Technology

Dot-Com, Inc.

The Real Estate Needs of New Technology Companies Aren't the Same as Traditional Corporate Clients.

The technological revolution has greatly changed corporate America. The growing technology sector is challenging traditional business models and implementing new ways of thinking. As a result, new corporate cultures are evolving and commercial real estate service providers may find themselves servicing a new generation of corporate clients.

Particularly in markets such as California's Silicon Valley, Austin, Texas, and the high-tech corridors of major cities such as Boston and Atlanta, the real estate decision-making process for these new corporate clients is dramatically different. High-tech companies often are headed by young entrepreneurs 

knowledgeable about their technological niche but not experienced in acquiring or leasing real estate. And many dot-com businesses are not mature enough - or large enough - to have a facilities manager who knows real estate.

To serve this niche, corporate real estate professionals may need to take on a greater advisory role than they play with traditional corporate clients. While still in their infancy, these companies may face a number of challenges: no credit history, a different set of site selection and physical requirements, and instant growth needs, as well as Wall Street's recent wariness of Internet companies.

Despite the possibility of a technology down cycle, commercial real estate service providers must realize that technology is a fast-evolving field that will not disappear. Thus brokers who serve this market must act with caution and good sense - approaching challenges with creativity but not losing sight of the fundamentals that underlie commercial real estate.

No Credit The biggest obstacle that many dot-com clients face is the lack of a credit history. Many Internet companies, especially start-ups, have not established credit, which means that many landlords will not lease to them. Even companies with financial track records may hesitate to use their capital sources for rent.

Some landlords require such high-risk tenants to put a year or more of rent payments in escrow. But others take a more entrepreneurial approach. For instance, some landlords are reducing rent in return for some of the dot-com stock. For example, developer Billingsley Co. has agreed to the equity-for-rent arrangement with four tenants in its International Business Park in Plano, Texas, part of the telecommunications corridor north of Dallas, according to a recent Dallas Morning News report. In another instance, Hillwood Development, owned by Ross Perot Jr., has promoted the idea of trading Internet and high-tech company stock for commercial space at the Alliance complex in north Fort Worth, Texas.

Property owners may see such high-risk deals as opportunities to diversify their own portfolios, intrigued with the idea of leveraging their real estate assets as an entry into the technology field.

Although the equity-for-rent concept may be appealing, it is not an easy process if lenders are involved. Lenders must be convinced that such cut-rate rental deals have an upside that will offset the property's diminished cash flow. Of course, owners that hold master leases or own buildings outright eliminate such lender problems; however they still must consider a number of legal and business issues before signing leases. (See "Swap Rent for Dot-Com Stock? Ask Tough Questions Before Proceeding," CIRE , May/June 2000.)

Despite the success that some landlords have had with such transactions, skepticism is growing about the future of Internet-related tenants. Publicity about the tech industry's down cycle and the lack of profitability of many Internet companies is prompting some developers and owners to wonder if this window of opportunity is closing.

Different Needs Technology firms also are driving a new type of office product because traditional buildings don't always fit their needs.

The differences start with site selection. Most technology-related tenants need access to fiber optics, which may limit their site options. And, while these companies may not have the standard requests for more traditional office locations, such as access to nearby shopping or good schools, their young employees often want to be near entertainment.

In addition, many technology companies require a dual power feed (from two different power generation plants), as well as a standby generator on site. Along with higher power needs, they also may require greater heating, ventilation, and air conditioning capacities.

Additional requirements may include surface parking, typically with 1-5 or 1-6 ratios and 14- to 16-foot floor-to-floor ceilings for indirect lighting and space for large telecommunications switches.

In a recent 140,000-square-foot lease by SBC Communications, the greatest challenge was meeting the company's utility needs. The site needed the same amount of electricity as a 2-million-sf office building or about 7,000 homes.

The deal had other challenges as well. In order to meet a short delivery time, the developer had about 250 construction workers day and night finishing the interiors, building the space as it was designed.

Dot-coms frequently require big floor plates for open floor plans into which they pack a lot of people. Often, their employees work long hours and need access to the office around the clock, increasing security needs.

Competition for the best technology workers is stiff, so these companies often have very specific ideas about what benefits and environment they want to provide their employees. For instance, one dot-com plans a Zen room in its new facilities, complete with couches and Internet connections. A well-established major national telecommunications company wants to build a softball field for its employees on a lot adjacent to its 100,000-sf facility.

This company chose to lease in Plano Corporate Center, due in part to its ability to grow within the multiple-building complex. The property also met many other specifications critical to technology and dot-com firms, including multiple fiber-optic providers and five parking spaces per each 1,000 sf. In addition, the overall density of the building worked well: One floor allowed for 50,000 contiguous sf, and the first floor allowed for a heavier load, which was ideal for the company's information technology section.

The Value Building As a result of these new kinds of corporate needs, a simplified architectural structure with cutting-edge technology has evolved. The new product is called a "value" building. It typically is two or three stories tall, with flexible work space and a sea of surface parking, all built around a central building core.

Raised-floor construction quickly is becoming a new requirement to improve flexibility, along with electrical requirements of up to 10 watts per sf. In this configuration, electrical wiring, telephone, Internet connection, and HVAC all are placed under the raised floor for maximum accessibility. With removable grates, companies have flexibility in locating employees and can relocate them on short notice.

While tenant requirements are dramatically changing the way buildings are designed and constructed, they are not necessarily enticing more companies into build-to-suit situations or owning real estate. Corporations that are large enough to take on building ownership often prefer to invest funds internally to focus on their business objectives. Leasing also brings flexibility in increasing or disposing of space.

Retrofit Opportunities Many dot-coms seek possible sites amid existing space that can be retrofitted.

Dallas is one market that is experiencing a number of rehabilitation office and warehouse projects. One of the primary reasons is location. Even though the buildings were built before 1930, they are located near one of the best fiber-optic loops in the Southwest. While these buildings don't meet all of the high-tech standards - they aren't as efficient to operate and some have limited parking - the access to fiber optics overshadows the other issues.

Heavy power demands also are driving corporations to the older industrial areas, particularly toward former manufacturing facilities.

Developers have renovated several of Dallas' prominent older buildings to meet the demands of this new economy. For example, the former Federal Reserve Building became the Carrier Center "telecom hotel" and the historic InterUrban Station (a former bus terminal) is being redeveloped as a mixed-use office and retail property.

The Challenge of Growth Another challenge in dealing with the new technology clients is a double-edged sword. Successful high-tech companies often experience explosive growth, which means additional real estate assignments, but sometimes the growth may be uncontrollable, resulting in unachievable needs.

With this in mind, corporate real estate advisers should consider negotiating leases differently. Depending on where a company is in its business life cycle, shorter-term leases with greater flexibility should be considered for technology firms. Expansion options and lease buy-out arrangements are standard negotiating points for high-tech clients.

By driving so many changes in facilities needs, dot-com corporate clients are changing how corporate real estate advisers work with them. Just as new issues have occurred regarding credit, site selection, facilities requirements, growth management, and lease terms, the rapidly moving environment of the technology industry will continue to evolve and make additional demands on corporate real estate advisers. Those who work smart and can adjust to the changing demands will benefit from working with this exciting new generation of corporate client.

Jerry D. Fults, CCIM, SIOR

Jerry D. Fults, CCIM, SIOR, is executive managing director of Kennedy-Wilson International in Dallas, with responsibility for the firm\'s southern region. Contact him at (214) 871-6666 or jfults@ccim.net.

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