304,200 square feet of sublease space is available at 300 Apollo Drive in Chelmsford Square.
The lessons learned from the days of technology’s eminence and subsequent downsize have left a mark of fear and scrutiny on the governing bodies of today’s companies. For many, survival has taken the place as priority number one over comfort and prominence.
As this pertains to behavior and opportunity in real estate, tech companies, both large and small, have adopted the mentality of focusing heavily upon cash-burn reduction and conservation. Because real estate is typically the second largest expense to technology companies, this has led to trends both in seeking space and in disposition of excess.
When we think of the larger technology company in this economic climate, we unfortunately tend to think of bankruptcies, lay-offs and capital remnants of the tech boom. All of these relate directly to a company’s real estate situation and excess space as a result of poor or mistimed planning, which is a common ailment among the bigger players in the industry.
There are companies within this group that have enough capital on hand to have written off these large parcels of space, and in doing so have presented the market with its most aggressive rents. In historically sought-after East Cambridge, there is a furnished and wired sublease priced in the mid-teens from CSG Systems marketing roughly 100,000 square feet; CNET Networks has just begun marketing 36,000 square feet for $9 per square foot. Other properties include: Bull in Billerica at 70,000 square feet, $0 base rent, tax and operating expenses only, approximately $8 per square foot; Cisco in Chelmsford with 450,000 square feet at nearly $10 per square foot; EMC in Westborough with over 300,000 square feet available.
For these firms, remaining competitive for such a rare target tenant – needing 30,000 to 100,000 square feet – has led to some very aggressive pricing. However, today’s companies are learning from bankruptcy cases such as Genuity and Divine, which both had significant space for sublease before their respective demises, that quickly finding sub-tenants may play a major role in their immediate- and long-term well-being.
Aggressive pricing of sublease space is perhaps the most simple of options for larger companies with excess space. However, other companies with particular circumstances take the path of lease restructuring or global audit. Depending upon the situation, some landlords will consider taking back some space or providing some rent relief for a term extension. Some, but oftentimes not many without a replacement tenant, will allow a company to pay a termination fee to escape its existing obligation.
Companies who are aggressively seeking savings might also decide to audit not only their domestic but also their international lease portfolio, in hopes of taking advantage of unseen opportunities and avenues for compromise. With regard to cash savings and survival in a harsh economy, the larger technology company that confronts its real estate issues in full is far ahead of the game.
Because the majority of larger technology companies are either maintaining the status quo or downsizing, their plight is somewhat one-sided. Alternatively, earlier-stage companies just as focused on cash conservation are treading in somewhat trickier waters.
The days of excessive spending may be behind for the larger tech companies, but the repercussion of those days for the earlier-stage companies has led to an almost maniacal scrutiny by the decision makers. Executives and board members alike, have taken a keen interest in all aspects of their respective company expenses, perhaps none more-so than real estate.
Everywhere we see survivors of the bust with a fraction of their former work force intact. Consequently, space once inhabited is now a burden that cannot easily be given away for next to nothing, although quoting high rents will almost certainly spook interested companies. Finding the balance that attracts and leads a prospective tenant down the sublease path, while simultaneously having the deal make sense for a degree of rent and balance sheet recuperation, has become difficult for many companies that are looking to keep afloat. This has led to some wide disparagement in the sublease market.
On the other hand, there are early-stage companies seeking space. Following an extreme reversal of the days of tech excess, executives charged with the search are feverishly looking for space that will appease demanding boards and accommodate for the uncertainty of the times. People in these positions are sometimes so influenced by rumors — often a result of the aforementioned larger, written-off spaces — they’re unable to see that opportunities for low rent, low capital expenditure spaces are available in all geographic areas. And the comparative differences among all from a historical standpoint tend to be dramatic. The first quarter of 2003 compared to the first quarter of 2002 shows discounts for asking rents in Cambridge and the Route 128 to Interstate 495 suburbs from 25 to 40 percent, representing large savings for start-up companies looking to open an office.
There’s no question that it is a tenant’s market and although the time estimate for when it will turn is subject to much speculation, tenants should continue to have run of the negotiating table for some time. Companies looking to ease the financial burden of excess space will have to continue to price aggressively and act creatively toward all their real estate obligations.
Tenants looking for space will find the availability of great spaces with superior rates but will continue to press for deals to impress the boards and executive teams. The objectives of the two are simple: save cash where possible. Where those objectives meet and become reconciled is a different story.
