Given that the long-overheated office market in Manhattan is starting to cool, commercial leases are beginning to get somewhat more tenant-friendly. One way that commercial landlords are sweetening deals for tenants is to give them a lease option to expand in the same building as their office needs grow. This option is especially prevalent in “silicon alley” in the Flatiron neighborhood.
Westbrook Partners recently entered into such a deal with a tech company giving it the right to double its square footage at a later date. The ability to grow without uprooting their location is very valuable to start-up tenants. These firms are attempting to establish themselves as stable, mature companies. They do not want to explain to their clients that they are moving offices every couple of years. Many of these burgeoning tech companies are savvy and have seen previous start-ups get too optimistic and collapse under the weight of their lease obligations. Tech firms know that they can’t predict what their office needs will be in a few years and need the flexibility these options afford.
Commercial landlords are reluctant to enter these deals as they don’t want to tie up their premises. They don’t want to have to turn away a potential large tenant later. The landlord’s fall back position in negotiating a lease option of this type is to demand the right to relocate the tenant within the building when the tenant exercises this option. It is a fair trade-off; the start-up will at least be able to maintain the same address while moving into a larger contiguous space in the building. Depending on the timing and space requirements, the building owner won’t have to forgo renting to another large tenant. Commercial landlords also are offering this lease option to start-up tech tenants because it is a wise business decision. Tech companies are more likely to grow and become a larger tenant than commercial tenants in other industries.