that we needed MORE people like Hypepotamus’ Kevin and Heath to bridge the gap between startups and commercial real estate. Betting on benefactors to reserve large chunks of space over several years for  startups is NOT a scalable or dependable business model.
  • We’re not going to trash the place – Do your homework. By the time a company has raised at least a seed round they’ve been through enough vetting that they’re not about to go and throw a college keg party in the space and destroy it. Examples to the contrary are welcome, but likely infrequent and perhaps even spread across companies of all stages.

Almost every major local conference I go to is blanketed with service providers scouting for clients. Commercial Real Estate agents see startups cashing big investor checks, and see a potential solution to their vacant building problems. Startups can be this solution, but you need to understand that they have different needs. These aren’t law or accounting firms that want to make their office super-plush on a long-term lease. For startups, growth is important, and planning for growth is fundamentally incompatible with the stagnant trajectory many commercial leases take.

If you’re in a major startup market, and you need renters for your vacant office space near the startup cores, there is a VERY real opportunity. Understand the needs of startups, craft your lease terms accordingly, and you will quickly gain a reputation that will fill your buildings with smart, energetic, young companies.


5 thoughts on “What Commercial Real Estate Doesn’t Understand About Startups

  1. Well written, Rob. The lack of availability of suitable office space in this city is obnoxious. If you had even one building embrace this concept, they’d become a hub of activity.

  2. @Colin – Right now, 730 Peachtree and the Biltmore both seem to “get it”, more or less. Although the midtown parking situation still is what it is.

  3. There seems to be a growing number of buildings that cater to the film industry. Though they may charge more on a per foot basis, they do have short term leases. The complex on Howell Mill Road that used to house iXL is a good example of such a place. Perhaps a starting point.

    1. This is interesting. Hadn’t heard about these places. Would love to check one out. Got a name/address of such a place?

      One benefit I believe they probably have is that density and proximity to specific resources probably aren’t as important to such places. Also, they have piles of money.

  4. Your points are excellent. We’re a startup (syncomation.com) and have tossed about the idea of a commercial lease, however the pricing strutcures are so far out of line for our small budget it just does not make sense!

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