News & Research Archive

Startups are Back Looking for Short Term Leases

May 26, 2010

 

The good news is the startups are back and looking for space; the bad news - for landlords and real estate brokers - is that they are all looking for deals that are one year or less. Over the last three boom and bust cycles I have seen, the first true sign of a recovery came when startup businesses started showing up looking for office space. Typically, we are seeing two types of startups; the first are traditional businesses where people were either laid off or people that have been experiencing income cuts from their existing employers and are now willing to take the risk of starting their own firms to improve their incomes. The second is "new concept" startups that have a new product or idea, but are uncertain how successful their product will be. In today's world, both startups have the same issues - limited startup capital and uncertainty of their success.

These latest startups are looking for office space with as limited exposure as they can secure. However, they tend to be very picky with their wants and needs. Sensing the soft office market, most startups believe that they have a lot of bargaining power, not only in securing an aggressive lease rate, but also in expecting landlords to do improvements for short-term deals.

Landlords on the other hand have difficultly making year or less deals. On their side, just paying for an attorney to prepare a lease could be months of rent from these small tenants. Add in tenant improvements, plus brokerage fees, against a weak tenant to begin with - landlords are reluctant to deal with startups unless they can pay a larger security deposit or show evidence of a secured personal guarantee.

So, how can startups and landlords make a deal? For startups, they need to consider lowering their expectations in terms of rate & improvements and come prepared with their financials & business plans, so that landlords with their offer can assess their risks upfront. Making offers and then offering to provide financials after the landlord responds to their offer, simply does not work. Next, startups should consider extending their lease terms to two to three years particularly if they are looking for even minimum improvements. Today even paint and carpet could cost a landlord $5 to $8 per square foot. Even at two years, landlords will find it difficult to make sense of spending that much money.

So how can a startup tie themselves down to longer leases with an uncertain future? First, most new firms will survive at least six months. If they fail on the seventh month and the landlord has significant guarantees or deposits, the tenant will risk the remaining portion of the lease. However, if they had a year or two remaining - given the increased interest in startups - they can protect their shortfall if they fail or better need to expand by trying to sublease their space with a term more attractive to tenants that are in the market place. This will allow startups the ability to protect themselves both on the downside or upside of their business needs to move prior to their lease expiring, plus it gives landlords more flexibility to provide tenant improvements (however minimal) to insure that startups start their businesses in spaces that are most efficient to help their success.

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 25 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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