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Subleases trump traditional leases amid New York City tech boom.

From social media heavy-hitters like Tumblr and Foursquare to creative content providers like BuzzFeed, Manhattan has become a veritable hotbed for technology startups, and that, in turn, has provided a boon to lessors of short-term space.

But the impact on commercial landlords hasn't been as rosy.

According to Studley's Insights report, "Subleases Popular Amid NYC Tech Boom," authored by its chief economist Heidi Learner and research colleague Chris Volney, the focus on sublease space by technology firms is creating unexpected opportunities for tenants across all industries while impeding demand for the direct office space controlled by many of Manhattan's largest landlords.

The white paper illustrates the rise and willingness of these firms to embrace short-term subleasing through a thoughtful narrative about the evolution of New York's "Silicon Valley of the East" as an economic and cultural powerhouse.

But despite the popularity of the tech sector, office landlords are seeing a diversion away from traditional, direct leasing transactions as a result.

"While the growth of existing tech companies and new startups would typically favor landlords, the current tech wave has not produced a surge in demand for direct office leases," Learner said.

"Like the tech industry overall, the physical space requirements for these tenants tend to be dynamic, efficient and unpredictable."

At the same time, the new class of tech/ creative tenants is making commercial real estate decisions that accommodate the uncertainty in other sectors heavily impacted by the 2008 recession, like financial services.

Learner explains that the rise in tech subleasing has resulted in benefits to large corporate tenants who have chosen to offload a portion of their space rather than to commercial landlords, who normally would be the beneficiaries of such growth.

"In addition, subleases are beneficial for tech companies because they typically necessitate less of an up-front cash outlay related to space build outs than direct space," Learner added, citing BuzzFeed's 57,691 s/f sublease from jewelry giant Tiffany & Co. at 200 Filth Avenue as an example.

"As we've seen in the marketplace, this trend has allowed larger companies to keep costs down on underutilized space while locking in current market rates for future expansion."

Other findings in the report include:

* 33.3% of new leases for tech/creative firms with move-in dates between January 2013 and April 2013 were subleases; In contrast, subleases for traditional tenants comprised just 15.4% of all traditional tenant deals;

* Tech firms have an average sublease term of 4.4 years, one year shorter than the average sublease term for non-tech tenants;

* Tech tenants finalized sublease agreements an average of 8.8 months after a space was listed, while non-tech firms took nearly 2.5 months longer on average to acquire their space;

* Flexible lease options such as right of first refusal, right of first offer and must take clauses are becoming important options in direct leases.

Going forward, Learner predicts that in addition to incorporating more flexible options into leases, tenants may 'buy' flexibility by taking more space than needed and structuring short-term sublease agreements amid strong demand from emerging start-ups.

"As Midtown South fills up, the Midtown and Downtown submarkets may become more of a value proposition as well," she added.
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Comment:Subleases trump traditional leases amid New York City tech boom.
Publication:Real Estate Weekly
Date:Jul 31, 2013
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