Maturing technology companies are competing for top-tier space in tech-oriented cities around the country. Here, of course, it’s Amazon that sets the pace.
When F5 Networks signed a lease last spring for 28 floors in the Mark, a new 48-floor office and hotel edifice in downtown Seattle, the deal capped a hunt for new headquarters that in 2019 will provide the company with room to grow and its employees with nearby transit, restaurants and other amenities.
Even with more than 6 million square feet of office space under construction in the Seattle metropolitan area, space was vanishing, said Jay Phillips, director of global real estate and operations for F5 Networks, which delivers application cloud and security solutions. Among other rivals, the company was competing with Amazon, the Seattle-bred online retailing behemoth, and out-of-town technology companies entering or expanding in the market, including Google, Facebook and Uber.
“The sarcastic joke is that our (current) headquarters has one of the farthest walks to a Starbucks in Seattle — a quarter of a mile away,” Phillips said. “But it was a fast-paced real- estate search to find space and not lose out on the opportunity.”
Recent notable tech deals
Signed a lease last spring for 516,000 square feet in the Mark, a new 48-floor office and hotel edifice in downtown Seattle
Lease of 436,000 square feet in a new office and residential tower in downtown San Francisco.
Lease of 378,000 square feet in 4 World Trade Center in Manhattan.
Lease of an entire 315,000-square-foot office building under construction in the Domain mixed-use neighborhood in Austin, Texas.
Square feet leased by tech, creative and media firms in “trophy buildings” in the U.S. during past 12 months.
Square feet of office space under construction in the Seattle metropolitan area.
Similar space races are happening in tech-oriented markets around the country, and like the decision of F5 Networks to move into a top tier, or “trophy,” building, more maturing tech companies are a main driver of occupancy in newer high-end offices. That’s a departure from the days when tech startups preferred old warehouses and office buildings converted into wide-open loft offices. Full of exposed brick, wooden beams, high ceilings and concrete floors, the funky work spaces gave birth to tech enclaves in places like San Francisco’s South of Market neighborhood and Manhattan’s Flatiron district.
“Tech companies pioneered the idea of going into cool, creative space, but they represent a greater percentage of our leasing activity each year,” said Nadeem Meghji, head of real estate for the Americas at Blackstone, the New York-based private equity firm that owns 50 million square feet of office space in the United States.
Tenants in the technology, creative and media industries leased more than 8.5 million square feet in trophy buildings in the United States over the 12 months that ended in the first quarter of 2017, according to Jones Lang LaSalle, the Chicago-based commercial real estate brokerage firm. That amounted to 22 percent of all trophy space leased over the period, a year-over-year increase of 7 percentage points. It was also second only to the banking and finance sector in total square feet leased.
Recent notable tech deals include Facebook’s lease of 436,000 square feet in a new office and residential tower in downtown San Francisco, Spotify’s lease of 378,000 square feet in 4 World Trade Center in Manhattan and HomeAway’s lease of an entire 315,000-square-foot office building under construction in the Domain mixed-use neighborhood in Austin, Texas.
Of course, tech companies dominate the office market in Seattle these days. In the third quarter, a majority of the 20 biggest leases the city were by tech companies, including major space taken by Snap, Oculus VR, Airbnb and Oracle, according to the Broderick Group.
Amazon alone made up five of the top seven leases in the last quarter. Amazon occupies about 19 percent of all Class A office space in Seattle.
But companies in all sectors today — not just tech — are demanding the design elements typically found in the warehouse conversions, such as open floor plans, natural light and exposed ceilings. Along with proximity to transit and amenities, layout is considered an important tool to recruit and retain workers, and developers are obliging tenants in new buildings and those in retrofitted older buildings, particularly modern offices built in the 1980s and later.
The Mark, wrapped in solid glass, has no columns, for example, and it boasts ceilings 16 1/2 feet high and windows 9 1/2 feet high, said Kevin Daniels, the building’s developer. About 10 years ago, he trusted his gut that tech employees would press for downtown Seattle locations that offered street energy and amenities nonexistent in campus or industrial settings. He also took note of space design ideas being discussed by executives at Starbucks, which in 1993 moved into a former Sears catalog distribution center that Daniels converted into office, retail and manufacturing space.
“It turns out that we look really smart,” said Daniels, whose early efforts to develop the Mark were halted by the Great Recession. “But it was kind of nerve-racking at the time.”
Real-estate professionals say older buildings generally lack modern energy efficiencies, elevators, bathrooms and data capabilities. The inability to expand in the converted buildings and their scarcity are also restrictive.
“Once tech companies get to a critical mass of employees, they realize that those funky buildings present more of an operations hassle versus any modern office building,” said Nicholas B. Farmakis, a senior managing director with tenant representation firm Savills Studley in New York. “They have become part of the establishment and are taking a more mature approach about various business decisions, like where to house their employees.”
Proximity to transit, shops and restaurants is critical, but so are amenities within buildings, including coffee stands, gyms, lounges and, of course, the proverbial Ping-Pong table. Tenants are more likely to find all of those features in new or retrofitted office buildings, said Stuart Williams, a managing director with Jones Lang LaSalle in Seattle.
The renovation of the century-old 114 W. 41st St. office building in Manhattan by Blackstone’s Equity Office division includes a coffee bar, pool table, bleacher and lounge seating, and four big-screen televisions in the lobby. Tech tenants include Roku and VTS, a real-estate leasing and asset management platform.
“We’re creating an atmosphere of fun, fitness and food, because that’s what tenants are looking for,” Meghji said. “The role of landlords has evolved — today it’s about providing an experience.”
Daniels added a hotel and event space to the Mark when he resumed development after the recession. The additions appealed to F5 Networks, which ended up leasing 516,000 square feet of space. The changes helped round out the building’s amenity package, which includes lounges, restaurants and a fitness facility.
“It all brings a lot more life after 5,” Daniels said. “The younger set really likes to be entertained — at all times — whether it’s by food, drink or games. They’ve got to have it.”