By C. J. HUGHES
To understand how the current office market for technology companies can
resemble a Russian nesting doll, with layer upon layer of increasingly
smaller subleases, it might help to consider the upper stories of 568
Broadway in SoHo.
In the cast-iron former sewing factory, Scholastic, the publisher, is
subletting two floors of space to Foursquare, a social media company. In
turn, Foursquare is subletting one of those floors to a handful of
other tech firms, including Fueled, which designs apps for phones.
And Fueled has divided its column-lined room as a co-working space,
where $650 a month gets a renter a seat and unlimited snacks from jars
along a wall.
One of those seats belongs to David Spiro, a self-employed entrepreneur,
who sat alone at the corner of a long table on a recent afternoon, a
bag of popcorn by his laptop. “I’ve raised some funding,” Mr. Spiro
said, “but not nearly enough to afford a typical lease in Manhattan, so
this place is great.”
The sentiment could also apply to the daisy chain of tenants in his
building, and more broadly to the surrounding neighborhoods.
In the last few months, the area of Manhattan south of Midtown has been
awash in deals where early-stage tech companies have opted to take over
office space belonging to another tenant, rather than enter into a
direct lease with a landlord.
These sublet deals are often preferred, tenants and brokers say, because
the rents are usually slightly cheaper than conventional leases. They
can also be for shorter lengths of time than the typical 10 years and
require a far smaller security deposit up front.
As important, they say, is that the spaces usually come built out, which
means essentials like high-speed Internet lines, air-conditioning and
conference rooms are already in place. Getting up and running quickly is
critical for companies or self-starters that often measure growth in
months, not years, analysts explain.
Of course, the office within an office within an office can carry risks.
If the first, second or third tenant goes bankrupt, a subletter could
find itself without a home. But because their own leases are so brief,
these low-rung tenants can also easily wind down operations quickly if,
say, their app never catches fire.
“They don’t know about the future, so flexibility is key,” said Heidi
Learner, the chief economist at Studley, the commercial real estate
firm, who is the co-author of a report on the tech sublet trend. “You
don’t know about what head count will be, whether you will get any
venture capital funding, or whether you will be acquired.”
In general, subletting is becoming more popular. In the Midtown South
area, or from Canal Street to 30th Street, sublets accounted for 19
percent of major leasing activity this year, up from 11 percent in 2010,
Studley said.
And between January and April of this year, 33 percent of all the leases
signed in Manhattan by tech companies — a major driver of the current
economy — were sublets, the report said. Sublet tenants among other
industries within the same period were less than half that.
The report also states that the average length of tech subleases is about four years.
Not just any space will do; tech firms almost exclusively want prewar
buildings with lofty ceilings and open floors, said Sean Black, a broker
with Jones Lang LaSalle. Since that type of converted industrial space
is clustered mainly around the Broadway corridor, supply is limited, he
added, and demand is robust.
“They like the ‘old world meets new world’ look,” said Mr. Black, whose
many tech clients include Foursquare. A lack of walls and cubicles, with
eclectic art on the walls, embodies a certain attitude. “The last thing
they want to do is conform with corporate America.”
Technology firms have been subletting a bit more space than they
personally need, reflecting awareness of heightened demand from a
flourishing industry that allows them to rent out extra room to similar
companies. Besides, locking in the space at today’s asking rents, which
for sublets is about $45 a square foot in Midtown South, according to
Studley, is considered wise, because rents are expected to climb,
companies say.
“It’s a great way to hedge the lease,” said Derek Stewart, who handled
leasing for Foursquare before leaving the company this summer.
Foursquare, which has 120 employees in New York, paid about $45 a square
foot in 2011 in a seven-year deal, Mr. Stewart said. But he estimated
that with companies like ZocDoc, a physician app service, and Thrillist,
a lifestyle site for men, under the same roof, the building had gained a
bit of buzz as a popular tech address. That means the space could
command $55 a foot today, he said.
But so far there has been little urge to profit off the subtenants, he
added, saying that Fueled and the other subtenants also pay about $45 a
foot for their space. “We felt kind of badly making money off it,” Mr.
Stewart said. “We didn’t want to have a bad name in this tight
community.”
Mr. Stewart, who now works for David Tisch, a tech investor, also
pointed out that subleases were essential for the survival of the tech
community.
In San Francisco, where Mr. Stewart leased two spaces on behalf of tech
companies, start-ups can afford direct leases, which often require just
three months of rent for a security deposit. But in New York, 12 months
of rent is common. “Landlords here are just so risk-averse,” he said.
In a business where a company’s start-up phase can be hypercompressed —
Instagram was founded in 2010 and bought by Facebook for $1 billion two
year later — short sublets are not unusual.
The news site BuzzFeed, for example, has signed a two-year sublease for
space in the new headquarters of Tiffany & Company at 200 Fifth
Avenue, across from Madison Square Park. BuzzFeed, which had been based
on West 21st Street in a 20,000-square-foot space, will take an entire
58,000-square-foot floor, which is one of seven floors Tiffany has
there.
The rent was not disclosed, but Greg B. Taubin, the Studley broker who
represented Tiffany, said that comparable sublet space in the area went
for $65 a square foot.
“Companies like this don’t sign long-term leases because they don’t have
a crystal ball,” Mr. Taubin said. But for Tiffany, which doesn’t need
the space immediately, there’s an upside in cost reduction, too, he
added.
Other advantages include having lights on and more people in the
elevators, said Bonnie Shapiro, the director of leasing for Allied
Partners, an owner of 568 Broadway. “You don’t want tenants touring the
building and seeing dark, unused spaces,” she said.
For tenants that may be consolidating or downsizing, the new demand for
sublet space may come at a fortunate time. Credit Suisse, the investment
bank, which has undergone several rounds of layoffs in recent months,
has managed to sublet all its former office space at 315 Park Avenue
South, one of three locations it has in Manhattan.
Tech subletters in the 20-story Beaux-Arts tower, which is at East 23rd
Street, include VaynerMedia, X+1 and Responsys, as well as Adap. TV,
which this month took the entire seventh floor measuring 16,000 square
feet. The new space features a red wall decorated with words like
energy, creativity and passion, and executive offices around the
perimeter have been turned into shared conference rooms. The space is a
far cry from its cramped, plain-jane 4,000-square-foot space at 915
Broadway, said Gerry Manolatos, the communications director for Adap.
TV.
Mr. Manolatos would not disclose the terms of his lease, only that it is
for less than a decade. But in the merry-go-round of the tech sublet
market, Adap. TV is cashing in itself; its former space on Broadway is
also being sublet to a tech firm, he said.
“It’s like one deal leads to the next,” Mr. Manolatos said. “Everybody’s
thinking, ‘Who knows where we will end up next?’ ”
Copyright 2013 The New York Times Company. All rights reserved.
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