As tech startups mature, so do their headquarters
Space races happening in tech-oriented markets around nation.
Joe Gose
When F5 Networks signed a lease last spring in the Mark, a new 48-floor office and hotel edifice in downtown Seattle, the deal capped a hunt for new headquarters that would provide the company with room to grow and its employees with nearby transit, restaurants and other amenities.
Even with more than 6 million square feet of office space under construction in the Seattle metropolitan area, space was vanishing, said Jay Phillips, director of global real estate and operations for F5 Networks, which delivers application cloud and security solutions. Among other rivals, the company was competing with Amazon, the Seattle-bred online retailing behemoth, and out-of-town technology companies entering or expanding in the market, including Google, Facebook and Uber.
“The sarcastic joke is that our headquarters has one of the farthest walks to a Starbucks in Seattle — a quarter of a mile away,” Phillips said. “But it was a fastpaced real estate search to find space and not lose out on the opportunity.”
Similar space races are happening in tech-oriented markets around the country, and like the decision of F5 Networks to move into a top tier, or “trophy,” building, more maturing tech companies are a main driver of occupancy in newer high-end offices. That’s a departure from the days when tech startups preferred old warehouses and office buildings converted into wide-open loft offices. Full of exposed brick, wooden beams, high ceilings and concrete floors, the funky work spaces gave birth to tech enclaves in places like San Francisco’s South of Market neighborhood and Manhattan’s Flatiron district.
“Tech companies pioneered the idea of going into cool, creative space, but they represent a greater percentage of our leasing activity each year,” said Nadeem Meghji, head of real estate for the Americas at Blackstone, the New York-based private equity firm that owns 50 million square feet of office space in the United States.
Tenants in the technology, creative and media industries leased more than 8.5 million square feet in trophy buildings in the United States over the 12 months that ended in the first quarter of 2017, according to Jones Lang LaSalle, the Chicago-based commercial real estate brokerage firm. That amounted to 22 percent of all trophy space leased over the period, a year-over-year increase of 7 percentage points. It was also second only to the banking and finance sector in total square feet leased.
Recent notable tech deals include Facebook’s lease of 436,000 square feet in a new office and residential tower in downtown San Francisco, Spotify’s lease of 378,000 square feet in 4 World Trade Center in Manhattan and HomeAway’s lease of an entire 315,000-square-foot office building under construction in the Domain mixed-use neighborhood in Austin, Texas.
But companies in all sectors today — not just tech — are demanding the design elements typically found in the warehouse conversions, such as open floor plans, natural light and exposed ceilings. Along with proximity to transit and amenities, layout is considered an important tool to recruit and retain workers, and developers are obliging tenants in new buildings and those in retrofitted older buildings, particularly modern offices built in the 1980s and later.
The Mark, wrapped in solid glass, has no columns, for example, and it boasts ceilings 16½ feet high and windows 9½ feet high, said Kevin Daniels, the building’s developer. About 10 years ago, he trusted his gut that tech employees would press for downtown Seattle locations that offered street energy and amenities nonexistent in campus or industrial settings. He also took note of space design ideas being discussed by executives at Starbucks, which in 1993 moved into a former Sears catalog distribution center that Daniels converted into office, retail and manufacturing space.
“It turns out that we look really smart,” said Daniels, whose early efforts to develop the Mark were halted by the Great Recession. “But it was kind of nerve-racking at the time.”
Real estate professionals say older buildings generally lack modern energy efficiencies, elevators, bathrooms and data capabilities. The inability to expand in the converted buildings and their scarcity are also restrictive.
“Once tech companies get to a critical mass of employees, they realize that those funky buildings present more of an operations hassle versus any modern office building,” said Nicholas B. Farmakis, a senior managing director with tenant representation firm Savills Studley in New York. “They have become part of the establishment and are taking a more mature approach about various business decisions, like where to house their employees.”
Proximity to transit, shops and restaurants is critical, but so are amenities within buildings, including coffee stands, gyms, lounges and, of course, the proverbial Ping-Pong table. Tenants are more likely to find all of those features in new or retrofitted office buildings, said Stuart Williams, a managing director with Jones Lang LaSalle in Seattle.
The renovation of the century-old 114 W. 41st St. office building in Manhattan by Blackstone’s Equity Office division includes a coffee bar, pool table, bleacher and lounge seating, and four bigscreen televisions in the lobby. Tech tenants include Roku and VTS, a real estate leasing and asset management platform.
“We’re creating an atmosphere of fun, fitness and food, because that’s what tenants are looking for,” Meghji said. “The role of landlords has evolved — today it’s about providing an experience.”
Daniels added a hotel and event space to the Mark when he resumed development after the recession. The additions appealed to F5 Networks, which ended up leasing 516,000 square feet of space. The changes helped round out the building’s amenity package, which includes lounges, restaurants and a fitness facility.
“It all brings a lot more life after 5,” Daniels said. “The younger set really likes to be entertained — at all times — whether it’s by food, drink or games. They’ve got to have it.”
But the migration of tech tenants to traditional office buildings has done little to affect demand for the still-popular conversions, observers say. In San Francisco, that space typically rents for around $66 a square foot, compared with $70.16 a square foot across all office space in the market, said Robert Sammons, regional director for Northwest research with Cushman & Wakefield.
Sammons expects rental rates to keep rising as many Silicon Valley companies establish a beachhead in San Francisco, even with 5 million square feet of office space under construction. The $1.1 billion Salesforce Tower is scheduled to open next year in the Salesforce Transit Center (formerly the Transbay Transit Center), a mixed-use project downtown, for example, and some 164,000 square feet left in the building is priced at more than $100 a square foot, he said.
“San Francisco certainly has morphed into more of a ‘big tech’ market, and the companies are all looking at new buildings,” Sammons said. “I think landlords are feeling much more confident in the market’s long term than they were a couple of years ago, when many tech tenants were startups.”