As tech IPOs hit record numbers, who is watching the real estate?
Even amid general economic uncertainty and stock market volatility, 2019 could be a record-setting year for companies going public. Real estate plays a critical role in growth and expansion.
In the first six months, five venture capital-backed tech companies had Initial Public Offerings (IPOs), at a combined valuation of almost $50 billion. Just last week, The We Company, parent of WeWork, filed for a +1 billion IPO. Since the week of July 25th, there have been more than 20 IPOs with another 160 or so already planned before the end of the year.
In real estate, ‘fail fast, fail often’ isn’t agile
With all this cash floating around, does anyone really care how much their real estate costs? After all, real estate isn’t the biggest cost on a company’s books.
Even so, real estate costs have risen at a faster rate than labor costs in some markets, especially the Bay Area. Construction costs in San Francisco are 15 percent higher than the national average. Also from a tenant perspective, San Francisco has less available space than any other market in the country right now. (Luckily, there’s still space available around the Bay, in Oakland and the East Bay, the Mid-Peninsula and Silicon Valley markets.) This means rents have skyrocketed. Average Class A rents in San Francisco rose 124 percent between 2010 and 2018.
So, all companies should care about real estate costs. After all, efficiency with cash is a trait looked on very favorably by investors. And, research shows that VC-backed start-ups are growing faster, roughly twice as fast as today as they did twenty years ago, putting even greater pressure on real estate departments. In real estate strategy, ‘fail fast, fail often’ doesn’t really get you very far.
Develop and execute
The bottom line is that unicorns and other companies headed to IPOs are facing the prospect of more post-IPO capital having to be pumped into real estate strategies, and that takes cash away from other revenue-generating business priorities.
Here are five things to consider when assessing real estate needs that might help keep your hands on more of that cash:
Plan – having a real estate plan is about more than picking a new building. Companies need to develop a plan that starts with the big picture and considers every facet of the business from productivity and revenue to employee wellbeing, sustainability and future success.
Assess – A thorough assessment of your existing workspaces can inform your future real estate strategy. What works? What doesn’t? Are there steps you can take to improve operations or productivity? What style of building suits you best? It’s hard to improve when you don’t know where you stand.
Enhance – Use all of the tools at your disposal, especially technology, to help you gain better insights into locations, interpret market data and make better decisions. ‘Heat maps’ of generational, skills and educational demographics as well as transport trends and availability can point you to better space and a better employee experience.
Negotiate – When you’ve decided on a location, be prepared to expedite negotiations, especially in today’s competitive tenant market. Know what your main objectives are going into lease negotiations and remain as flexible as possible. Most of all, use a trusted advisor!
Complete – Once you have successfully negotiated and signed a lease, you have a location. Congratulations, but it’s not over. The average cost to fit out workspace rose by 15 percent last year and materials costs and labor aren’t getting cheaper. Keeping the build-out project efficiently managed and on schedule can help keep you on budget.
Life for a pre-IPO company can move at a dizzying pace but having a well-prepared and executable real estate strategy in place can at least save leadership some headaches down the road. The good news for IPO candidates is that there are flexible real estate solutions in the current marketplace.
For more insight into how to prepare a real estate strategy for the current market, check out our guide here.