December 13th, 2013, By Don Catalano
Formulating corporate real estate strategy is challenging for a startup company. Startups need space like any other business. However, real estate is expensive and frequently takes long-term commitment, even though a new venture usually has neither money nor the ability to make such a commitment. With the right strategy, a new company in its earliest stages of existence can manage these risks and find real estate that grows with business. Here are three essential strategies that can help startups find commercial real estate that works for them:
Given that many parts of the country have a surplus of inexpensive commercial real estate properties that are just a bit of spit, polish and vision away from being a home for a startup, buying a building can be tempting. However, it’s one of the worst corporate real estate strategy mistakes that a startup can make.
Cheap buildings typically need work, and work costs money that startups usually don’t have. Furthermore, most startup companies are a small fraction of the size that they will become as they mature. A building purchased today will be much too big if the startup doesn’t succeed and much too small if it does. In either case, the company is stuck with a piece of vacant real estate that it has to re-tenant, or sell to someone else.
Leasing space is inexpensive, fast and flexible. It’s a much better match for the needs of most startup entities.
The only better corporate real estate strategy than leasing is signing short-term leases. Doing this also maximizes a startup’s flexibility. While short-term leases expose the startup company to rent increases in the future, careful budgeting while business grows should resolve this problem.
One way to get a short-term lease at a discount is to take on sublease space. Master tenants are highly motivated to find a sublessee and could be willing to negotiate terms that are in favor of the startup entity. Furthermore, while a landlord might want higher rent for a short lease on direct space, subleases are typically short-term by design.
In the heady days of the dot.com era, startups took extremely lavish space as they competed on how quickly they could burn through their venture capital funding so that they could go back for another round. Today’s corporate real estate strategy for startups is much more austere and can be summed up in three words: find cheap space.
Part of finding cheap space is selecting space that is already built-out or is adequate for the company’s needs with little or no work. Existing spaces are one way to accomplish this. Another is to find a flex space with HVAC, lighting and a few amenities that can be used as an open floorplan office.
Class C space offers two key benefits. Typically, it is already built-out, reducing the need for capital expenditures on tenant improvements. It also usually carries low rents and flexible terms thanks to the private landlords that typically own and control it. The challenge with class C space is finding a large enough open area that is supportive of collaboration. Shifting corporate real estate strategy to a space that requires leaving a few doors open or removing a few non-load bearing walls might be a small price to pay for move-in ready space with affordable rent.