GETTING TO LEASE HOW TO LEASE SPACE FOR YOUR BUSINESS IN NEW YORK CITY AND GET WHAT YOU WANT M IC H A E L P I N N E Y
Copyright Š 2014 Michael Pinney All rights reserved. PUBLISHER
GETTING TO LEASE, LLC EDITOR
RANDY LADENHEIM-GIL STRATEGIST
ALEXANDRE NGUYEN BOOK DESIGN
HUY ANH LE SA NGUYEN PHOTOGRAPHY
JAN COBB
WWW.GETTINGTOLEASE.COM While the author has used his best efforts in the preparation of this book, no representation or warranty is made as to the completeness or accuracy of the information contained herein. The advice and strategies outlined may not be suitable for your situation. You should consult with a professional where appropriate.
01 02 03 04 05
PLANNING THE HUNT
13
HOMING IN ON THE TARGET
47
ACQUIRING THE SPACE
66
NEGOTIATING THE TERMS OF THE LEASE
135
GLOSSARY
154
06 INDEX
173
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INTRODUCTION
If you are reading this book, then you are probably thinking about looking for a new office, store, factory, showroom, studio, or (fill in the blank) in New York City. Maybe you’ve thought about what your dream office would look like. Maybe you’ve checked out a few classified ads, done a little research on the internet, looked up at buildings on your way to your current office and wondered what they’re like. You may have thought about the time, careful planning, and commitment of resources it will take to find the right place. As someone who was once a newcomer, who has searched for space and negotiated and executed leases as a tenant, I understand the hopes and uncertainties that surround the process. This book is intended to help you to see space beyond the façade. It is a dictionary of experience that will guide you through the process and get you to the point where you can sign a lease that lets you get on with your business which is the whole point.
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Because finding the right space is only the first step. In order to gain control of it, you’re going to have to negotiate with the person who controls it now, collects rent on it, probably earns a living from it, and has a point of view about it as unique as your own. To help you better understand what motivates the owners of office space, throughout Getting to Lease I have attempted to illuminate the landlord’s mind-set and to give a historical perspective which might help make it more understandable and less provocative (though maybe no less maddening). I will help you to manage the search effectively, to understand the negotiating positions and the posturing, and to wind up with the space you want and need without losing your mind. If you’ve never gone through the process before, you’re probably not sure how to start. The book will be a road map that will help you to see what you need and to plan where you’re going. While it is not a substitute for going out and looking at space, it’s a good way to jump-start your experience so you’ll have a better idea of what you’re looking at and how to make sense of it.
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INTRODUCTION
In Getting to Lease I won’t be saying much about what makes a good office space; while there may be universally appealing qualities of light and space, none apply universally. Plus, there are as many ways to use space as there are spaces, and what makes one good and one bad is entirely up to you. What I will be offering are a lot of ideas about how to find and acquire the right space, how to think like a landlord, and some advice that will help you avoid specific pitfalls.
WHO AM I AND WHY SHOULD YOU LISTEN TO ME? My experiences in commercial leasing began in earnest in 1997, when I was hired by a company as the project manager for the construction of a 10,000-foot office space in midtown Manhattan. I had a background in construction, as well as diverse experience in computer technology, finance, sales, human resources, and running my own small business. All of that experience stood me in good stead when navigating the vagaries of the real estate business and the sometimes outrageous characters I came into contact with in the industry in New York City.
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Besides dealing with belligerent contractors, as a construction project manager, I also had to manage the relationship between the decision makers of the company, the architect, and the building manager; negotiating the intersection of expectations on such issues as cost, scheduling, and aesthetics was a challenge, as you can imagine. Dealing with contractors was easy, though, in comparison with the landlords, brokers, and managers I dealt with in my next job as the facilities director of an Internet company during the first dot-com boom. While I worked for that company we acquired new space in New York, London, and Los Angeles at a time when commercial real estate rents were skyrocketing. My job was to find space, build offices, and then try to keep the whole house of cards under some kind of fiscal control. The customs and language of real estate in each of those cities are quite different from one another, but after some time, I learned to navigate them while learning a lot of useful lessons along the way. After a couple of years, the Internet company imploded and soon after that I realized that
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INTRODUCTION
the sum of my experiences and my insight into the many different forces that impact a company’s physical needs could be put to good use as a broker. By bringing my unique, empathetic understanding of the various and sometimes competing needs of the interested parties and an experienced understanding of each discipline, I could be effective in bringing about a meeting of the minds. So that’s what I did. I have taken it as my mission to give people a better experience when acquiring space. Over the past sixteen years I have helped hundreds of companies in many different industries find space for their businesses. A good portion of my time is spent educating people who are looking for space, guiding them past their fears and preconceived notions, and generally helping them to better understand the relationship between the space, the landlord, and the tenant. It’s a lot like being a guide for people who have come to a vaguely familiar but ultimately foreign country. After all, how many commercial leases are you going to sign in your lifetime? If you’re an average small business owner, such as the founder of a technology company, a fashion importer, or a law or PR firm, maybe you’ll search for new
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INTRODUCTION
space three to five times. If you are a serial entrepreneur, the sky’s the limit; you could sign a new lease every two years for your entire career. Or you may be an operations or office manager or even an executive assistant with no experience in commercial real estate at all whose boss came to you last Friday and said,
“WE NEED TO FIND A NEW OFFICE. GO LOOK AT SOME SPACES, NARROW DOWN THE CHOICES TO THE BEST THREE OR FOUR, AND I’LL MAKE A DECISION AT THAT POINT.” WHERE DO YOU BEGIN?
This book will be your guide. If you’ve never done it, walking into a raw space and envisioning your future there is a unique experience for which no discussion can completely prepare you. Once you’ve seen several spaces, you’ll start to hear the same subjects repeated again and again, and you’ll begin to be able to trust your own impressions. Once you’ve signed several leases, you’ll have a general map of the terrain in your head. For the moment, don’t worry about the lease or the worrisome terms in it. I’ll go over the main points in detail later. And although I have a lot of experience in this area, I strongly recommend having a lawyer with experience in commercial leases review it and refine the
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language so that it isn’t weighted too much in favor of the landlord (which it will be in the beginning). If you want, you can read one of the many fine books written by real estate lawyers that will help interpret the language of commercial leases. But even that is not a substitute for expert legal advice. Whether you’ve done this before or this is your first time, Getting to Lease will get you to the point where you can be confident that you can sign the lease you have in hand because you know the space is workable and is the one you want. Finally, throughout the book, I’ve included references to the website. In the "Resources" section you will find an appendix that elaborates on some concepts that are related to the themes mentioned here, but are not necessarily concerned directly with a search for space. There is also a glossary in the back of the book and on the website with a list of relevant real estate terms that you may need to know. I tried to define the most important ones in context, but if there are any you still don’t understand, look them up.
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1. THE SEARCH 2. WHAT TO LOOK FOR? 3. TIMING _PLANNING BACKWARDS _STARTING BEFORE YOU'RE PLANNING TO MOVE _STARTING TOO LATE
_THE RULES
4. WHERE TO LOOK? _MICRO NEIGHBORHOOD GUIDE
5. BEGINNING THE SEARCH 6. YOUR ATTENTION NO MATTER WHAT _USING THE BROKER 7. SETTING YOUR EXPECTATIONS
_THE CEO _THE SCOUT _THE COMMITTEE
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1. THE SEARCH There are a lot of ways to go about finding space. The best, most reliable way is to hire a broker. I’m a broker, but even if I weren’t, I would believe that using a trustworthy broker will yield the best results 98 percent of the time. About 2 percent of potential tenants will find the space they’re looking for because their friend’s girlfriend’s roommate’s business is moving to Boulder and nobody else knows yet that they’ll be subletting their space in a few months. For those lucky few, there is nothing to do except sign the sublease and get to work. That does happen, but so do rainbows, and they’re not something you can build a business on. We’ll get to the actual looking in a little while, but let’s take first things first. Before you start looking for your space, it helps to know a few other things.
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2. WHAT TO LOOK FOR? The first step is to identify your actual needs. Those needs might be obvious because somebody else has told you what to look for and you have been given the job of identifying good prospects. Or it may be that you have outgrown your current space and need more of the same type, or you may be shrinking and need less, or the space you have now may be perfect but the rent is going up or the building is going to be torn down, or it could be that you want an office just like that of a company you admire. Whatever the reason for wanting to look, the first question is: How much space do you need? The best rule of thumb is to count the number of employees now and in the foreseeable future and multiply by 150 to 200 square feet.1 That’s a good ballpark figure. Like any guideline, this number is extremely fungible. I have worked with companies that allotted less than 100 square feet per person, and there are law firms that wouldn’t consider having less than 400 square feet per person. Not that every person in the company needs so much personal space. All offices also have public spaces that have to be taken into account, like the reception area, conference rooms, the kitchen, storage space, and hallways. The different types, uses, and amounts of space within a given office is called programming, and 1
THROUGHOUT GETTING TO LEASE, WHEN I REFER TO SQUARE FEET, IN ALMOST ALL CASES I MEAN RENTABLE SQUARE FEET. THERE IS A DIFFERENCE BETWEEN RENTABLE AND USABLE SQUARE FEET WHICH IS DISCUSSED IN DETAIL LATER.
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we’ll get into that in more detail in a later chapter (see page 68), but determining these different needs is essential in setting a target.
FACTORS THAT AFFECT THE SIZE OF YOUR REQUIREMENT: » A certain number of offices for executives with workstations for assistants » A conference room that will fit a certain number of people » Training rooms » A shipping and receiving area » A recreation space » A place where everybody in the company can gather all at once » A library » Extra server equipment » Extra meeting rooms and informal meeting areas » A file room
The possibilities are endless. I once worked with a psychiatrist who ran what were essentially hotels that rented space to other psychiatrists. He knew exactly how much revenue each office could generate and cared only about the ratio of windowed offices to circulation space. The total size of the place didn’t matter to him at all. If your company is in a growth phase, no one can provide you with a crystal ball to let you know how much space to allow for that growth. Even though you may have a detailed business plan that lays
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out a clear trajectory for your company, or have ambitions tucked away in the back of your mind, you know you can never be sure of exactly what’s going to happen in the future. It’s a leap of faith to take space that you can only imagine needing, that you hope you will need. My advice would be this: consider however much you are 100 percent confident in needing for the next three years plus however much more your current income can support. But even as I say that, I can immediately think of a dozen arguments for making a different decision, such as—take as much space as you can comfortably afford if your business contracts by twenty-five percent or you will fit in for five years if your company grows by fifty percent. Growth is a double-edged sword. On the one hand, it’s a good problem to have, and if you are outgrowing your current space, you probably have the revenue to afford something larger. But in that case you might have to sublet your current space in order to live up to the terms of that lease. Or you might consider a second space on another floor or in another building, in which case you would have to split the company. There is pain of different sorts in any of these choices, the analysis is which one is the least painful. If you’re still unsure, talk to people: your
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accountant (who will probably advise you to take much less space), your lawyer (who will probably advise you to stay where you are), or to other business owners (who will probably advise you to do whatever they did, but who may tell you about mistakes they made that they—and you— can learn from). Eventually, your gut will tell you how much space to get. THE RULES
When searching for space, some people find it useful to create a list of about four (or six or eight) attributes that every space must have or it can be eliminated immediately.
THOSE FOUR RULES MIGHT BE: » The right neighborhood » The overall size » Tenant-controlled air conditioning (as opposed to building-controlled) » Completely open space except for one large conference room
OR THE FOUR THINGS MIGHT BE: » Overall size » The right number of offices already built » A pantry » An attended lobby.
The exact number of rules doesn’t really matter, but there should be few enough to be kept in
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DOES YOUR BUSINESS HAVE ANY SPECIFIC TECHNICAL REQUIREMENTS? » A battery backup system to keep your computer system online 24/7/365? » A certain amount of power available because of some specialized equipment? » Access to the freight elevator at all hours of the day and night?
mind when the initial spaces are being evaluated. All of these things are possible; you just need to know the touch points that will include or exclude a building for you. My experience with businesses has shown me that these things are rarely all defined perfectly from the beginning. Sometimes they don’t surface until well after the search is underway, often not until attention is starting to get focused on one particular space and people start to really think through all the details. Suddenly a great space will start to look untenable. There isn’t very much you can do to prepare yourself for this; it’s just the way things go. The process teaches flexibility if nothing else.
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3. TIMING PLANNING BACKWARD
The timing of a move is never going to be perfect; it can only be optimized. What is the latest date you can imagine moving in to your new office? Start there and work backward. Since you’re reading this book you’re already thinking about moving, so the timing of your search is already a factor. In order to decide when to move, you have to examine the forces at work that initiated the desire to move and factor in the logistics involved in the move itself.
SO WORK BACKWARD: 1. When do I need to be in the new space? 2. When does my current lease expire, and how much overlap is optimal? 3. How long will it take to find the right space? 4. How long will it take to negotiate with the landlord? 5. How long will it take to get the space ready?
A business that requires less than 2,000 square feet or has fewer than five employees can probably do without a lot of paper planning without any problem. But as businesses get larger the complexity increases geometrically, and the move will need a lot of attention in order to plan and execute it. My experience has shown that moves are best organized when one person is the central point
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of contact for all things related to the move rather than dividing areas of responsibility among a group. It would be best if that person has the ability and authority to delegate responsibility, with everything flowing back to him or her. STARTING EARLY
It’s perfectly fine to go out and start to educate yourself about the market by looking at space, even if you’re not really ready to make the move yet or if the possible move date is far out in the future. I have had the experience, though, of working with tenants who believed they could break their current lease when, in reality, they couldn’t. If that’s your situation, be realistic with yourself about it. Most landlords won’t allow it. Even if you think a landlord ought to think it’s a good idea because the market is strong and you’re paying less than market rent, they may or may not for a number of reasons. Have your broker talk to your landlord and find out whether or not he will allow it. Remember too that in a weak market, a tenant may be able to finesse the move-in date and free rent2 to their advantage. But in a strong market, landlords will try to force you to sign a lease today and start paying rent tomorrow.
2
FREE RENT IS DEFINED FURTHER IN SECTION 3, BUT BRIEFLY IT IS A PERIOD OF TIME THAT A TENANT POSSESSES A SPACE BUT IS NOT REQUIRED TO PAY RENT.
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If you’re a small or medium-sized business and you’re starting to look more than six months before your optimal move-in date, it should be with the understanding that even if you like the first thing you see but you’re not willing or able to act on it, you may have to let it go. For a landlord the risk calculation is quite simply “is this bird in the hand really better than the one that might be in the bush?” His point of view is going to be based on his experience with this issue in the past and his view of the current market, which can also be described as his appetite for risk. If a landlord knows you don’t want to move in for six months and thinks he can start collecting rent sooner from someone else, he will go with that other tenant. If there is some factor that makes you more attractive than average (e.g., you’ve been in business for a long time, have a lot of cash in the bank, or are offering a very attractive rent figure), he might decide it’s better to wait for you and accept the time that the space sits fallow as a part of his overall expense. Don’t forget that free rent is always seen as a dealmaking expense by the landlord and is money out of his pocket. STARTING LATE
Starting too close to your deadline to move adds a lot of additional pressures. While I don’t
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recommend it as a form of thrill-seeking—there are better ways to raise your heart rate—just because you’re late doesn’t mean you won’t find a perfectly suitable new space. But being short on time definitely puts you at a negotiating disadvantage. In general, it requires more willingness to make concessions on all manner of choices and it narrows your maneuvering room. The initial search may turn up one or two promising spaces. If you only have 21 days until you must move, one of those spaces is going to have to be your choice. In that case, though, if the landlord has some onerous provision in his lease that in other circumstances might kill the deal for you, you may have to suck it up and accept that provision rather than walk away. Being late also demands that the condition of the space fit your requirements more readily. The landlord may not be willing to do a rush job, or he may not be able to accommodate your schedule to make changes for any number of logistical reasons. If a lease expiration is what’s driving your move, you might be able to stay in your current space a little longer. First make sure you know the exact date on which the lease expires. It’s very common to misremember a date that was decided on
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years before. You should also examine your lease and make sure you understand the holdover provision. Most leases stipulate that if you stay beyond the end of a lease, you are “holding over” and will be required to pay a penalty for doing so. That penalty is usually that the monthly rent increases to about 1½ to 3 times the current rent. Once you’re sure you might bump up against the expiration of your lease, have your broker open a dialogue with your current landlord. A lot of landlords won’t enforce the holdover provision as long as they’re given sufficient notice of your intention to hold over, and as long as they aren’t going to be damaged in some way by your doing so. Many times, they’ll be glad to have the space occupied longer to give them more time to find a new tenant. A search is a perishable item; it has a time frame and once time goes by, the time cannot be regained. One day you’ll be thinking that you have all the time in the world and then suddenly, before you realize it, you might find that time is running out. This can happen for many reasons. Sometimes the forces that impact a move can’t be controlled, and so be it. You have to play the hand you’re dealt. As I said, no timing is going to be perfect; it can only be optimized. Four to six months is generally the right amount of time
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to allow for an average search. Four months is just about the minimum for an average search for a small company that requires a few offices, open space, a conference room, a pantry, and a reception area. The larger and more complex the requirements, the more time should be allotted. Nine months is the minimum amount of time when you need 20,000 feet or you have a lot of special technical needs.
4. WHERE TO LOOK? As with the uses of space, the reasons for choosing one area over another are entirely subjective. You know where you feel most comfortable.
WHAT’S MOST IMPORTANT TO YOU? » Restaurants for client entertaining? » Safety at night? » Easy transportation? » Proximity to others in your industry or your customers? » Something that helps retain employees in your industry? » Allegiance to a neighborhood? » Cost?
Below is a chart showing the major commercial office districts in Manhattan. Keep in mind that this is not about retail space, which is a whole different ball game.
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NEIGHBORHOOD
2013 PRICE RANGE, $ PER SF PER YEAR
BOUNDARY EAST/WEST
BOUNDARY SOUTH/NORTH
VIBE
Gramercy Park
$40 to $60
3rd Ave. to 5th Ave.
19th St. to 24th St..
Hip, Laid-back
Union Square
$45 to $70
3rd Ave. to 5th Ave.
11th St. to 18th St.
Ultrahip
Murray Hill
$40 to $55
3rd Ave. to 5th Ave.
25th St. to 39th St.
Down-to-earth, work-a-day
Grand Central
$50 to $90
2nd Ave. to 5th Ave.
40th St. to 50th St.
Commuter driven
Plaza District
$60 to $105
2nd Ave. to 5th Ave.
51st St. to 60th St.
Exclusive, expensive
Flatiron District
$45 to $70
5th Ave. to 6th Ave.
14th St. to 24th St.
Ultrahip
Lower Chelsea
$40 to $55
6th Ave. to 8th Ave.
14th St. to 23rd St.
Hip on a budget
Upper Chelsea
$35 to $55
5th Ave. to 9th Ave.
23rd St. to 29th St.
Less hip, on a budget
Chelsea Gallery Dist.
$45 to $80
9th Ave. to West Side Highway
17th St to 29th St.
Cool, but far from transportation
Meat Packing Dist.
$50 to $100
9th Ave. to 11th Ave.
Little West 12th St. to 16th St.
Ultrahip, expensive
Garment District
$35 to $55
5th Ave. to 6th Ave. (includes Broadway)
30th St. to 40th St.
Nice buildings, good value
Penn Stn/ Garment
$30 to $45
6th Ave. to 9th Ave.
30th St. to 40th St.
Best value, but very workmanlike
Hudson Yards
$45 to $70
9th Ave to West Side Highway
30th St. to 40th St.
Good potential when completed
Times Square
$45 to $75
5th Ave. to 8th Ave.
41st St. to 50th St.
Crowded, convenient
Hell’s Kitchen (Clinton)
$40 to $65
8th Ave. to West Side Highway
40th St. to 59th St.
Trendy, midpriced
Columbus Circle
$45 to $115
5th Ave. to 8th Ave.
51st St. to 63rd St.
Exclusive, expensive
SoHo
$55 to $80
3rd Ave. to 6th Ave.
Houston St. to Canal St.
Crowded, trendy, convenient
Hudson Square
$45 to $65
6th Ave to West Side Highway
Houston St. to Canal St.
Big lofty spaces
Tribeca
$45 to $75
Broadway to West Side Highway
Canal St. to Chambers St.
Trendy, expensive
City Hall
$35 to $45
Chambers St. to Fulton St.
Pearl St. to West St.
Good value, drab
Insurance District
$30 to $45
Fulton St. to Wall St.
Pearl St. to West St.
Good value, drab
Wall St./Financial District
$30 to $80
Wall St. and below
River to River
Veers from drab to outrageously nice
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Generally speaking, anything on an avenue will command a price at the higher end of the spectrum. Anything directly facing certain parks—Union Square, Bryant Park, and Madison Square Park are a few examples—will probably get a 10- to 15-percent premium over the average rent for the area. Penn Station/Garment District and the Financial District have given the best value for the dollar consistently throughout my career, though at the expense of having the lowest cool factor. The Plaza District has the highest percentage of Class A buildings (see the sidebar) and is therefore the most expensive and exclusive. At the height of the market, in 2007, rents there reached as high as $140 per square foot.
BUILDING CLASSES Building classifications are one of those ideas that have a different meaning in every individual’s mind. In a way, it’s a useful means to rank buildings in comparison with other buildings. In another way, it’s simply a marketing tool that owners use to set their building apart from others. A Class A building should be a full service building. It will have numerous passenger elevators to minimize waiting time and marble bathrooms that are spotless. Building staff will take care of any and all maintenance issues within the space like leaky sinks, electrical shorts, burned-out light bulbs, cleaning, etc. They also tend to be clustered near major transportation hubs like Grand Central and Wall Street, where financial services firms tend to be. Some iconic Class A buildings are the GM Building, the Lipstick Building, and the World Financial Center.
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But even within the A classification, there are A minus buildings that are not quite the same standard or that might have been upgraded from a Class B building; the lobby might not have the same soaring ceiling, the building staff might not be as attentive, the hallways might not be quite as elegant. Class B buildings emulate all of the above to some degree but have less of it. They usually have 24/7 door guards, but no concierge service. The lobbies and elevators are usually nice but not ultrasleek. Common areas range from nice to just okay. Cleaning is sometimes included and sometimes not. Maintenance within the space is usually the tenant’s responsibility. Class C buildings include everything else. Any multistory building with less than 100,000 square feet is probably a Class C building because it can’t generate enough income for the landlord to offer better service. The quality of these buildings varies immensely, and they employ every imaginable scheme for security, maintenance, and services. The buildings might be former factories, garment manufacturing buildings, old department stores, converted dairies, bakeries, or rendering plants; some are quite eccentric and some are quite nice.
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5. BEGINNING THE SEARCH USING THE BROKER
Once you know what you’re looking for in broad strokes, you’re ready to begin the search. Your next task is identifying potential spaces. Should you use a broker? As I said in the beginning of the chapter, I’m a broker, and I think you should just get in touch with me (www.gettingtolease. com). That’s bald self-promotion, yes, but even so, I think it’s true. There are a lot of resources on the internet these days and I understand the temptation to believe that a human broker is obsolete, that you can do it all from your desktop. But the fact is I’m not obsolete. By virtue of the fact that you’re reading this book, I’m guessing you want help with the process, so the question is simply how much.
HOW MUCH IS YOUR TIME WORTH? » I’ll run a well-organized, methodical search that will yield an excellent office that can sustain you for whatever period of time you want and for whatever purpose you need. » I’ll help you think about things you might not have otherwise. That’s the benefit of my experience as a tenant looking for space. » I’ll analyze the financial aspects of multiple potential deals and present them to you in an apples-to-apples comparison. That’s the benefit of my financial and analytical background. » I’ll help you determine whether a given space has all the technical attributes you need; that’s the benefit of my construction experience. » I know how to negotiate terms with a landlord, what to ask for, when to push, and when to fall back. That’s the benefit of my experience as an agent.
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You should expect no less from any broker. What I can’t do is make you trust me if you’re inclined to think that I’m a back-stabbing, double-dealing bloodsucker. If you think that, I can’t help you, but you’re also not alone. I talk to people all the time who think that way. I know it’s partly because there are a lot of commercial real estate brokers, and some of them behave like I’ve just described. It’s true that as a group we’re competing for scarce resources, often by calling you out of the blue and trying to pressure you to look at space or tell us when your lease expires or generally being annoying. We tend to be pushy, overtly and sometimes comically ingratiating and…well, baldly self-promoting. I understand all of that. But I still think you should call me. If you must call someone else, get a recommendation from friend or another business owner you know and trust. There are valid reasons not to go it alone. For one thing, while you might negotiate for a new office lease five times in your career, Landlords might do it five times a month which immediately puts you at a disadvantage. In New York commercial leasing, unlike residential leasing, the landlord pays the tenant’s broker, so there’s no economic
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disincentive. The market is extremely variegated and chaotic, and an experienced person acting as an advisor should be nothing less than welcome, if for no other reason than to act as a curator of the vast amount of information you will encounter. There’s also a temptation to simply call a bunch of different brokers. Often, people from out of town tell me with absolute certainty that “the best deals never make it to the market” and ask me to use my contacts to get them something that’s off-market. It’s true that the building sales market is that way. The very best deals in building sales in Manhattan rarely get publicly disseminated before some insider/ developer/ golf buddy offers to buy it first. But with rentals, the worst that can be said is that it sometimes takes a couple of “extra” weeks before something gets listed. And in that case, there’s only one broker or one firm that knows about it, and if you don’t happen to call that particular broker or firm at exactly the right time, you’re not going to have access to it. Most active brokers in New York City subscribe to a database called CoStar.3 It’s very expensive, but about 98 percent of all space gets listed there. Unless one of the three or four brokers you happen to
3
COSTAR IS THE SOURCE FOR MOST OF THE STATISTICS USED IN THIS BOOK.
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call (I defy anybody to use more brokers than that) has something perfect for you in his or her pocket, the chances of a phone call leading to a successful lease of an off-market space are no better than those on a roulette wheel. The fact is that the New York commercial real estate market is gargantuan (according to Costar, there is more than half a billion square feet of commercial space in Manhattan alone) and there is simply too much space available not to list it publicly even in a tight market. Many brokers will require you to work with them exclusively and to sign an agreement to that effect. But should you sign up with one broker? Again, it all boils down to trust and to your thoughts regarding how much your time is worth. Companies that are accustomed to signing contracts for labor will generally have little trouble signing an exclusive with a single broker. Larger companies with a well-formed bureaucracy and a large, diverse workforce will also have little trouble signing an exclusive arrangement and see it as a simple division of labor. An entrepreneur who has built a company from scratch and is the driving force behind a company’s growth will generally believe he or she would be ceding too much control via an exclusive agreement and won’t do it.
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Personally, I rarely work without an exclusive. There are circumstances where I won’t require one, certainly, and my decision to do so is always made on a case-by-case basis. Most larger firms will never allow their agents to work without one. In those few cases where I don’t have one, as long as we’re agreed that you’ll work with me solely until you’re satisfied I’m not getting the job done for you, I won’t force the issue. But I never knowingly get involved in a scrum with other brokers. If I know you’re seeing space with other brokers, I may only show you space I control directly, which will take just a couple of hours of my time, but which, as I’ve said, the law of averages states probably won’t lead to a successful result. Without putting too fine a point on it, all of the most effective brokers work this way. If, for whatever reason, you want to do it yourself, this too can be done. I found the following description in a post by Joel Spolsky, a tech blogger who at one time wrote a lot about creating office environments friendly to programmers. In this post, from 2003, it’s clear his opinion of brokers is pretty low, though he has changed his mind as the years passed and in later posts has spoken highly of the broker who eventually found space for his company.
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“FIRST, DO SEARCHES ON TWO WEBSITES, WHICH OVERLAP SOME BUT NOT ENTIRELY IN THEIR LISTINGS: CITYFEET AND MROFFICESPACE. 4 IF YOU WANT CHEAPER, ARTSY SPACE, CHECK THE VILLAGE VOICE."5 "Avoid two things: ads that sound like executive office spaces, and ads that are just pitches for brokers disguised as listings. You can identify these because they don’t give any details about the space, like the address. If the address is not in the listing, don’t bother responding, it’s almost certainly a broker who is fishing for potential tenants. He’ll tell you to meet him at Starbucks at 10:00 am where he’ll show up with exactly the same list you printed out from MrOfficeSpace.
like the building. Check out the lobby. Read the list of tenants to see if they’re mostly software companies, architects, and graphic designers, or if they’re mostly clothing factories, importers, and methadone clinics. Check out the neighborhood.
Like the building? Here's the next step, for which you should be reasonably well dressed. Go into the building's service entrance and ask to speak to the super. Tell the super you're looking for office space and you want to see the space Next step: do not call the broker in the in his building. He will show it to you... listing. Yes, they can show you the space, That's all there is to it. but you don’t need them yet. First go to the building in the listing and see if you Now, if you like the space, call the broker."
"'What would have happened,' you may ask, 'if I had just called the number in the ad?' Well, nothing terrible. The broker would have met you in the building lobby, and then he would have asked to see the super, and the super would have shown you the space. You see, the super has the keys and knows how to drive that cool manual elevator that goes to the floors where the fancy automatic elevators don't stop because there are no tenants there."6 — Joel Spolsky
From this post you get a reasonably good idea of how to go about looking for space without a broker. The question is, again, how much is your time worth? I won’t beat this horse anymore, but, to my mind, the answer is—call me. 4
5 6
NOTE: MROFFICESPACE IS STILL IN BUSINESS, BUT LOOPNET AND PROPERTY SHARK HAVE OVERTAKEN IT AS MORE EFFECTIVE TOOLS. CR AIGSLIST WORKS, TOO, BUT IS HIT OR MISS BECAUSE THERE ARE SO MANY DUBIOUS LISTINGS. AS OF 2013, THE VILLAGE VOICE IS NO LONGER EFFECTIVE. FOR SMALL SPACE, USE CR AIGSLIST, WHICH DOES WORK WELL FOR THIS PURPOSE, IT JUST TAKES SOME DIGGING. HTTP://NEW.JOELONSOFTWARE.COM/ARTICLES/OFFICENEW YORK.HTML
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6. YOUR ATTENTION NO MATTER WHAT A real estate broker can only do so much to keep the search on the right track; even with a good, experienced broker guiding your search, somebody from your organization is going to need to be 100- percent responsible for organizing the search internally. There will be a lot of information coming in and somebody’s going to have to keep track of it and manage the flow up and down the organizational chart and out to other consultants and service providers like architects, furniture planners, and IT consultants. THE CEO
By its very nature, the space hunt requires a lot of subtle decisions, not all of which are easy to communicate. But they still have to be communicated. If you are the ultimate decision maker and have taken the lead on the search, you can make course-changing decisions on the fly. The hunt will almost always require some compromises only you can make. It’s your vision that’s ultimately being brought to life and, along with the raw data analysis, the decisions involve spatial awareness and emotional connections that may be hard to communicate to an employee. I can’t tell you how many times I’ve heard the phrases, “I’m not feeling it here,” and “I’ll know it when I see it.” So go out, see some space, and feel it.
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THE SCOUT
If you’re the office manager or an executive assistant, you’re going to be acting as the scout and reporting information back to the decision makers. Here’s where determining the Rules (see page 21) becomes imperative. If you can, try to get the decision maker to express the most important attributes and keep them in mind when looking at space. But don’t get complacent about them; keep going back and pressing the decision maker to see if there are possible exceptions or any new information. I’ve often had the experience where a busy executive has expressed a strong desire to the person who has been delegated to do the search and then, when speaking to me, expressed something much more flexible, which can make you feel like you’re standing on constantly shifting ground. It can be frustrating, but just know that it’s very common. Changing course several times is the rule rather than the exception in a process like this, which is another good reason to leave yourself plenty of time. Whoever is the point person should have the most up-to-date information about the company’s requirements and should be able to understand how each space under consideration fits into the current thinking.
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I once had the experience where a scout thought he had identified a good candidate space that he wanted the busy CEO to come out to see. We had to jump through a lot of hoops to find time in the CEO’s schedule, but we had high hopes that the search could be concluded after this meeting. The CEO spent about a minute walking through the space, then turned on his heel and walked out. Outside he dressed us down for wasting his time on a space that was about half the size it needed to be. The scout and I were both stunned because it was in the middle of the size range we had been tasked to find. As it turned out, the company’s latest projections predicted it would be doubling in size in the next year, so the new space needed to be a lot bigger, but nobody had told the scout. We came to find out that this projection had been known for some time and the scout had spent at least a month touring and cataloging data on unsuitable spaces. Now the entire search had to be recalibrated with this new information. Aside from being just aggravating, this lack of simple communication cost a month of time, which, in a fast-paced market like New York, could have been decisive in acquiring or losing a good space for the company.
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So keep the information flowing up and down the line. Ideally, the scout will have a direct pipeline either to the decision maker or the decision maker’s trusted advisor. Avoid a situation in which the scout is made to feel like he or she is taking up too much of the decision maker’s time by reporting the findings regularly. At the very least, there should be someone who has the decision maker’s ear and to whom the scout can speak freely. THE COMMITTEE
Avoid the temptation to create a search committee unless it has the power to actually make decisions. Even within an organization that appears very like-minded, there will be differing opinions about what constitutes good space and what doesn’t, and a committee can get mired in details that may not be important to the decision maker. I’ve had the experience where a requirement was poorly defined by a committee and not consistent with the wishes of the decision maker. The committee approved the terms of an offer, but, as it turned out, while the CEO liked the space, he didn’t like some of the terms regarding timing and build-out the committee had approved, so the offer had to be changed. I wish I had known sooner that this was the dynamic at work
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because I could have counteracted it. As it was, the landlord accommodated that first change, but as new information and requirements kept coming from the committee, the landlord became mistrustful and started to think that the changes would never stop. Eventually the mistrust grew toxic on both sides and the deal fell apart. A group of people may be good at deciding the details of laying out the space, but more often than not they will muddy the waters in a negotiation. Define your needs as clearly as possible with the information you have now. The first offer to a landlord is a powerful moment. A new relationship is being formed. Even though the details are memorialized in a lease, what you’re entering into is really a relationship between people. Every communication is important to forging that relationship, and you should strive not to appear capricious. While consistency is your ally in negotiations, I’ve rarely had the experience where an opening stance was perfectly consistent. Minds change and new information leads to different requirements. So start with what you can control, which is your knowledge of what you want at that
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moment. Then, when new information requires you to request a change in terms, you won’t have used up your goodwill and created an impression of chaos that could kill an otherwise viable deal.
7. SETTING YOUR EXPECTATIONS To make a generalization, it’s no longer automatic to assume that if the broader economy is faltering, the real estate market in New York will swing down dramatically as well. During the “Great Recession,” from 2008 to 2010, office space got cheaper, but not cheaper than it was in 2005. Just to give you a little history, after 9/11 the market crumbled and New York experienced a wave of bankruptcies leading to a dramatic rise in vacancies. This was followed by two or three years of robust but rational growth. Prices started to inflate in 2006 and continued to inflate all through 2007. That period saw the fastest run-up in prices in anybody's memory. There were people who had been in the business for 30 years who had not seen anything like it, and everybody wondered where it would stop. Prices hit their high point in January 2008 and started an inexorable slide which didn’t stop until January, 2010.7
7
CoStar
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But the interesting thing was that prices never fell as much as most tenants had hoped. Everyone heard stories about the spectacular bankruptcies of some high-profile property owners, and many hoped all space would soon be had for a song. Prices did drop an average of 33 percent8 which sounds great until you understand that in the run-up that preceded it, prices had risen an average of 40 percent so all the loss didn’t equal the gains made during the bubble. Why? Some of it can be chalked up to inflation, but also, in the wake of the Great Recession, there was no swift landslide of companies going broke and creating a glut of empty space. Because there were still plenty of companies in New York City with robust cash reserves who were able to keep the market buoyant, the number of available spaces rose slowly and steadily rather than in a torrent, as in 2002. Average rents did fall during this time, and landlords did offer more concessions. Rents of $140 per square foot fell by more than half. Class B and C buildings in some neighborhoods cut their rents much less, though. And in some particularly fashionable neighborhoods, prices hardly fell at all, and then only for a short period of time.
8
CoStar
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MY PERSONAL VIEW IS THAT NEW YORK HAS REACHED A TIPPING POINT WITH SEVERAL DISTINCTIVE FEATURES: » Typically, as industries evolved and left behind empty space, there were opportunities to find cheap space; artists, for instance, moving into unused warehouse space. Then other pioneering businesses would move in to take advantage of the low prices too. Eventually the area would become more and more popular and the prices would go up, driving out the early pioneers but leaving a more desirable neighborhood. Now the majority of that conversion is complete in Manhattan. » All new construction in New York is one of four types: Residential condominiums Hotels Retail Class A office space » With no new construction of Class B office space and no new conversions of Class C space the market for that space will stay supported. » The improved quality of life that began in the 1990’s led to immense population growth which in turn led to a resurgence of economic activity has continued to draw capital and customers from all over the world. As long as that’s the case, the market here will stay strong.
Two other factors played a part in supporting prices during the recession as well. First, despite the broader reasons for the crisis, there were many New York City landlords who hadn’t succumbed to the lure of cheap credit and so entered the crisis with good cash reserves, low debt ratios, and enough wisely chosen, rentpaying tenants to keep them afloat without making fire-sale deals.
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Another component that kept space from getting cheaper was the fact that loss factors— the difference between how much space a tenant can use and the size the landlord calls a space for marketing purposes—rose as well as rents. In 2009, the 33-percent average drop in price wiped out much of the dollar cost inflation of the previous two years, but the increase in loss factor is like a lingering hangover that isn’t likely to go away. My advice to tenants is to always use the advertised size and price as a starting point. Figure out if the space is the right size for what you intend to do with it and proceed from there. If you’re signing a long- term lease, hire a space planner or architect to make sure your business fits into the usable space. They’ll be able to help define the “program” or list of your requirements and then perhaps do a test fit of all your furniture to see if everything works. As of this writing, rents have risen in some areas of Manhattan to historically high levels. Union Square, Flatiron, and SoHo have never been more expensive. This is mostly due to the fact that so many technology start-ups want to be there. Plaza District and Grand Central are starting to recover their 2007 heights. Nicely built
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space that’s well configured is renting quickly everywhere. If you’re looking during a landlord’s market, you’ll be best served by planning ahead and allotting plenty of time. Space that needs to be built lingers on the market the longest, so a good strategy is to look for a space that may have good overall structure that can be changed to your specifications. Taking a longer-term view opens up your options considerably. Another strategy is to expand your horizons. Other areas may be more desirable than you first suspected and on closer examination of your needs may not be the handicap you once thought. A third strategy is to simply wait and be poised to pounce when something good comes along. Right now, good space in the Flatiron district between 3,000 and 5,000 square feet and priced below $50 per square foot rents within a week of coming on the market. If you’re the company ready to rush in, you may get it. Just remember, this is a market and exactly what you want may or may not be in stock at any given time. But with the right amount of flexibility and a devoted search, New York City will give it up every time.
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LOSS FACTOR Loss factor as practiced in New York City is a means of keeping the advertised dollar cost per square foot of a space low. It’s exactly the same as what happened to other product packaging. You used to be able to buy coffee in one pound cans, and people got used to the familiar size and shape of the can. Sometime in the past, a coffee can started to hold only 15 ounces of coffee, though the price remained the same. And although it was stated clearly on the can, most consumers didn’t register this as a 6.25-percent price increase, even though it was. This practice has been a part of our consumer society as long as there’s been packaging. One of my earliest memories of my father’s working life was him telling me that his company was designing a package for a Sara Lee Pound Cake that was less than a pound. Eventually, the price of coffee rose too much to disguise through skinny packaging and not only did the cans get smaller, but the price rose, too. Some amount of loss factor is perfectly understandable. New York City is a vertical city with elevators, sometimes a lot of them, and thick walls with thick supporting columns. A floor that has been divided into several units will have hallways and common bathrooms. It’s reasonable to expect landlords to include some ratio of that in their space calculations. But as it is practiced in 2013 in New York City, the concept of loss factor has stopped having a rational basis and is simply a way of raising the rent without raising the rent. Today you will find buildings with loss factors that approach 50 percent. The latest run-up started in 2006. That year rents started their astonishing rise, which reached a 40-percent increase by the end of 2007. But what got little or no press attention at the time was the simultaneous rise in loss factors. Buildings that are actually 100 feet x 100 feet (10,000 square feet) suddenly
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had floors of 12,000 rentable square feet. This also became known as the “market adjustment,” and its pervasiveness was justified in the industry by the fact that since everybody was doing it, then everybody had to do it. There’s some validity to this argument because based on first impressions, just like the can of coffee, when a tenant looks at two spaces, one priced at $42 per foot for 10,000 square feet and one priced at $35 for 12,000 square feet, the second space seems like a better deal, until, on closer examination, the actual usable area might be exactly the same for exactly the same rent per year.
NEW YORK CITY HAS OVER HALF A BILLION SQUARE FEET OF OFFICE SPACE. SO HOW DO YOU FIND THE OFFICE THAT IS RIGHT FOR YOU? THEN, ONCE YOU FIND IT WHAT WILL A LANDLORD EXPECT FROM YOU? AND WHAT CAN YOU EXPECT FROM A LANDLORD? For all the dizzying possibilities, there is no shortage of people with advice and opinions about how to approach New York City leasing. But how will you know that the advice you’re getting is real, actionable, and useful? The answers can be found in Getting to Lease. Getting to Lease is a comprehensive guide to leasing office space in New York City. It’s all here: » Search guidelines outlined » Financial terms simplified » Negotiating strategies planned » Lease conditions clarified » Construction variations detailed Everything you need to know about finding and leasing office space is here in one concise guide.
MICHAEL PINNEY HAS 16 YEARS OF COMMERCIAL REAL ESTATE EXPERIENCE. AS BOTH A TENA NT A ND A BROKER HE HAS NEGOTIATED FOR HUNDREDS OF THOUSANDS OF SQUARE FEET OF SPACE WORTH MILLIONS OF DOLLARS IN RENTALS AND SALES. HE HAS ALSO SUPERVISED CONSTRUCTION WORTH MILLIONS OF DOLLARS. MIKE IS A NEW YORK STATE LICENSED REAL ESTATE SALESPERSON WITH THE SPECIALTY OF REPRESENTING TENANTS SEARCHING FOR OFFICE SPACE.
WWW.GETTINGTOLEASE.COM