How to Find and Negotiate for Office Space in New York City as a Startup

This is a re-post of my guest post on BetaBeat.com and the Commercial Observer.  I hope you like it! 

So your startup has gotten too large for General Assembly, Dogpatch Labs, WeWork Labs, Betaworks, TechStars, or wherever you choose to incubate the next Facebook. You love the high tin ceilings, the wood floors, the exposed columns, and the proximity to the Ace Hotel, but it’s time to take off the training wheels and ride out on your own. This article is your definitive 900-words-or-less guide to making it in the big city.

Step 1: Determine what you need.

Most importantly, how much space do you need? Major considerations that impact square footage are employee count, number of private offices and conference rooms, and room for expansion. An architect can help you develop a “space program” that outlines the square footage you will need.

Other things to think about are:
What type of space? Traditional or creative/loft?
What neighborhood? Choices often focus on industry/image, employee commute and subway access.

A note on location: We brokers divide Manhattan into three major markets: Midtown, Midtown South and Downtown. Each market has many submarkets (neighborhoods), but on the whole, Midtown is the most expensive, followed by Midtown South and Downtown. Most startups end up in Midtown South, as it is a location of choice for peers, has lots of loft buildings, and exudes a hip vibe. The largest concentration of startups is in Gramercy/Flatiron, followed by SoHo/NoHo.

Step 2: Identify and explore your options.

A broker can create a survey of different spaces that meet your criteria. From this survey, you can pinpoint the spaces you’d like to tour. Touring each of these options gives you the opportunity to test your assumptions on neighborhood, type of space, square footage and other needs.

Step 3: Prepare a short list/financial analysis.

Each space will be sized differently and have varying rent and deal terms. A comparative analysis allows you to put all properties on a level playing field.

Step 4: Submit offers and negotiate deal terms.

Your offer outlines the terms at which you are willing to make a deal. If possible, you should submit offers for multiple spaces at the same time. This creates competition among owners and helps achieve the best deal possible. Some deal terms to think about:

• Rental rate (per square foot per year)
• Rent abatement
• Lease term
• Electricity
• Heating and air conditioning
• Operating expenses
• Taxes
• Landlord’s work or funds for space build-out
• Sublease and assignment rights
• Signage
• Renewal/termination options
• Security deposit/guarantee

While all of these items are negotiable, there are market standards for each of them. Your broker will help you establish what terms are fair.

Step 5: Negotiate your lease.

Hire a lawyer! New York City landlords are sophisticated. Their lawyers draw up leases that benefit them. Your lawyer will work with your broker to advocate on your behalf and ensure the landlord doesn’t take advantage of you. When negotiating a lease, watch for:

• Correct business terms
• Sublease provisions
• Compensation for failure to deliver the space on time
• Relocation clauses
• Subordination, non-disturbance and attornment
• Insurance (check with your insurance agent)
• Accurate description of landlord’s work or drawdown of tenant improvement allowance.

There are a million other items like these, so make sure you have a broker and a lawyer!

Step 6: Build out the space and move-in.

If your lease stipulates that the landlord construct your space, be sure you know the completion date and the finishes/quality of installation. Plan to integrate your IT/telephone wiring at the same time. If you’re overseeing space construction, monitor layout, costs and deadlines! When move-in time arrives, make sure the internet and phone services are functional and you understand the building protocol for move-ins.

A few words on ways to accommodate growth:

Find a sublease. Sublease space typically rents for 20 to 30 percent less than space available directly from landlords. Most also require a shorter time commitment in years than an owner will offer, because you are assuming another company’s remaining term. However, with a sublease you won’t have a direct relationship with the landlord, the landlord can possibly throw you out if the sublandlord defaults, and you’ll likely have to pay for a new build-out out of pocket.

Right of first offer. Depending on the size of your requirement, the landlord may give you the right of first offer on any space that becomes available next to yours, on your floor, or in the building.

Right to terminate. Landlords will often allow you to terminate your lease early provided that you give advance notice and pay a penalty equal to the landlord’s unamortized transaction costs.

Renewal/expansion clause. You may insert an option into your lease to renew or expand at either a pre-determined price or fair market value.

Expansion within portfolio. If you’ve outgrown your space, most landlords will accommodate relocation to a larger space within your building or another in their portfolio and rip up your existing lease. Still, it’s helpful to get this in writing.

These are just a few of the many considerations you’ll need to keep in mind when looking for space and negotiating a lease, so find someone you trust to help understand them. Your broker’s job is to educate you on the market, landlord character, and market-appropriate deal terms, and to walk you through the process.

Is the New Jersey Wholesale Data Center Market Back on Track?

Reposted from my July 21st Post on on www.datacenterpractice.com.

Two weeks ago,without much fanfare,Sentinel Data Centers announced that it had signed three major leases with “the largest”Fortune 500 firms for an initial aggregate footprint of 50,000 SF of turnkey data center space.  Since Sentinel’s first phase in  Somerset,N.J. represents 50,000 sf of data center space,this means that Sentinel has effectively sold out its first phase.  This press release came three weeks after The Wall Street Journal proclaimed that there was a “glut”of New Jersey data center space.

Meanwhile,we’ve heard from Digital Realty Trust ,that the company is now at 100% capacity in its 3 Corporate Place facility in Piscataway (there were only a few thousand SF left),and as we announced in our last newsletter,DLR leased a large chunk of Powered Base Building  space to Savvis at 365 S. Randolphville Road. That said,Digital has had a new turnkey 11,000 SF POD available in Piscataway for a very long time,and has not yet had success leasing its PBB offering at 650 Randolph Road in Somerset. DLR insiders tell us that the company is planning on building out at least one very large (20,000+ SF) pod in 650 Randolph Road which would be shared by multiple tenants with shared infrastructure. This would be a first for DLR,and according to our sources,the move is being made so that DLR can better compete on price and model with Sentinel and DuPont Fabros .

So what does all this tell us about the New Jersey Wholesale Data Center market? And,why is it that Sentinel has sold out its not yet complete Phase 1,while DuPont Fabros (which built-out over 80,000 SF of turnkey space) has had reported no activity for several months?

The answer to the first question is not simple. It seems that the New Jersey Wholesale Data Center market is improving. The good news from Sentinel and encouraging news from DLR is the most we’ve heard in quite some time,but until we hear more positive news from DuPont Fabros (fingers crossed for the company’s Aug. 3rd earnings call),it will be hard to make a proclamation that the  market is heating up again.

To get the answer to the second question,I reached out directly to Sentinel’s co-CEOs Todd Aaron and Josh Rabina. They offered three factors that are attributable to their success in the New Jersey market;“quality,energy efficiency and flexibility.”

I believe the most notable differentiator for  Sentinel is flexibility. According to Rabina,Sentinel’s  “on demand business model enables tenants to avoid oversizing initial up-front financial commitments,yet retain fixed-price contractual options to seamlessly add space and/or power capacity in the future as needed.”. In the New Jersey market,where corporate users must accommodate the migration from low density legacy systems to modern high density environments,flexibility is key.

We’ve heard from DuPont Fabros,that they have also “gotten the memo”regarding the needs of New Jersey data center users (vs. the Facebooks,Googles,and Yahoo!s of the world),and they are willing to be flexible in accommodating the ramp up of tenants. There is no question that DFT’s purpose built facility is a high quality product,and if the company can provide the type of flexibility offered by Sentinel,they should have the same kind of success in the New Jersey market.

While it’s unclear if the momentum in New Jersey will continue,we are cautiously optimistic,and look forward to more good news moving forward.

The Future of Manhattan Data Centers –Part 3 –More on 111 Eighth Avenue

Reposted from my June 14th post on www.datacenterpractice.com.

In The Future of Manhattan Data Centers –Part 1, I mentioned that “the jury is out for the future of data center tenants”in the building, but that it was unlikely that Google would try to remove these tenants entirely. We have now uncovered some new information that supports this theory,and sheds some light onto Google’s plans for the building.

On Google’s Jobs page they have listed a position in New York of “Strategic Negotiator,Network.” The role of this position is to “spearhead the acquisition and allocation of Google’s global networking infrastructure,”and ”interact closely with outside vendors to design,develop,and deliver [. . .] contracts for dark fiber,colocation,peering,voice,and data services.” More specifically the job description notes that the candidate will “Develop and execute on a vision for continuously improving the distinction of 111 8th Avenue as a premier location for telecommunications carriers,data center and colocation facility operators,and their customers.”

So,perhaps the jury is still out on the extent to which data center tenants will have a place in 111 Eighth Avenue,but it certainly appears that these tenants are part of the vision for the building’s future.

Have you heard any news regarding tenants in the building?  Please leave a comment and let us know!

The Future of Manhattan Data Centers Part 2 – The Next 111 Eighth Avenue?

I admit it, I've been neglecting this blog.  In part it's because I've been doing most of my writing for www.datacenterpractice.com, in part because of another side project that you'll hear more about soon, in part because I'm busy, and in part because it's the summer and when/if I have extra time I want to be outside.  

For now, I'm going to re-post my recent posts from datacenterpractice.com, and then I promise . . . new content! Much of it will be from my class on Negotiating a Lease for Startup Office Space. So without further ado . . 


In my last blog post I mentioned that new data center users and expanding tenants will likely not have any options in 111 Eighth Avenue.  Google has indicated that it plans to expand in the building and has taken all available space off the market.  Meanwhile,quality data center space in Manhattan is in high demand.  The most recent sizable data center spaces that have come to the market in Manhattan leased at very high rents after bidding wars –the former Lehman Brothers space at 85 Tenth Avenue and Digital Realty Trust’s space at 111 Eighth Avenue. Most recently,XO has leased a raw floor at 32 Avenue of the Americas,where it will have to make a significant investment to convert the space for data center use.

With the uncertainty around 111 Eighth Avenue,recent strong activity in the market,and an overall stock of data center space in Manhattan that is outdated and inadequate for modern users,many developers,owners and operators are bringing new data center opportunities to the Manhattan market.  These speculators are planning something never before tried in NYC,they are building turn-key wholesale data center space and powered shell space on spec.

375 Pearl Street –Sabey

The most well known of these new opportunities is 375 Pearl Street,a 1 million square foot former Verizon switching building.  The property is currently under contract by a partnership of Sabey and NY developer Young Woo and is expected close within the next week.  Sabey is still formulating its strategy for the building,but the first phase is expect to include four floors (36,000 sf each) of turn-key data center space and 9 floors of shell data center space. Verizon will also continue to maintain a 3 floor condo interest in the building. 375 Pearl shares a lot in common with 111 Eighth Avenue,with its huge elevators,very high ceiling heights,abundance of shaft space,and heavy floor loads.




121 Varick Street –SoHo CoLo

The second new opportunity on the Manhattan data center scene is SoHo CoLo at 121 Varick Street (full disclosure,we exclusively represent the landlord to lease their space). SoHo Colo is initially offering six floors of 13,250 sf each in a building that is being completely repositioned for data center use.  121 Varick Street sits atop the Hudson Street/Ninth Avenue “fiber highway,”and as a former printing building,has the floor loads,freight capacity and ceiling heights to handle virtually any use.  The building already houses a small data center aptly named Data Center NYC.  The owners plan to take the building to the next level by bringing in 15 MW of power from Con Edison,installing an entire-building double-interlocked pre-action sprinkler system,and delivering power and ample chilled water to each floor.  Construction has begun for the building repositioning and the new power vaults should be fully operational in six months.  Space in the building will be offered as either powered shell or turn-key depending on tenant needs and demand.


60 Hudson Street –Name TBD

Finally,an as of yet unnamed entity is believed to be in talks to acquire a four-floor 240,000 sf block of available space at 60 Hudson Street.  60 Hudson Street is well established as one of the most prominent carrier hotels in the world,but has historically been occupied by low density telecommunications users taking advantage of the building’s interconnection opportunities.  This new project could bring new life to the building with high-density modern data center users.

It is unclear whether demand for new data center users is sufficient to meet all of this potential new supply.  However,it is our opinion that at greatest risk are NYC landlords with outdated data center space.  If these new entrants to the market can price their space fairly it would stand to reason that tenants of outdated data center space will jump at the chance to move in to the 21st century.

Class Tomorrow - Negotiating a Lease for Startup Office Space

I'm teaching a class tomorrow on Negotiating a Lease for Startup Office Space.

The class is geared to helping growing companies find creative office space and negotiate leases that accommodate growth and flexibility.

Here is a link to the class: Skillshare - Negotiate a Lease for Startup Office Space.

The class will be held at Grubb & Ellis - 1301 Avenue of the Americas, 42nd Floor from 6:30 - 8:00 pm.

Here is the full overview:

Negotiating an office lease in New York City is a complex and challenging prospect for even the most experienced tenants. Finding office space and negotiating a lease that will meet the needs of a quickly growing company is even more challenging.

Students will learn the ins and outs of finding and securing office space, the nuances of New York City office leases, and tips for successful negotiation with savvy landlords that will assure flexibility for growth.

Note: All proceeds will be donated to Soles 4 Souls, a charity that donates shoes to adults and children in need.

You can sign up for the class here. If you're interested, please sign up as soon as possible so I can get you on the list with building security.

The Future of Manhattan Data Centers Part 1 - 111 Eighth Avenue

Reposted from my post on the Grubb & Ellis National Data Center Practice Blog.

Back in September, when 111 Eighth Avenue – one of the world’s premier carrier hotels was up for sale, I mentioned in a blog post that “an astute purchaser [of the building] will see the inherent value in great tenants with excellent credit (like Google), and data center tenants.” I did not predict at the time that Google itself would purchase the building. Now that Google has purchased the building, and has shown its intent to expand its presence in the building as quickly as possible, many of our clients have asked us what Google intends to do with the building’s data center tenants.

Google has not had much to say on this topic other than a statement from CEO, Larry Page:

“I think our primary reason for purchasing the building there was not the Internet infrastructure there but rather the office space that we really enjoy using. The Internet tenants are great, well-paying tenants. We appreciate having them there, but that’s not the primary reason why we purchased the building.”

What we do know, as we reported in our last New York Metro report, and was further reported by Datacenter Dynamics and Seeking Alpha, is that Google has taken all available space in 111 Eighth Avenue (aside from retail space) off the market. We have heard rumors that current tenants without renewal options have received letters from Google indicating that they should not expect to renew in place, and real estate industry sources claim that Google tried unsuccessfully to buy Nike out of its sixth floor lease. We have also heard from a data center tenant in the building, that the company received an ultimatum to the effect of – we will let you renew your POP space if you agree to terminate your office space early.

The jury is out for the future of data center tenants, but it certainly appears that new data center users and expanding tenants will not have any options in the building. So, this leaves me wondering, if I were Larry Page (oh if only!), what would I do?

The short answer is, that I would let the data center tenants stay, albeit at very high rents. In explaining this to a colleague, I started by attempting to explain “latency,” “hops,” and 111 Eighth’s place in the Internet’s infrastructure as an “ecosystem” of carriers and networks. He replied, “so it’s sort of like the Grand Central of the internet?” I love this analogy.

If you compare 111 Eighth Avenue to New York City’s public transportation system, the building is like Grand Central, Penn Station and the Port Authority combined. If Amtrak purchased Penn Station, it wouldn’t kick out New Jersey Transit and the Long Island Railroad, because so much of the value in the building is the ability to easily connect from one form of transportation to the other. If Amtrak didn’t want to lose the commuter business that goes through the building, it would have to provide the same services that New Jersey Transit and the Long Island Railroad provide.

In the same vein, if Google wanted to kick out XO, Abovenet, Telx and others, it would need to get into the interconnection business (to a much larger extent than it already is). This is certainly possible, but not highly likely. What I believe is more likely, is in the event that Google wants/needs the space occupied by data center tenants, it will allow these tenants to keep their Points of Presence to maintain the building’s ecosystem. What these tenants may lose, is their office space and perhaps some colocation space. It’s like leaving the railroad tracks, but getting rid of the “waiting rooms, concessions and ticket desks.”

In my next post, I’ll touch on how other data center operators and landlords are looking to create “The Next 111 Eighth Avenue,” and where the opportunity lies in New York City.

Grubb & Ellis First Quarter 2011 Market Trends

Office Market Highlights:

• Net Effective Rents are up 24% year over year
• Class A asking rents are up 11% year over year
• Class B Net Effective Rents are up 12% year over year
• The spread between Net Effective Rent and Asking rent has reduced from 28% to 21%

Click here for the latest report!