Office Space for Tech Startups

Don Prater

Don Prater

Our Q&A today is with Don Prater (732-8700) of The Stone Group. We wanted to find out some great tips and ideas that emerging technology companies should think about when looking at office space in Austin. Don is a tenant representative, and has been in the commercial real estate business in Austin for 20 years.

Q: You exclusively represent tenants. How can that be important for someone growing their tech company?

First, since The Stone Group does not have property listings in Austin, we won’t have a conflict of interest. A real estate firm with both landlord rep and tenant rep brokers would make more money putting the tenant in one of their own properties, which could be a conflict of interest. A good tenant rep will know the lease “gotcha’s” to avoid, and negotiate flexibility into the lease terms for tech companies, like expansion options, early termination options, sublease options, rights of first refusal, renewal rights, etc. A good tenant rep will know the market well, and will provide options that landlord reps won’t – like temporary holding space, sublease space, executive suites, and virtual offices. By knowing about existing space that a growing tech company can move right into with minimal remodelling costs, we can get shorter lease terms, smaller security deposits, and avoid personal guarantees.

Q: What is the Austin market like these days?

Austin has not experienced the downturn of office rates and occupancy that the larger markets have. Landlords here have seen a slowdown of activity, and are offering lease concessions like free rent and generous improvement allowances in order to keep the book rates high enough to meet the proforma they needed to purchase the building. So the “effective” rates are coming down, but not so much the market rates or asking rates. We have a 2-3 year supply of new Class-A vacant shell space, and plenty of vacant finished space in all parts of town.

Q: It doesn’t cost anything to have you represent a tenant to help find space. How do you get paid?

The landlords pay our commissions. If a tenant deals with the landlord’s broker directly, their broker gets the entire commission and looks out for the landlord’s best interest. If you engage me to represent your company, the landlord splits the commission between both brokers and I look out for your best interests.

Q: What are the advantages of subleasing somebody else’s space, as opposed to leasing space directly from a landlord?

Sublease rental rates are usually lower than new lease rates, because the tenant signed the lease several years ago when rates were lower, and because they are still paying the rent on the space and not using it, so the may be more motivated to offer discounted rates. The space was built out or altered for the original tenant, so if the subtenant can be flexible on the configuration of the space, they can expect a better rate, free rent, flexible lease terms, and smaller security deposits. Normally the shorter the sublease term left, the lower the asking rate because of moving costs and rent increases at the end of the sublease term.

Q: Do you have a “horror story” of someone who tried to do it themselves, or handle negotiations with someone directly?

We have a lease review checklist that we use to edit our cients’ leases and amendments. It is a long list of terms and conditions to avoid based on horror stories we have learned about. Examples include hold-over rent, lease termination after fire or causalty, default provisions, conditions for consent to sublease or assign, recapture provisions, construction costs and change orders, repair problems, HVAC, mold, parking problems, hazardous materials, etc.

Q: Is this a good time to renegotiate if your lease or sublease is coming to an end in the next 3-9 months?
Over the next year, as both direct and sublease space continues to come on the market, we should see a stronger buyer’s and tenant’s market with lower effective rental rates and higher concessions.

About Bryan Menell

Bryan is the Managing Editor for AustinStartup and the CEO of Mahana. He is a co-founder of Capital Factory, an investor and advisor, and runs the popular Austin Tech Happy Hour with his wife.

Comments

  1. In the age of the internet and information technology, there are quite a few folks who feel they can cut their own office lease deals Some things to note are – Subleases are harder to find typically they do not have signage visible, also there are advantages and disadvantages to subleasing which a listing service on the web does not tell tenants (sub-lessees). Also, the transaction of finding and negotiating office space in Austin is not just about finding a listing, there is quite a bit of market knowledge that goes into the transaction as well as understanding nuances such as security deposits, insurance requirements, provisions in the lease to look for. All in all, utilizing a commercial real estate broker is well worth the cost of zero to the client.

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