Streams

Office Space a Challenge for Silicon Alley Startups

Wednesday, August 28, 2013

When a Silicon Alley startup gets a new round of funding, the company might double or triple in size and quickly need to find a roomier office to house all its new employees.

Established businesses in New York's signature industries like finance and advertising typically sign decade-long leases, but small tech firms operate by different rules.

"A small company who's been in an incubator or has been in a shared space might go from zero to two people to two to 10 people, but they're still not ready to sign a five, seven, 10-year lease," says Kyle Kimball, president of New York City's Economic Development Corporation

Many tech entrepreneurs say their companies need flexible arrangements, not the one-size-fits-all leases landlords are offering. That disconnect has led to a booming secondary market in subleases with bigger tech companies offering desks or corners or conference rooms to smaller firms.

Subleases made up a third of all rentals among Manhattan tech companies between January and April, according a recent report from commercial real estate firm Studley. That's twice the rate of other industries. 

"Startups are mobile. They come in different sizes. They seek flexibility," said Amol Sarva, a serial tech entrepreneur. "Most floor plates of offices are bigger than your average early-stage startup will need, so mutualizing or sharing in this way, I've found to be extremely common."

Sarva leases a floor in a building on 18th Street, right in the heart of Silicon Alley. He rents the space to two startups, including Aloha, a nine-person health and wellness outfit. Both have subleases.

"It's great because you don't have to sign any big contracts, and we had a really good deal," said Aloha founder Constantin Bisanz. 

The company is currently in stealth mode as it prepares for an October 15 launch. A few months back, when it had fewer employees, it shared its office with another startup.

Sarva's other tenant rents out desks and portions of its office to three startups, so there are four or five businesses sharing one floor, the entire operation cobbled together through subleases.

Another tech company getting creative with space is Squarespace, which helps people and businesses build websites. Its employees have been working in a 12,000 square foot SoHo loft for more than two years. 

The company is growing, but instead of decamping to a 40,000 or 50,000 square foot space that it could grow into over several years, Squarespace is keeping its loft and annexing space nearby. 

It recently added a 5,000 square foot office next door. The downside is that some office mates have to leave to building to see each other, but there are upsides too, like flexibility, lower cost and a shorter sublease. 

Tech entrepreneurs are doing what they like to do: Innovating and disrupting. Observers in and out of the industry, however, say the city needs to come up with solutions too.

"How do we make sure that there's ample space for the next round of startups, that there's enough space for the successful startups of the last couple of years to grow?" said Jonathan Bowles, executive director of the Center for an Urban Future

Bowles says the next mayor needs to address the tech industry's real estate concerns. The current administration under Mayor Bloomberg is trying to deal with the demand with grants for companies willing to move downtown.

Kyle Kimball of the EDC says the city recognizes landlords and tech companies aren't always on the same page. He calls it's an opportunity for the private sector.

"I think we're hopeful that the real estate industry will innovate. They want less risk, more stable cash flow," he said. "There's probably a business in there for someone to step in and say, well I'm willing to take that risk and I want exposure to tech companies."

If that idea inspires a new company to form in New York City, there might be one more startup vying for space.

Produced by:

Cambra Moniz-Edwards

Editors:

Charlie Herman

Contributors:

Daniel P. Tucker

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