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As seen in
Corporate Real Estate Strategies
May
, 2001
Subject to Change
Subleasing helps new economy tenants cope with recent uncertainties
in their businesses
By SEAN G. WELLINGTON, Assistant Editor
Flexibility has
long been the battle cry of corporate real estate departments
at high technology companies. Now, following the landslide of
the NASDAQ, many of these corporations are cashing in on the
ability to adjust their occupancy strategies.
"We’re
experiencing a fundamental shift in the way our economy works
with the Internet and its application," explained Jerry
Porter, vice chairman of CRESA Partners. "But there’s
such an adverse reaction now. All technology infrastructure
companies that we need to establish future growth across all
of the economy are out of favor."
High-tech companies, therefore, have moved into survival mode
and are scaling back their operations and spending until the
storm passes. As they lay off employees or try to fit more employees
in fewer square feet, their space demands have fallen off and
warehoused space has become a luxury they can no longer afford.
That’s where subleasing comes in handy.
Seattle-based Amazon.com Inc. has grown from 400,000 square
feet of space three years ago - in Seattle and Delaware - to
almost 7 million today. Subleasing has always been part
of the company’s five-year trajectory growth because they
often take more space than they need to ensure it will be there
when required. The online shopping leader has had to deal with
near-zero office vacancies in its hometown. "We had to
take major commitments the year before," said Julie Benezet,
director of global real estate and facilities. "(We) saw
prices going up as well as our head count."
But now Benezet must compensate for a 10 percent cutback in
Amazon’s Seattle staff "It made our subleasing program
more aggressive, especially in Union Station (one of the company’s
larger facilities)," she said.
Restructuring, consolidations and department migrations are
all part of the game for corporate real estate departments,
especially at a technology firm. "Most of it was planned for,"
Benezet noted. More importantly, she added, "We still control
(the space)."
Such control is essential if the urban-based company intends
to occupy large chunks of space in Downtown. While vacancy rates
are now inching higher - measuring closer to 5 percent
- and prices are coming down, it is still difficult to attain
significant contiguous blocks of high-quality space. Seattle
will see some buildings coming on in 2002, but they do not meet
Amazon’s parameters.
Even Cisco, which is faring better than most, recently put 86,000
square feet on the market in addition to putting a freeze on
hiring.
"Subleases are all about speed," explained Stephen
Rich, vice president of Equis Corp. "There’s a bit
of a frenzy out there when every month that goes by you’re
writing a check for $50,000."
Subleasing space in a market that has many tenants running
scared is no easy task. While real estate markets in general
are still chugging along at a relatively healthy pace, the demand
has waned considerably since the third quarter of 2000, said
Fred Beaubien, senior managing director at Cushman & Wakefield
Inc. "It could be a problem, especially if it’s a large
tenant," noted Beaubien. "The softness in the market is
on the sublessors, who have responsibility of the space."
"I have a dozen subleases on the wall that I’ve been
engaged in for the last two months," noted Rich. "Soon
it will be very difficult, so now we’re doing special promotions."
But the excess space is a relief to some who have been seeking
space, especially sublessees seeking lower rents and shorter
commitments.
Consequently, sublessors, while concerned with lack of demand,
have usually been able to dispose of space.
Catapult, a division of IBM Corp., recently signed a lease for
632,000 square feet in Bothell, Wash., but as demand for software
training decreased, so did IBM’s need for the space. IBM,
fortunately, had negotiated the ability to walk away from the
deal before occupying it. Eden Bioscience Corp. stepped up and
took over the space.
Sublease space is available, in part, because of the dot-com
crash. For those start-ups in a fight for survival, real estate
was important to creating a corporate culture and a brand. With
little or no operational profitability, the appearance of a
quality brand carried more weight with potential investors and
employees.
Joseph McMahon, vice president of The Garibaldi Group L.L.C.,
represents a financial services firm that was looking for suburban
office space. It settled on a location that had been tenanted
by Scient Corp. But now they are stepping up their sublease
program. "(Scient) went crazy with every expensive amenity
(and) lime-green and sky-blue coloring," said McMahon.
Consequently, those dot-coms that continue to have a pulse are
far less likely to demand such amenities. In the past, rent,
square footage and improvement costs hardly caused a flinch,
today form is taking a back seat to function. Essentially, they
will take what they can get, often taking space on different
floors.
But some of the space is in good shape. "That’s the
silver lining," said Bill Halford, president of The Irvine
Co.'s office properties division. "People are getting good,
highly-improved space."
Other high-tech companies are absorbing many technology-related
subleases. In January, biotechnology firm, Avigen Inc., inked
a 10-year 67,000-square-foot sublease in Alameda, Calif. And
Navigation Technologies Corp. signed a 100,000-square-foot sublease
in Chicago’s Merchandise Building in February, relocating
its headquarters from Rosemont, Ill.
Some dot-com plans are turning out okay. Quickarrow Inc., for
example, took more space than needed last year because they
were afraid there would be nothing available if they acted too
conservatively. They subleased for a year, and in January, grew
into the space as planned.
High-tech tenants in general are more conscientious of the structure
of their leases today. They are looking for shorter leases with
options to sublease or terminate under certain criteria.
"The smaller, shorter deals are the terms today,"
noted Kurt Rosene, senior vice president of national development
at The Alter Group, who added that he is getting five years
with two- to three-year "outs" in many of his transactions.
Of Lucent Technologies Inc.'s 50 million square feet worldwide,
half is leased, and that percentage is likely to grow. "We
tend to favor leases going forward or other forms of ownership
that allow for more flexibility," explained Lucent’s vice
president of real estate Tony Marano. "I’d rather
see capital invested in activities that grow the business."
The New Jersey-based company recently transacted synthetic leases
for a 120,000 square-foot data center in Denver and Ascend Communications’
(now part of Lucent) former 100,000 square-foot headquarter
facility in Alameda, Calif.
Marano noted that Lucent does between 200 and 300 leases a year,
but that number is likely to decrease in the near future.
To help financial matters, Lucent is in the final stages of
receiving approval to monetize a major portion of its owned
property in the form of sale-leasebacks, a reflection of its
overall strategy of freeing up capital and attaining flexibility.
"There’s no need to tie yourself in," said Marano.
Like many, Lucent had its share of financial difficulties in
2000 and into 2001. In fact, Marano noted that it had lost its
AAA credit rating. But as Lucent has forged ahead; others have
not. Marano is hopeful with the recent introduction of Lucent’s
new wireless technology, which has attracted the attention of
Verizon Communications and Telefonica SA.
Dallas-based 12 Technologies Inc. is also confident, but it
exercises a conservative approach to facilities and has throughout
its 11-year existence. "We prefer to double up before we take
a large lease obligation," noted Adrianne Court, director of
facilities. Her colleague, Mike Patterson, senior managing director
of corporate real estate, agreed, "It’s foolish not
to know that the market is softening and rates are dropping.
We’re in a mode where we don’t want to dive into a
market right now."
All of its approximately 2 million square feet of space is leased,
including its two-building, 360,000-square-foot headquarters.
"We’re not in the business of being land owners,"
stated Patterson.
12 also acquired space through corporate acquisitions, most
recently adding approximately 25 percent to its portfolio through
the recent purchase of Aspect Development Inc. "We look
at who has the most favorable leases," said Court. "We
also want generous sublease and termination (agreements)."
Like many of its competitors and others in corporate America,
they are currently in the initial modes of dispositions. With
first quarter earnings’ projections down by about 10 percent,
Court noted that 12 will dispose of approximately 10 percent
of its current portfolio.
A portion of the excess space was due to space redundancy. In
Atlanta, for example, it made acquisitions that led to it operating
four offices. As a result, it will look to consolidate this
year.
While 12 did expand in Dallas and Austin in 2000, it is, for
now, content with its domestic presence. It has expanded more
overseas. It took space in London, Munich and Brussels, Belgium,
among other international spots. With average leases as long
as 20 years in several European cities, 12 opted to sublease
where it could in order to provide increased flexibility.
Another advantage, said Court, was that 12 never received venture
capital money, unlike many other technology firms. Issues facing
smaller, less-established companies tend to differ, especially
venture capital-dependent dot-coms. Now that the capital markets
have gone cold, it is more important than ever to free up funds
for operational use.
Benezet of Amazon has also had more luck overseas. "Given
the fluidity of the company, (you) never know when you’re
going to bulge in another area," she remarked. Indeed,
the ever-increasing globalization of commerce helped to push
the company to expand into Paris, where it opened a distribution
facility last year. She also ventured into Tokyo, as well as
Sapporo, Japan where Amazon now maintains a customer service
site.
The conditions in Europe also propelled Lucent to look for space
in the Silicon Valley-like Swindon, a high-technology pocket
west of London. While Western Europe generally lags several
months behind U.S. conditions, changes can already be felt across
the Atlantic.
"In the last couple of months, some difficult developers
have become more pleasant;" chortled Marano, who has also been
integral in the move to such non-traditional places as India,
Egypt and South Africa as well. In the last five years, the
company has doubled in size.
Some technology companies are still signing larger, more traditional
new leases in the United States. On the East coast, Global Crossing
Holdings Ltd. signed a 15-year lease at 32 Avenue of the Americas
in Manhattan for more than 92,000 square feet; Data Peer inked
a 65,000-square-foot deal in Fort Lee N.J.’s Executive
Park; and Akami Technologies Inc. inked a 114,000-square-foot
lease at 600 Technology Square in Cambridge, Mass., expanding
its presence there to 234,000 square feet.
Heading West, Vignette Corp. signed two leases totaling more
than 161,000 square feet for terms between seven and 10 years
at Barton Skyway III and IV, in Austin, Texas. Ericsson leased
68,000 square feet of flex space in San Diego for seven years
for $12.9 million; and Cyclone Commerce Inc. signed an eight-year
lease for 66,000 square feet of flex space in Scottsdale, Ariz.
"I’m telling clients
to wait, things (rental rates) will get worse," said James Meiskin,
president at Plymouth Partners Ltd. ‘Tenants will have
more leverage and negotiating power."
In spite of the softening market, in most
areas (especially technology-heavy areas such as Silicon Valley),
landlords are asking more of technology-related tenants, most
notably higher security deposits, letters of credit and corporate
guarantees and less tenant improvement money.
"You may have 10 testimonials of other landlords around
the country, (but landlords) are still requiring much heftier
security deposits or some other kind of insurance," remarked
Todd Gabriel, vice president of Grubb & Ellis Co.’s
office services group.
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