In May 2012, Chicago co-working space 1871 opened its doors on the 12th floor of the Merchandise Mart. The funky 50,000 square-foot hub for tech entrepreneurs was a real estate experiment of local investor J.B. Pritzker. He wanted to provide Chicago’s burgeoning tech scene with a flexible, affordable alternative to the traditional office lease, and 1871 served as his pet project.
But he wasn’t the first to pioneer the idea. Companies like Regus had been providing a similar service since the late 1980’s, but 1871 wasn’t looking to compete with their executive office model. So what was different? Collaboration and community. 1871’s concept revolved around the idea that a single entrepreneur can benefit from having exposure to a brain trust of fellow entrepreneurs, advisors and, perhaps most importantly, investors. The timing couldn’t have been better. As of January 2016, 1871 occupies nearly 120,000 square feet at the Merchandise Mart and shows no sign of slowing down.
In recent years, the co-working landscape has grown significantly with providers like WeWork voraciously gobbling up space across the country—including over 400,000 square feet in Chicago. And it’s no secret why. For startups looking to remain lean and attract investment, co-working has many advantages such as flexibility, affordability and the ability to network and learn from other entrepreneurs and advisors. And let’s not forget the allure of an office with free beer, coffee and rustic décor. Seems like the perfect place for a startup to thrive and grow, right?
Time to Grow Up?
Not so fast. Just like a college graduate living at home to save money, there comes a time when a fledgling company must leave the nest—and all the comforts associated with it. Typically, the catalyst for change comes with the original round of seed capital. The initial team of employees has built an investable business, but to effectively scale it, a larger, highly skilled workforce is required. The incubation period gives the company the opportunity to grow, but then comes the time to move on.
This is when we encounter the startup office dilemma. Let’s assume you’re the founder of a recently funded FinTech company called Disruptive Pivot Data or “DPD.” Your business needs its own office, but, as a startup, managing your cash flow is fundamental to staying alive and leasing office space is expensive. The moment you become unprofitable, investors will lose interest, and you’ll be headed to the startup graveyard. You’ve come too far to let an irresponsible, binding office lease stunt your growth … or end it altogether.
So, how do you find an affordable, lean and flexible real estate solution that simultaneously allows you to create a collaborative company culture that will attract and retain highly coveted talent without a crippling commitment?
Don’t Follow the Pied Piper
In a recent episode of HBO’s Silicon Valley, the Pied Piper boys bit off more than they could chew with a gaudy, clichéd tech space. Unfortunately, they ran into some internal issues and had to “break their lease” because funds had dried up. Did I mention the show is a comedy? Sorry, HBO, but no landlord will build you a personal Taj Mahal and then let you walk away from the lease one month later.
The Pied-Piper team of HBO’s Silicon Valley. Image courtesy of HBO.
Perhaps the Pied Piper boys should have hired a Tenant Rep! An experienced advisor will review your budget, immediate needs, growth plans and cultural vision for your first office. The workplace has become a critical factor in recruiting and retaining high-caliber talent, and it serves as the most tangible depiction of your brand, which makes this an important hiring decision.
Negotiating a lease is a nuanced process that encompasses far more than achieving a desirable rental rate. It’s critical to remember that, as a growing company, your first office must adhere to your budget, maintain maximum flexibility, and minimize liability. After confirming that all presented options are truly viable and within your budget, a good Tenant Rep will work to achieve terms within your lease that include:
- Favorable sublease consent language
- Termination options
- Expansion/contraction rights
What’s more, they’ll provide a detailed financial analysis of all costs associated with your occupancy of a selected space outside of the rent: Utilities? Common Area Maintenance? Real Estate Taxes? Insurance? Different types of leases outline various ways for these costs to be paid. Understanding your full financial obligation is vital to avoid the pitfalls of an irresponsible lease.
Learning to Fly
Sounds scary, doesn’t it? In a co-working environment, you’re simply paying your monthly dues to the provider. No risk, free perks, and hip decor that appeals to millennials! While these are certainly alluring features, if you want to scale properly and build an attractive company culture, it may be time to leave the nest. Just make sure you hire the right advisor to teach you how to fly first.
Wes McGowan is an associate with Colliers International’s Chicago Office. He has been with Colliers for 5 years and focuses exclusively on tenant representation and corporate services with a specialization in growing startups and tech companies.