Mix and match

What good can come of moving a start-up right next door to a large corporation? Can a good tenant-mix in an office scheme generate synergies that benefit both small firms and big businesses, as well as the landlord?

By Beata Socha

Every landlord knows that a good tenant-mix in an office building includes a major core tenant, preferably a stable multinational corporation, and a number of income-generating smaller firms. The core tenant usually gets highly preferential rates, because once it’s secured, it will become a magnet attracting other companies to follow suit. What if you added a few tech start-ups to the mix? T

he first and main question is: how do you, as the developer or property manager, go about managing the tenant mix in a tenant-driven market? “You need space? Great, which floor are you interested in?” seems to be how the business is run these days. There’s no room for being picky when vacancies are climbing upwards of 14 percent, as they are in Warsaw.

Know thy neighbor

[caption id="attachment_98481" align="alignleft" width="300"] Image: Olivia Business Centre[/caption]

Not quite so. Developers are becoming aware that companies are paying increasing attention to tenant synergies. “Year after year, more tenants openly admit that one of the key criteria for selecting a particular building is the access to various services as well as proximity to known brands,” said Grzegorz Strutyński, commercial director and board member at HB Reavis Poland. “It’s a clear signal that despite the market being highly competitive, a careful selection of the tenant portfolio cannot be a secondary consideration,” he added.

All well and good, but even if the tenant-mix is manageable, why would you even consider leasing to start-ups that basically have no financial credibility? Sounds like the proverbial shooting yourself in the foot, doesn’t it?

Risky business

“From the point of view of the landlord, leasing directly to start-ups is of course risky given that according to popular statistics, over 90 percent of start-ups fail to develop into mature, sustainable companies,” admitted Mikołaj Niemczycki, junior negotiator & startup lead in Office Department at Cushman & Wakefield. After all, landlords, especially international funds, do financial credibility checks on potential tenants looking at their ability to generate profits, which, by their very nature, start-ups are unable to provide.

The idea is to look at start-ups as an added value to the building, like extra event space or a nearby park. Once green certificates did the trick, but now they’re old news. Over the past two-three years, Europe has seen an explosion of corporations from various sectors, including IT/telecoms, banking, beverages and real estate that have set up “corporate incubators” offering early-stage investment, shared working space, mentorship and access to clients for start-ups developing software and hardware solutions within their industries.

“I think that in time big corporations will be attracted to places with a strong start-up presence. Once developers and property managers see how strong a pull that is, they will become more lenient towards start-ups as prospective tenants,” Niemczycki said.

“The worlds of corporations and start-ups are no longer separate – corporations need start-ups to develop innovative products and services quickly enough in order to stay ahead of the game. Meanwhile, start-ups need corporations in order to gain access to new customers and scale their businesses – the benefits are mutual,” he explained.

The term “tech-friendly buildings,” proposed by Cushman & Wakefield, describes office schemes that lease a part of their space at highly preferential commercial terms to tech start-ups in order to bolster synergies between established businesses and fledgling micro-firms. It involves putting the financial means, know-how and business acumen, together with the tech skills and enthusiasm of a start-up, into a comfortably furnished Petri dish to see what will grow.

Price-sensitive

Here’s another “but:” even if we can agree that the presence of tech start-ups improves the way firms view an office buildings as a potential location, there are a number of practical problems. Mixing start-ups and corporations in one building could be tricky as their price expectations vary greatly. “When we did a price sensitivity study among start-ups in Warsaw, we discovered that PLN 800 per person per month was the ceiling and they wouldn’t go beyond that. That’s how start-ups look at office space: not in terms of sqm, but per employee,” explained Niemczycki.

This translates into headline rents of some €13-€14 per sqm per month, a price range that can be found for example in Warsaw’s Mokotów district. “I feel that, despite its renowned challenges with traffic, financially Mokotów has the potential to attract start-ups. Companies are leaving Mokotów, and the more of them leave, the more these prices are going to drop. In some office buildings they could go as low as €8-10 effective,” he said. Then, there are a number of class-B buildings that are even 30-40 percent vacant. “The office market today is promising for start-ups.”

Other problems include: the required deposit, the financial credibility of the company, lease length, or even space requirements. In many buildings the minimum amount of space is 100-150 sqm. A start-up doesn’t need that much. Developers will definitely have to rethink their leasing policies if they decide to go “tech-friendly.”

Collective disruption

Still, putting start-ups in modern office schemes is not an entirely new idea in the Polish market. Business Link, a network of business accelerators in Poland has been on the market for five years now and is present in 10 locations, including Zebra Tower and the National Stadium in Warsaw. The company emphasizes the co-working nature of its offices: the events and business mixers organized by Business Link are open to all the tenants in the building.

But it’s one thing to lease space to a business accelerator taking over the risk and management costs of leasing to start-ups, and completely different if the developer or property manager goes its own way. Yet, the first-movers are already making their mark in the Polish market.

Olivia Business Centre in Gdańsk is one of the best examples of “tech-friendly” office space in the Polish market. The developer has created the O4, a vibrant co-working center located on the first three floors of the Olivia Four building. In 2013, the developer launched the Olivia Synergy Project with the goal of integrating all of the tenants in the complex. The project includes a wide range of activities and events, such as an inter-company sports league, an onside Campus program and cultural events that involve the wider local community.

Others are following suit. Adgar Poland is preparing a co-working center in Adgar Park West, a renovated and repositioned office complex in Warsaw (previously it housed the HQ of T-Mobile). It is due to open in June of this year. The center will offer approximately 1,500 sqm of co-working and private office space, and it might be expanded over time. It is earmarked for three types of groups: software firms that have already acquired financing and a customer base, freelancers, and corporations (innovative divisions of large companies, individuals hired to seek collaborative areas with start-ups). “It has a very good chance of becoming the second ‘tech-friendly’ building in Poland after Olivia Business Center,” said Niemczycki.

Tech-appeal

But typical, modern office space is not the only potential environment that could work well for “co-creation.” There are also other types of commercial space that could be used to serve as a co-working platform for start-ups. “It could be space on the retail floor of a mixed-use building where conference rooms double as pop up stores or tech demo zones where start-ups could demonstrate their ideas on a regular

Naturally, we need to be very flexible as our tenants may grow rather rapidly and their space requirements could grow substantially very quickly,” said Marcin Juszczyk, board member of Capital Park. “We want to stimulate cooperation between our tenants and create a business ecosystem of companies complimenting one another,” he added.

Drawing from experience

Some of the most successful examples of the co-working environment in the world are in fact located in post-industrial space, like Second Home in London, where start-ups, fast-growing creative companies and venturing corporations take up a total of 2,000 sqm. The founder of Second Home, Rohan Silva, former tech advisor to David Cameron, handpicked all the start-ups, looking for companies that would work well with each other. Second Home is already extending the scheme to cover two additional floors. If more Polish developers decide to move in the “tech-friendly” direction, they will be able to draw experience from a number of working and successful models. The largest facility in the world dedicated to housing startups is CIC – Cambridge Innovation Center. Sitting next door to the Massachusetts Institute of Technology in Boston since the late 1990s, CIC expanded to other US cities including St. Louis and Miami with great success. CIC has recently began international expansion. “They’ve set up their first European outpost in Rotterdam and they are now eying Warsaw,” added Niemczycki. The real estate services company focuses on taking up space in phases, even up to 100,000 sqm, in order to allow startups to grow within the building. You begin with several start-ups and allow them to grow within the building. As the start-ups gain traction and grow beyond a certain level, it’s time to install another batch of micro firms that could learn from their neighbors. One of the most notable success stories that grew out of CIC’s Boston office is Google’s Android. Once it reached a level of 175 employees, no longer able to fit in the CIC building, the team relocated a block away, in order to stay close to the “community of entrepreneurs” that CIC had built.

Mental barriers

Still, while developers may be getting around to the idea of mixing start-ups with corporations to help them integrate and work together, there are still mental barriers that prevent synergies from emerging. First and foremost, Poles are a highly distrustful nation, especially when it comes to doing business together. A Savills study conducted two years ago revealed that only 35 percent of office workers in Warsaw saw value in networking with companies from the same industry. “Probably even fewer saw meeting people from other sectors as valuable, which is the way forward in the West,” Niemczycki said.

Grading tech-friendliness

The similarity of the term “tech-friendly” to “eco-friendly” is by no means a coincidence. The green trend has revolutionized the commercial real estate business, and the office segment in particular, over the past decade. A number of institutions awarding green certificates have emerged since then. A similar evaluation system could well be used to decide how conducive to co-creation a building is. According to Niemczycki, grading the “tech-friendliness” of a building would involve a number of measurements: space devoted to start-ups, methods of integrating tenants in the building, such as the number, size and frequency of business mixers, workshops, speeches and other business and social events, as well as the way they are communicated. “The quality of the integration can be measured by the number of tenants in the building that regularly stop by the physical space, or the number of business partnerships that are formed between corporates and start-ups working in the building.”

Just as a green certificate is considered a must today, housing a vibrant tech start-up community might become tomorrow’s standard bargaining chip for office schemes. Who knows? Office schemes with the most appealing tenant mix will be like hot downtown nightclubs that everybody is lining up to get into, and only a lucky few can.