David Cummings on Startups

The Real Estate Equation for Fast Growing Startups

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David Cummings

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Real estate is tough for startups. There’s the unpredictability with where you’ll be in 24-36 months combined with one of the last remaining old boys network (at least in Atlanta). The best thing for startups to do is go the sublease route. Unfortunately, with the sagging commercial real estate market many of the subleases have dried up as companies that went out of business turned their space back over to the landlord and the macro economy has been soft for several years now resulting in enough time for many subleases to be rented by tenants.

Subleases are most plentiful right after the economy turns downward and companies put excess inventory on the market. When things are starting to pick up, even so slightly like now, companies hold on to excess space longer in the event things do continue to improve and the space is needed. Fast growing startups have an even bigger challenge because they are hiring people so quickly they need an even larger amount of unused space on hand to accommodate the growth. There’s no easy equation.

The best thing to do, absent a sublease, is to look for flexible landlords and build into the contract things like an option to break the lease early if you out grow it, right of first refusal on adjacent spaces, and flexibility to move into other spaces in the same complex without penalty. Yes, flexibility is the most important consideration for direct deals.

What else? What other thoughts do you have on real estate for fast growing startups?

Comments

6 responses to “The Real Estate Equation for Fast Growing Startups”

  1. Charles Brian Quinn Avatar
    Charles Brian Quinn

    On general advice for “real estate” for startups: Don’t do it! Stay nimble, and don’t fret too much over real estate. A “cool office” won’t make or break your business, and isn’t necessary when you first start. There are so many ways to collaborate and work virtually, that I say: “delay getting a real office as long as possible.”

    I’ve been a fan of the “sublease” option for quite some time. It’s helped us grow and be flexible about space. We’re actually about to go into another 6-month sublease (instead of month to month), which is flexible enough for us to continue growing!

    Reply
    1. David Cummings Avatar
      David Cummings

      Great points. I agree that entrepreneurs shouldn’t spend too much time on real estate and keep their costs down with maximum flexibility.

      Reply
  2. Michael Cohn, Cloud Sherpas Avatar
    Michael Cohn, Cloud Sherpas

    We were very fortunate to find a flexible landlord willing to work with us as we grew during our first two years. Sure, our startup space was a bit grimy, but fold-out tables for desks and two-to-an-office is how you do it in the early years. Contact Ash Parker at 404.816.1600 if you’re looking for flexible real estate options.

    Reply
    1. David Cummings Avatar
      David Cummings

      That’s the way to do! Keep costs down and invest in the team.

      Reply
  3. Scott Perry Avatar
    Scott Perry

    Good points, David.

    And to Mr. Quinn’s point, the longer you can go without a traditional office the better. It saves capital that you can in turn spend on research, marketing, or people. As well as you will be able to provide a landlord with a longer track record of growth for them to feel more comfortable to brining you in as a tenant in the buildng when that time comes. And at that time, hopefully, you will not have to not have to jump through as many hoops, though letter of credits or personal gaurantees can still be likely.

    If looking for space, it is crucial that you know and understand the market and the dynamics of short term solutions and startups. A local building onwer is more accepting of doing a deal with a startup as well. Some of your larger institutional, nantional owners are less likely to be open to signing a lease with a startup. Spec space is good to seek out, as the landlord has already sunk in the imporvement dollars. Providing business plans, contracts that you have recently won, as well a painting a picture (a story) of success of your company will help an ownership understand you and your business.

    Getting into space may not be a bad idea. If you need to be in a space for creating culture, team building, and continuity, its a great idea. There are a lot of options out there and the benefits can outway the costs. However, as a Tenant Rep myself, my job is to make sure my client knows the challenges that they will face in respect to certain buildings, owners, and growing pains. It’s definately a balancing act and having a good stragegy in place necessary to minimizing occupancy costs and mitigate risks.

    Reply
  4. How to Be Successful in Commercial Real Estate | Return On Investment

    […] of the building, and compare it to others in the area. Try to get a good idea of what the going lease rate is before you decide to purchase a building. Otherwise, you may end up in more debt than you would […]

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