Technology

Tech:Take 2

Today's high-tech scene features new options for commercial real estate pros.

Tech is back. And it's coming to a market near you.

Out in Silicon Valley, Calif., the venture capital angels are rustling their wings as they search for new bioscience companies to fund. Down in the Telecom Corridor of Richardson, Texas, the granddaddy of all technology companies, Texas Instruments, just broke ground on a $3 billion semiconductor manufacturing plant. Up in Minneapolis, fast-growing biomedical companies are expanding onto corporate campuses originally occupied by long-gone telecommunications businesses.

A Maturing Industry

“I haven't met anyone who says technology is going away,” says Scott M. Jessen, CCIM, a principal with the Morse Co. in Richardson. He and commercial real estate professionals in other tech markets see an industry where some sectors are maturing, and new ones are on the fast track to growth.

Richardson suffered during the 2001 tech bust, but lately “we've noticed an uptick in tech activity,” Jessen says. “Historically the area has had a lot of telecom, but now there is a lot of voice over Internet protocol and nanotechnology.” Several wireless technology and radio frequency identification companies also are settling into the North Texas tech cluster.

Developing sectors primarily reflect the industry's advances. “It's the higher end of tech,” Jessen says. “The low end, such as assembling cell phones, has gone overseas. But the research engineers and the companies between the [original equipments manufacturers] and the contract manufacturers are staying here.”

In Silicon Valley, Michael R. Hanneken, CCIM, president of Real Estate Strategies & Solutions in Richmond, Calif., agrees that the face of technolnogy is changing. “Tech manufacturing has gone offshore forever. It's not coming back because of the price.” One of his clients, Sun Microsystems, is converting manufacturing space to office. Another, Plantronics, is building a manufacturing plant in China.

Even software engineering most likely will be outsourced to India, Hanneken says. “The only ones staying here are the very high-level engineers.”

This means that the United States is moving up the technology food chain: More jobs are tied to research, which requires locations with universities, well-educated workforces, and incubator support systems to smooth the process from basic science through product development to commercialization.

At the same time, established tech companies are cutting costs and consolidating space needs. Some are looking to secondary markets to find cheaper operational costs. A comparative cost analysis of biomedical facilities located in the traditional tech capitals of San Jose, Calif., San Francisco, and Boston are among the most expensive to operate, while facilities in Sioux Falls, S.D., Shreveport, La., Athens, Ga., and Tulsa, Okla., cost about $4 million less per year to run, leveraging lower land and utility costs.

But while maturing companies consider operating costs, start-up tech companies are borne of state and federal research money. For instance, passage of California's $3 billion stem cell research initiative has lured private venture capital funds into health sciences, Hanneken notes.

Other cities and states are vying for their pieces of the biotechnology, biopharmaceutical, and nanotechnology pies and creating clusters outside the traditional high-tech capitals. For example, the Translational Genomics Research Institute is anchoring Phoenix's 15-acre downtown Bioscience Center, part of the 90-block Copper Square mixed-use development.

At last count, the Cleveland area had more than 360 bioscience businesses, 42 with sales between $5 million and $50 million a year. New York boasts Albany NanoTech, a growing nanotechnology research cluster in the state capital that has brought $2.5 billion into the local economy. Danville, Va.'s Tobacco Warehouse District is the site of Luna Innovations' $6.4 million nanomanufacturing facility. Even North Dakota State University has a nanotechnology center with six Department of Defense-sponsored programs.

As older tech sectors mature and younger ones are created, many secondary and even tertiary markets will attract technology companies looking for space. What strategies and skills do commercial brokers need to work with these clients? Three commercial real estate brokers operating in well-established tech markets offer insights on what works.

A Template for Tomorrow

In some respects, Hanneken may be a prototype for tomorrow's commercial real estate professional. Interestingly, he's not a market specialist. “I can't tell you off the top of my head what the market rates are for research and development space in Sunnyvale, Calif. I can find out, but it's not really relevant to tech companies. Of all businesses, they feel the least tied down to physical space. They move a lot. And that aspect means they need relocation services, not just transaction services.”

After beginning his career as an architect, Hanneken was the project manager for Sun Microsystems' 1.2 million-sf Silicon Valley campus, with nine build-to-suit class A office and laboratory buildings constructed at the tech boom's tail end. Today Sun Microsystems, along with other established tech companies, has downsized its real estate holdings considerably.

That's typical of tech companies, he says. “There's a lot of fluctuation in the industry. There's a lot of growth, mergers and acquisitions, and [as a commercial real estate professional] you have to be prepared to switch gears very quickly.”

Hanneken still counts Sun Microsystems among his clients, which speaks to his ability to provide service throughout a company's life cycle, despite the technology market's fluctuations.

Many of his clients are Fortune 1000 technology companies located throughout northern California. “These companies are large enough to have real estate holdings, but they don't have staff that understands real estate,” he says. “It's very important to do an analysis of the holdings as opposed to just looking at the transaction.” For example, in determining whether to expand a facility or relocate to a new one, Hanneken meets with human resource managers to get hiring projections and then factors in the work force loss that occurs when companies relocate. He also manages current facility redesign and new building purchases, and he deals with such issues as space planning and specialized equipment installation.

For some clients, such as headset manufacturer Plantronics, he works on improving their existing space to “bring it in line with what the company is today. It has evolved from a business-to-business to a business-to-consumer company, and that new focus requires improvements in their facilities.”

What sets Hanneken apart is the breadth of his training. Along with a master's degree in architecture, he holds a general contractor's license as well as the CCIM designation, which provides a skill set that spans space planning, design, construction, facilities use, and investment. “The designation allows me to translate ideas and concepts into real estate analysis.”

Fast-Track Flexibility

Like Hanneken, Jessen has watched the tech cycle play out among North Texas' telecommunications companies. Anchored by industry giants TI, Nortel, and Fujitsu, the area also is home to smaller “feeder” companies that manufacture parts for industry leaders. In addition, Richardson's pro-business environment, which includes the StarTech business incubator and a ready supply of venture capitalists, has attracted a large number of start-up companies.

“The biggest challenge is finding a landlord that is willing to take a risk on a fledgling tech company that might have great potential but currently has less than $500,000 to work with,” Jessen says.

Matching landlords and emerging companies means looking at the landlord's business style as well as the tenant's. “Building owners that operate like bureaucracies are not going to work well with tech companies. Landlords have to understand the tech world and be quick to respond,” he says.

About half of the area's buildings are in the hands of institutional owners, which are not known for flexibility or risk taking. But in one instance Jessen targeted an educational institution — the Stanford University pension fund — and convinced it to take a chance on a young company. “We sold them on the idea of supporting a technology company. They had confidence in the technology and decided to take the risk.”

Start-up companies also have tremendous upfront capital expenditures, he says. “For example, a clean room, which is a controlled environment to avoid contamination, can cost upward of $500 per square foot. So once these companies settle, they don't want to face these costs again by moving.”

In addition, they prefer to lease from landlords that have a lot of space in the market to accommodate expansion, he says. Another hurdle: They often want new space because “leaky roofs and tech do not mix.”

Richardson is an example of how tech companies cluster, locating near each other and near the resources they need: a good infrastructure with lots of commercial buildings, an educated work force, and a low cost of living.

The area also is bolstering its research offerings, Jessen says. Part of the deal that brought TI's $3 billion manufacturing plant to Richardson included $300 million in state funding for the University of Texas at Dallas to transform its engineering school into a top-tier research institution. The money is building an $85 million research lab that will support up to 35 large-scale projects at once, underscoring the need to continually invest in education and research to attract new businesses.

Finger on the Pulse

When the tech boom ended in Minneapolis, “the computer companies went bust and pulled up stakes. What remains are health-care and food-related companies; those are the bread and butter of the area,” says Kay Harris, CCIM, a principal of Kay Harris Real Estate Consultants. A native who grew up in Minneapolis, left, and then returned, Harris says she monitors tech companies and tries to get to know them, but in the long run, there's not much that distinguishes her small office from other brokers.

But that may change after her recent brokering of a 27-acre corporate park for AGA Medical Corp.'s new headquarters. It's a $5.4 million deal with another $10 million in improvements.

What caught her attention — and got her the deal — was a full parking lot. While looking for space for another client, “I noticed AGA's parking lot was jammed.” She left her card with the receptionist with instructions to tell the owners why she had stopped by.

While AGA was looking for office space, they also needed to expand their manufacturing capabilities. “You have to understand the diverse nature of their space needs and have an appreciation for the potential for rapid growth. AGA was founded in 1995 with 4,500 sf of space. Each year they took on more. Along with office, their space included clean rooms, air-conditioned assembly, R&D labs, and warehouses,” she says.

The purchase of Qwest Communications' 189,000-sf former wireless headquarters in suburban Plymouth, Minn., quadruples AGA's current space. The company expects to need as much as 400,000 sf in the next 10 years.

What closed the deal was a below-market price — nearly half the original asking price — the availability of 11 buildable acres next door, an existing data center, and the feeling of a corporate campus. Denver-based Qwest wanted to get the remote facility off its books, and AGA could virtually move in and use the office space, while also building their production facility.

Harris brought the Qwest site to the table; its brokers thought the property was best suited to residential redevelopment and, in fact, had it under contract for that purpose. But Harris could see the potential for a growing technology company.

The year-long space search involved a number of issues. “We walked away from market-priced deals because of the immense cost of setup. We walked away from sites that offered the right location but limited expansion capabilities, long start times, or expensive tear-down and setup prices. … We had some cities offer tax increment financing and tax rebates, but in the end … cash flow was not as important as overall total cost and the need to answer to a board of directors justifying the move,” she says.

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