Having the flexibility of shorter leases for smaller spaces and a voice in the design of prebuilts have become important to tenants, especially for the new companies that are in a growth mode.
Since most tenants don’t have either departments or an executive focused on real estate, they prefer that building operators construct the spaces. “Tenants also like having no risk in terms of construction or delivery,” says Scott Rechler, CEO of RXR Realty.
Owners including RXR, HSP Real Estate Group and the Kaufman Organization are providing prebuilts for smaller tenants and even allowing shorter terms.
“If you are going to grab a tenant in the growth mode, you need to afford them options [to move around and grow in your building],” says Paul Amrich, vice chairman of CBRE. “You therefore build an environment you can amortize over 10 or 15 years and have some of that [work] embedded in the deal.”
In some locations, even larger full floors of as much as 15,000 square feet can also be rented for less time.
That’s because these installations can later be recycled to the next company with minimum work, like a fresh coat of paint and swapping out some floor tiles.
“The idea is that you can reuse their space if they move out and are growing — and at a higher rent,” says Mike Reid, a principal with HSP Real Estate Group. “The assumption is that [in three years] the rents will be higher.”
Still, HSP principal Gerry Nocera adds, “We tend to like tenants that can make money — and grow.”
Grant Greenspan, a principal with the Kaufman Organization, is willing to gamble on shorter deals because the space is “110 percent recyclable.”
Many such tenants are startups with new concepts and set funding. Some have millions of dollars and may not be in the black yet — but they have plans with a three-year horizon.
“A lot of them expand and take another floor and renew,” Greenspan says. “Very few actually leave.”
To ensure payment, most owners and managers like David Koeppel, principal of Koeppel Rosen, obtain a letter of credit to hedge the risk. “We understand there is risk. If the [tenant does] leave, we are covered for the cost of the work, rent and brokerage,” Koeppel says. “It won’t replace the rent, but it certainly cushions the blow.”
While there is no rule of thumb, Reid says they ask for three to six months of rent as security. “We are much stricter with the ‘burn rate’ companies,” he says, referring to firms that have no income but are spending down — i.e. burning up — their investors’ cash.
Koeppel is seeing activity from tech companies at 902 Broadway, where he has signed some five-year leases. “The tech companies need the seats today because they have these business plans with meteoric growth,” he says. “They are coming with 40 people and a budget for 70 to 90.”
Even the institutional-quality 527 Madison now has large full-floor prebuilts of 15,000 square feet, says Keith Purcell, vice president at Mitsui Fudosan America. (Smaller ones are available at its other buildings.)
With many properties providing these varied offices and flexible terms, tenants have lots of choices, including subleases.
To stand out from the sudden crowd, Greenspan is offering the ability to personalize Kaufman’s spaces. This might include a different color paint or other branding.
With the goal of attracting creative tenants to buildings near Madison Square Park, Kaufman has installed lots of funky artwork and edgy lobbies, plus added roof decks.
It’s now updating 236 Fifth Ave. at 27th Street, along a stretch with apartment buildings. To blend in, the firm created a “resi-mercial” look with rich woods. “The doorman will have a jacket and we’ll have concierge services,” Greenspan adds.
