September 19, 2006 by jack petrie.

A prime lesson learned from the “Web 1.0” market corrections of the early part of this decade is that the governance boards of Venture Capital-backed technology firms no longer wish to see a large portion of their early stage investment money go towards non-core expenditures (think traditional brick-and-mortar real estate in the form of lavishly appointed offices with long-term lease obligations.) The current trend in space requirements for tech firms has been for 1) built space (sublease or direct), 2) in “move-in” condition and 3) available for terms of less that five years. Recently, however, and perhaps in response to the rising real estate market, we’ve also noticed an additional criterion of high-density in layout/ seating plan.

Density Defined

The concept of density, with regard to a space’s layout is the ratio of the rentable square footage (”rsf”) divided by the headcount (based on a seating or furniture plan). In today’s rising and increasingly competitive market for commercial space, leasing opportunities that would meet the other three criteria (i.e., economical, turn-key and short-term subleases) are often eliminated from consideration by a relatively low-density layout.

It is possible to improve a space’s density, but it is accomplished most efficiently when addressed in the pre-construction or planning stage. The easiest method for increasing density is by substituting workstations for private offices wherever possible or by substituting smaller workstations for larger workstations. A traditional office environment with a mix of individual offices and workstations and common areas averages anywhere from 225 to 375+ rsf per employee. The higher metrics tend to represent lavish executive or law office installations while the lower numbers represent primarily open, sales or bullpen-type environments. A broker’s rule of thumb for a space requirement formerly was to use 250 rsf per employee and multiply a firm’s headcount by that number, i.e. 40 employees equals 10,000 rsf. Now, however, that number needs to be lower as most open-plan or call center environments can layout at densities under 200 rsf/employee.

Advantages & Disadvantages

The economic benefits to these substitutions are obvious: less square footage reduces base rent costs. However, there are other benefits to an open-plan or high-density environment such as higher levels of employee communication, camaraderie, cooperation and creativity. Similarly, an open plan environment tends to be less hierarchal and can improve and accelerate decision-making processes. The primary detractions of open-plan space, though, are loss of privacy and a potentially negative impact on recruitment of senior executives or others accustomed to a private office environment.

Most firms that create a high-density environment, however, offset the lack of privacy and personal areas with communal-type amenities, such as conference or “huddle” rooms, cafeterias, phone “booths”, lounges, even game rooms. At CRESA, for example, we attempt to practice what we preach in advocating open plan environments. Unlike most of our competitors, we have an open office environment that encourages sharing information and collaborating on assignments and new business development. Our 9,834 rsf office near Grand Central Station (100 Park Avenue) provides seating for 36 employees (273.2 rsf/employee). While this is comparable in density to a perimeter office-type installation, we compensate for our workstation efficiencies with approximately 2,000 rsf of communal areas and modular conference rooms. If you overlook the communal space, we occupy at a density of 217.6 rsf/employee, which is relatively lean by the standards of professional services firms.

But our late-1990’s space is relatively lavish compared to some of the layout densities we are seeing with recently negotiated leases for technology clients. A couple examples:

Some Examples

An Internet marketing firm’s original premises had a seating plan of 5,000 rsf for approximately 40 employees = a density of just under 125 rsf/employee. Their growth necessitated a move to larger quarters. The challenge was to find suitable, existing open-plan layouts with acceptable densities. Our solution was to find an existing sublease installation in Hudson Square with the combination of a high-density, open-plan environment with multiple communal areas. The resulting space density came in at just under 225 rsf/employee.

A venture-backed Internet client leased space in lower Manhattan for five years – a long-term commitment by technology standards. However, this firm was able to accommodate long-term growth by designing an open layout with a seating plan that attained an overall density of under 115/rsf employee.

This trend was taken to an extreme by a mobile content provider that interviewed our construction management team to devise a layout for their expansion space at approximately 65 rsf per employee, based on target density for full occupancy. We determined that we were unable to assist this firm, mostly because at such a high-density, there is little space remaining for any traditional office furniture or partitions.

Historical Comparison

For comparison purposes, I revisited a white paper written by members of our firm from 1999-2000. During this period, the average rentable square foot (“rsf”) per employee for the “New Media” industry was 246 rsf. This was low by comparison to the traditional office occupancy standards of 350 to 400 rsf/employee, but still higher than today’s trend, mostly due to the generous allotment of lounge and recreational common areas – think “foosball tables”. However, at that time, like today, in the “bootstrapping” phase of growth it was not unusual to see firms reach average occupying standards of 100-150 rsf/employee consistent with today’s densities. This was typically during the prefunding phase and achieved by “doubling up” workstations and offices.

Doubleclick was a prime example of density trade-offs. They achieved an efficiency of 280 rsf per employee (at 450 West 33rd Street) while including a full size basketball court, gymnasium, large “park” area, break out rooms, lounges and other common amenity areas.

To conclude, like in 1999, today‘s technology firms are able to use internal expansion and fluctuating densities to accommodate growth and to offset the economic impacts of a rising real estate market. The key difference is a much more economical approach to both space design and leasing decisions. While communal areas are required to offset an open-plan environment, they do not have to be extravagant or playful. On the leasing side, while the market is competitive, there is less of the “land grab” mentality of 1999 in the leasing commitments made today. Instead, the key drivers for practicing these aggressive density modulations are 1) more flexible layout and furniture systems, 2) greater mobility and flexibility in employees, 3) flatter hierarchical structure and 4) the addition of amenities to offset loss of space and privacy.

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September 13, 2006 by jack petrie.

Driven by a client’s desire to support its investments in the new technology needed to better serve its customers while providing an optimum work environment for its staff, CRESA Partners has succeeded in finding and negotiating long-term office space for Aer Lingus with the technological capabilities the international carrier needed.

CRESA assembled a project management team, and conducted an extensive search, culminating in a 10-year sublease for the international airline comprising 14,021 rentable square feet (”rsf”)at 300 Jericho Quadrangle in Jericho, on Long Island.

While the space provides the technology needed to support Aer Lingus’ new North American headquarters, the length of the lease allows Aer Lingus the time and freedom to fully invest in the technology and the space, all while providing staff with a centrally-located facility.
By November, the airline will relocate from its current headquarters at 538 Broadhollow Road in Melville, N.Y., to its new space.

300 Jericho Quadrangle is owned by We’re Group, which has net-leased this space to Cablevision, the sublessor to Aer Lingus.

“This new location in Jericho, combined with the length of the lease, allows Aer Lingus to fully invest in its new technology capabilities,” says CRESA Partners’ senior vice president, Jack Petrie, who represented the tenant. “At the same time, it also is more centrally located in the metropolitan New York area, which was important to our client and its employee base.”

Petrie worked with CRESA Partners’ project management principal, Leonard Eagle, and project manager, Cathleen Lynch, in finding Aer Lingus’ new space.

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September 13, 2006 by jack petrie.

Recently, the New York City chapter of the German American Chamber of Commerce moved its headquarters from Midtown to Downtown Manhattan. A key driver in the relocation was the continued cost pressures of maintaining a Midtown office.

In relocating Downtown, the Chamber took advantage of substantially reduced office space rates, as well as a number of other benefits. Although both Midtown and Downtown rates have both been rising, Midtown rates have been rising more rapidly, and the cost differential between the two sections of Manhattan has recently risen to historic highs. Therefore, companies who are in sight of their lease’s expiration date might do well to consider the potential benefits of relocating to Downtown Manhattan.

Office space rates in Midtown have been climbing sharply over the past several years, as the City’s economy has grown at a robust pace. Even though some large tenants, e.g., Verizon, are vacating Midtown space, the available Midtown office supply has not been keeping pace with the strong and growing demand from the securities industry, advertising, media, telecom and other sectors.

On the other hand, Lower Manhattan office rental rates are climbing, too, but from a substantially depressed level immediately following September 11, 2001.

Historically Large Rent Differentials

At this writing, average asking rents in Midtown have risen to $59.65 per rentable square foot (”rsf”) of Class A office space, while Downtown, Class A space currently averages $41.50 per rsf — a differential of more than $18.00 per rsf, or about 30% below the Midtown average. (Class A space is the best available space, typically in newer buildings and with the greatest amount of amenities.)

Thus, based on the rent differential alone, Downtown space would seem to be a bargain compared with Midtown, and a move to Lower Manhattan can be viewed as a highly opportunistic action, particularly for a non-profit entity such as the German American Chamber of Commerce.

Midtown Concessions, Downtown Benefits

The economics of office leasing are a bit more complex, however. For example, a typical Midtown landlord might offer a “tenant improvement allowance” to offset renovation costs in the range of $40.00 to $45.00 per rsf – i.e., between 67% and 75% of the first year’s rent. At first glance, that sounds substantial.

However, when building from “raw or demolished space,” an improvement allowance of this size would only offset about half of the tenant’s total project cost for move-in condition – depending on the layout configuration, finishes (e.g., “plain vanilla” offices versus glass & wood) and timing/scheduling (e.g., an expedited job costs more for overtime labor). Additional costs, such as cabling, architectural and engineering fees, furniture and phone equipment add further to tenant costs.

Thus, the tenant improvement allowance could be essentially offset or wiped out by the project’s additional costs.

Turnkey Move-Ins

Further, Downtown office space is today subject to significant financial benefits not always available in Midtown space. For example, some landlords will provide “turnkey” move-in spaces, with the space already configured, ready for the organization to move in – i.e., requiring no additional construction costs. The German American Chamber of Commerce was able to take advantage of such a landlord’s concession package at the Chamber’s new location at 75 Broad Street in Lower Manhattan.

Downtown Incentive Payments

Another potential advantage of relocating to Lower Manhattan are federal, as well as New York City and State incentive payments that have been made available since September 11, 2001 to encourage organizations to relocate or return to the Downtown district. In addition to the concession package discussed above, in making its move, the German American Chamber was able to take advantage of such government incentives totaling nearly $100,000. Additionally, there are also tax and utility incentives available Downtown.

CRESA Partners represented the Chamber in negotiations with the landlord at 75 Broad Street; in disposing of the Chamber’s former Midtown offices at 12 East 49th Street; and in managing the construction and build-out of the new offices.

Another Advantage: Former “Telco Hotel” Space

Furthermore, because of both its original construction and its previous use, quite a bit of space outside of Midtown offers additional benefits to tenants. For example, the selection of 75 Broad Street as a location for the German American Chamber’s new headquarters reflects a recent trend in Manhattan real estate. This trend – the quiet transitioning of former “telco hotel” locations back to traditional office tenancies – offers “big block” or “large floorplate” spaces in buildings that historically, have had large quantities of available space. “Telco hotels” are buildings that were designed (or retrofitted) to be used primarily for telecommunications switching equipment. These buildings were shared warehouses of fiber optic cable and telephone wiring for the co-location of voice, data and Internet providers. They were one-stop warehouses for switching networks that were either too valuable or too vulnerable to be housed in traditional office buildings.

These telecom equipment warehouses, while having their advantages – e.g., in terms of faster Internet connections – peaked in the marketplace in the early part of this decade. The end of the dot.com era began a downturn in the economy and in the futures of the telecommunications companies and the telco buildings where they were occupants. Other factors, such as zoning restrictions and power shortages, contributed to this downturn.

Thus, a significant amount of former telco hotel space has come onto the market as being available for traditional office leasing. Such space offers a multitude of advantages. These are typically older, sturdier buildings, with high ceilings. As telco hotels, they were upgraded with advanced telecom and broadband infrastructure. And, as the industry matured, additional services were provided in these buildings beyond space and broadband infrastructure – such as reinforced concrete construction, closed circuit TV surveillance, firewall protection, auxiliary power generation, biometric hand scanners, Kevlar-coated bullet resistant walls, and laser-aided intruder detection systems.

Where Many Household Names Have Moved

These advantages, in addition to the significantly lower rents compared with Midtown, have created substantial motivation to move into these buildings, especially for companies that are heavy users of telecommunications and broadband technology.

The building at 75 Broad Street, where the new offices of the German American Chamber are located, is a former telco hotel.

The lower rental rates Downtown, as well as the additional advantages, have induced many companies with household names in a variety of industry sectors to locate offices further south of Midtown. These include RAI Broadcasting, Cambridge University Press, Bartle Bogle Hegarty (advertising), Google and WebMD, all of whom are currently occupying space in buildings formerly marketed as telco hotels.

The bottom line: Downtown Manhattan is a viable location – with many available advantages – that companies should consider when evaluating new office locations. While the rental rate differential between Midtown and Downtown may narrow in the years ahead, as overall economic conditions, as well as office space demand and supply, evolve, the benefits of locating Downtown will not evaporate.

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