BY Sushma Udipi
The growth of Silicon Alley from a small group of startups in Manhattan to the country’s second largest startup hub comes with a price: a change in real-estate dynamics in the neighborhood.
Over the last few quarters, funding for startups based in New York City – most of them in the Chelsea and Flatiron districts – has been increasing. “The first half of 2015 saw an unprecedented amount of venture dollars backing New York-based startups,” the New York Venture Capital Association (NYVCA) said in a report released in August. Capital invested in the first half of 2015 rose 20 percent over the same period last year. This enables startups to channel capital into hiring, marketing and larger office spaces, which in turn contributes to rising rents — office spaces in the Flatiron District go for as much as $60 a square foot, up from $48 in 2013.
“Given the sustained rate of VC (venture capital) funding over the past five years, a number of early stage startups are now turning into middle to later stage, requiring bigger spaces to house new employees. Therefore, many are searching for larger office spaces,” Devin O’Brien, head of strategic marketing at Zumper, a real-estate startup that helps tenants search for apartments in real-time.
“With more funding backing them, startups no longer have the pressure to be scrappy and work out of apartments. They have a few hundred dollars more to spend on renting office spaces,” says Ryan Matzner, director of strategy at Fueled, which owns Fueled Collective, a shared working office in Soho.
Startups now raise funding both from venture capitalists and from newer sources like multinational firms that want to support innovative ideas, as well as government grants. The image of a few smart kids working in a basement is giving way to that of professionals working in larger, established companies.
This is not just driving up rents, but is also changing the way real-estate leases work.
“Tech tenants are growing faster so lease times are shorter,” said David Eisenberg, founder and CEO of Floored, a startup that creates virtual-reality software and 3D-visualization of offices and other real-estate spaces. “Startups now want to move after 18 to 36 months, so they are subleasing office spaces. With people growing at about 100 percent every year, they don’t want to lock in spaces for long leases and are going in for sub leases and shorter leases.” His company had subleased office space from another company in Chelsea and will soon be moving to another office.
“Startups usually like to be around other startups, so when one co-shared space comes up in a neighborhood, other startups too go there, and this brings about changes in real-estate prices,” said Michael Vallejos, director of Truman James, a company in Gramercy Park that helps startups find and move into office spaces. “Large companies sign leases of five to ten years but startups sign shorter leases, depending on how much funding they have.”
Landlords are now more open to letting out space for startups than they used to be. “Since there is more funding available, landlords have the confidence that startups can manage the rents so they are more willing,” said a senior executive at a startup that develops project management software. Several startups that used to work from their investors’ or lawyers’ offices are now moving into their own.
The demand for co-shared offices – where companies like Fueled Collective and WeWork own large office shapes and rent out portions of the space to startups – is also growing. “The office space very professional. It is also very different and open space,” says Jay Weinberg, Principal at an investment startup Prosperity Real Estate Partners, who worked from home before he moved to a coshared office space in Herald Square.
The Yard, one company that manages shared office space for startups, has just opened an office in Herald Square, its fifth after Lincoln Square, Williamsburg, and two in the Flatiron District. “We have more companies coming in than we have space for,” said Morris Levy, one of the cofounders of The Yard.
Startups are making their presence visible in the neighborhood.
Leivy Pena, an employee at a fashion accessories store on 5th Avenue in the Flatiron District, has been working at the store for over six years now, but in all these years, she hasn’t seen as many young adults as she does now, as well as shops that cater to them, including cafes and new rental buildings.
An employee at Madison Cleaners, a dry-cleaning store, said that the profile of his customers has changed. “I definitely see more college graduates walking in. They also live here, I know, since they inquire about housing. The rents are shooting up too,” he said. “A great thing is that the place is much safer now than earlier. Perhaps because of more youngsters living here. So it is good!”