Want Office Space for Your Startup in NYC? 4 Things You Need to Know
If you’re a startup looking to take your first (or any) office space in NYC, you’re in good company. Hybrid work is here to stay, but if there’s one thing even the biggest remote-work lovers can agree on, it’s that you cannot grow a successful startup from the couch. The good news? You’re the cool kids on the block, and landlords want you (and your growth story). Whether you’re a seed stage or Series A startup or have raised several rounds of funding, startup office space in NYC can be an overwhelming and tricky landscape with a lot of moving parts and “gotchas” to watch out for. We’re here to help you navigate the end to end leasing process so you can focus on what matters most – growing your business. Here are the 4 most important things startups should know when taking their first (or any) startup office space in NYC:
1. “Your space is your face”: Your office space can help (or hurt) your ability to attract and retain talent in a competitive market
We have a saying in commercial real estate (not one of the cringey broker jargon ones, we promise) – “your space is your face”. Meaning, your space is someone’s initial impression of your brand and your vision, whether that someone is a prospective hire, existing employee, investor, interviewer or guest. The good news is there’s a space in this “post-pandemic” NYC office market for just about every face, and it’s a tenant’s market – here are 3 types of office space to decide between for your startup office space:
Coworking space: Many startups take coworking space as their first office space, which allows you to start out with a 6-12 month commitment. You’re going to pay a premium vs. traditional office space (we’ve modeled it at about a 32% premium all-in), but that premium buys you the convenience and flexibility of taking furnished, wired, and well designed space that’s ready to start working immediately and easy to maintain (no setting up wifi, buying furniture, or keeping up with the coffee and snacks) – and for a shorter term than a non-coworking landlord would accept. You’ll also sign a license agreement, not a lease, which saves you the cost of a lawyer reviewing a lease or sublease (this typically runs into the thousands). WeWork and Industrious are the main players, but there are others including Spaces, Bond Collective, the Yard and Regus. (Here’s our advice on what you should know when considering coworking)
Sublease space: Subleases have always been a great way to maximize value for startup office space, but especially now. 20 million square feet of sublease space hit the market during the pandemic, so chances are you’ll find a deeply discounted space that works for your aesthetic and layout, and comes furnished, wired and ready to go. Like any space, subleases run the full spectrum from brand new and beautifully built to the dungeon you wouldn’t wish on your worst enemies (a slight exaggeration but you get the point). There’s often a direct relationship between length of term remaining and price – less term = lower price; companies know at some point they’ll have to write off the asset if they aren’t able to rent it. Two other key things to know about subleases: (1) you’ll sign a sublease document that refers to the master lease (often 70+ pages) in several places – you’ll need a lawyer to review this and (2) even though you’re taking it off someone’s hands, they will still likely want a substantial security deposit because if you don’t leave when you’re supposed to, your sublandlord is on the hook for double or triple rent. The good news is you offset the pain of putting down a security deposit with paying a substantially lower amount in rent than you would in the same space direct with the landlord.
Direct space: Direct office space makes sense for startup office space if you’re looking for longer term space (3+ years) and there isn’t a less expensive sublease that suits your specifications, and/or when you want new space built to your specific requirements. You have your choice of prebuilt space that the landlord will modify to fit the floorplan you want, or what we call “whitebox” space, meaning the space exists but waiting for a tenant to specify the build. In this post-pandemic NYC office space market, you can expect landlords to pay for the build or modification in full so long as the floor plan and design fall within their building standards. With vacancy rates at ~18% (more than 2x the normal vacancy rate), landlords are especially willing to make a deal to attract and retain tenants in their buildings – especially for startup office space with high growth potential. The downside of direct space for startups is the relatively more expensive price tag (though not always the case), and the need for a longer term commitment; even with a longer term (3+ years), there are ways to build in flexibility to grow (see section 3 of this article on how to handle ambiguous growth plans for startup office space).
2. “Forget the office…what’s around the office”: The employee experience in startup office space
We’ve learned from working with many companies looking for startup office space that it’s not just the inside of your space that will attract and retain the best talent in a competitive market – what’s around the space matters too. Here are some of the top features startups taking NYC space are considering:
Location, location, location: This age-old real estate favorite is especially true for startups looking to find their first NYC office space…or any NYC office space. Key considerations include:
Are you close to the “hub” subway stations? Post-pandemic, getting people back to the office is all about convenience, so as a startup looking to take NYC office space you want to find office space that’s convenient for as many employees (and potential employees) as possible. For example, in more recent years, with so much of the work-force living in Brooklyn, access to the L train has become important, and one of the reasons Union Square and Flatiron have become home to so many tech companies. Areas like Meatpacking and Tribeca offer a great aesthetic and vibrant neighborhoods, but a lot of start ups are picking proximity to transportation over “cool factor” particularly at the beginning..
Are you close to other startups? Many founders like to know they’re growing a team and a business alongside others doing the same. Midtown South (Union Square, Flatiron, Chelsea) has historically been home for more startups than other areas of NYC, but in recent years this has expanded to include the Financial District as a startup hub. Proximity to other startups and founders can also be helpful when you’re considering buildings and landlords with startups in their portfolio. These landlords will be more accustomed to the relative risk of a startup tenant, understand and be willing to adapt for uncertainty with respect to growth, and be more comfortable with startup financials. When you’re a startup, landlords want to “win” your business and grow you within their portfolio, but they also have varying levels of comfort with your relative “risk”. It’s important to understand which buildings and landlords are experienced with startups, as this will have a direct impact on the economics of your deal.
What fast casual food is close to your building? We recently represented a startup that specifically wanted to be close to a Chipotle (yup, you read that right). As fellow burrito lovers, we completely understand and support this, but the bigger point wasn’t to enjoy an afternoon burrito: it was to be close to fast casual lunch places that their employees like and want to frequent (think Chipotle, Sweetgreen, Cava, Starbucks). Walking distance to household favorites might sound like a crazy way to choose space, but it matters. Especially when their alternative over the last 2 years has been to walk to their kitchen 10 feet away.
Outdoor space (and other building amenities): let’s face it, we live in New York City – so outdoor space has always been (and will always be) an added bonus. Right now with the pandemic fading and increased emphasis on bringing employees back to the office safely and happily, some startup founders and other NYC tenants are looking for outdoor space as a must-have vs. a nice to have (for this reason, almost every new construction building in NYC includes both private and shared outdoor space). Outdoor space can come in the form of private terraces specific to your space, or shared access to a roof deck or other terrace for tenants only; for shared space, you can usually rent exclusive use of the space for employee events, investor happy hours, etc. With the emphasis on outdoor space, office space with outdoor space is renting substantially faster – and relatively closer to asking rents – than other types of space.
In addition to outdoor space, landlords are especially focused on offering building amenities as part of the office space experience to attract startups and other desirable tenants. Many buildings now dedicate floor(s) to conference room space and event space so tenants have access to these amenities when needed without having to dedicate precious square footage from their space. Landlords are also looking at the retail space in their buildings as an added amenity, and pairing their retail space with the type of tenant they want to attract (i.e. looking to attract startups, a food court style retail concept or fast-casual restaurant that appeals to young talent).
The take-away: You want to think about your neighborhood, building and its amenities as an important part of the employee experience you’re offering in addition to the office space itself.
3. “ We don’t know how fast we’ll grow, we’re a startup”: How to handle ambiguous growth plans
One of the most common questions we hear from founders is how to think about growth when it comes to taking startup office space; you need to optimize spend and take space to fit your existing needs now, while also considering what happens when you grow and possibly outgrow your space before the lease ends (this is what we like to call a high class problem, but one worth solving for before it becomes a problem). Here’s how to solve for ambiguous growth plans when looking for startup office space:
COWORKING: many seed stage and other early stage startups start with a coworking space and take a lease for 6 – 12 months to start while they refine growth plans. The space is furnished, built, wired and ready to go, and allows for maximum flexibility that many founders consider worth the premium price tag. At the end of a short term and once you have a clearer picture of planned growth, you’ll have the option to stay in your space, expand, or consider taking more permanent space.
SUBLEASES: subleases are a strong option whether you’re a seed stage startup or have raised large amounts of capital but haven’t finalized growth plans; with 20 million square feet of sublease space available in NYC, you can likely find a substantially discounted sublease space that works for as long a term as you can comfortably plan for right now:
on a short term (1-2 years), this will be found money to the company subleasing so you’ll get an even better discount on the space
on a longer term (2 – 10 years), some sublandlords are eager to rent the space and will allow you to take a shorter term than is remaining on their lease with an option to extend, or you can take the full term with rights to sublease to another company down the road if you outgrow the space.
Because sublease space is substantially discounted relative to direct space, in some cases you can take larger space than you think you need within the same planned budget to hedge for unplanned growth.
Two caveats to watch out for: make sure your sublandlord is a stable company and won’t go out of business so you don’t risk losing your discounted rent, and be careful with your security deposit; a letter of credit (as opposed to cash) will save you should things go south. If you post a cash security deposit directly to the sublandlord and they declare bankruptcy, your money is tied up in court; if you post a letter of credit, it will cost a bit more with your bank but you’ll recover the security deposit in the bankruptcy scenario. (Note: not legal advice. Consult your attorney).
DIRECT SPACE: if you’re considering direct space, you’ll want to find a building that has vacant space and/or a landlord with a portfolio of buildings large enough to accommodate growth; most landlords will rip up your lease and give you a new one within the building or their portfolio if you outgrow the space, but they’ll need to have it available to do this; you’ll want to include this growth language in your initial lease as well as right of first offer on contiguous spaces, both of which will give you the option to outgrow the space should you need it. You also want to think about the footprint of existing tenants; if they prefer to rent full 10,000sf floors and you may grow into 15,000sf (a floor and a half), that building may not be able to accommodate this easily.
Some startups who are further along in their funding rounds also specifically look to new construction buildings because they’re more likely to have vacant space to facilitate growth in the building. New construction comes with a hefty price tag, but for well-funded startups who want to pair the ability to grow easily with the best aesthetic and amenities, it can be worth it.
4. “We have to pay WHAT?!?!”: The most common startup office space surprises
It’s not just base rent – there’s a “fully loaded” space cost: in direct or sublease space, you’ll typically have 3 main expenses in addition to base rent:
(1) Electric: sometimes it’s directly metered by use like in a house or apartment, sometimes it’s a fixed price per square foot – we use $3.50 / square foot when modeling conservatively, but each building will vary (and be careful with lease language, there are a lot of games that can be played with how electricity is billed that can add up to real money)
(2) Real estate taxes: these can be opaque and complicated, but the basic idea is you pay nothing in the first year (your “base year”) and you pay your proportionate amount of tax for the building above that base year (for example, if tax on a building is currently $10k / year, that’s your base, and you’ll pay nothing in that first base year as a new tenant. In year 2, you’ll only pay on increases above that $10k. If next year the building tax increases to $11k, and you’re renting 10% of the building, your tax hit in year 2 would be 10% of the $1k increase, or $100).
3) Operating costs: many buildings apply an annual increase above base rent in lieu of passing through operating costs to the tenants (which also creates a small profit center for landlords). 2-3% is “market standard” but if you’re a large tenant it’s possible to negotiate direct operating costs that will come in lower. You’ll want to understand whether your building includes cleaning in base rent or you’ll be paying the additional cost, and whether your building adds water, sprinkler and other charges (typically a few hundred dollars per month for each). What you don’t know will hurt you, so you’ll want to ask for a comprehensive list of any additional charges.
Note: If you’re looking for a more detailed summary of each office space cost, here’s how we recommend you budget for your startup office space.
4) Security deposit: for the same reason a startup can grow exceptionally fast, a startup can also disappear exceptionally fast. Landlords have varying degrees of comfort with this risk, so in any case you’ll want to focus on landlords who are experienced with startup office space. Landlords for direct and sublease space will typically ask for 4-12 months of the first year’s rent as a security deposit, depending on the landlord, space type and your financial risk. Coworking spaces will typically ask for 1 – 2 months rent as a security deposit (less than direct or sublease space because you’re a licensee not a tenant, so they have less risk. And again, you always have the option of posting a letter of credit instead of cash, which will cost a little extra with your bank but relieves the risk of your money being tied up in court if your sublandlord goes bankrupt. (Note: not legal advice. Consult your attorney).
Note: You can find some of our tips and tricks when it comes to security deposits here.
The Takeaway:
In conclusion, when it comes to startup office space, you want to keep occupancy costs low and flexibility high as long as possible, and you have options to do that (especially in this pandemic market). Startup office space comes with a lot of moving parts and “gotchas”, and can be an overwhelming and tricky landscape. You’ll want a broker team with deep knowledge and insight into the market, but equally as important one who you can trust to shoot you straight, negotiate aggressively on your behalf, and represent your best interests and bottom line only (and not also your landlord’s). We also have an article on the top 4 notable things we saw in 2022.
How We Can Help:
Why is that us? Unlike other firms in NYC, we represent tenants only to avoid conflict of interest that only hurts the tenant (especially for startups). With many startup clients under our belt, we’re experienced and well versed in the moving parts and “gotchas” of startup office space; we’re here to help you navigate the end to end leasing process so you can focus on what really matters: growing your business.
Contact us:
If you have any questions or want to talk through your specific scenario, please reach out to our founder Bert Rosenblatt at brosenblatt@vicuspartners.com, or at (917) 862-8820.