Chad Leiker on Your First Commercial Lease

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Chad S. Leiker is a Vice President at Kidder Mathews who dropped by our Mar-15-2016 Bootstrapper Breakfast in  Sunnyvale.  He joined Kidder Mathews in 2000 and and specializes in sales and leasing of office and R&D spaces throughout the Silicon Valley. I asked him if he would answer a few questions about how firms approach finding the right office space and signing their first lease and he was gracious enough to let me publish them on the blog

Chad Leiker on Your First Commercial Lease

Sean Murphy: Can you talk a little bit about your background and how you got into commercial real estate?

Chad Leiker: I was in capital equipment sales for Xerox and I had an uncle in Commercial Real Estate.  When the owner of his company found out that I was working in sales he courted me until I joined his company.  It is a great business for someone who wants to be their own boss.

The entrepreneurial spirit is alive and kicking in Silicon Valley and I love walking into young companies abound with new ideas trying to make a difference.  They have a great energy to them.  I always say, “like minds think alike” and that is one of the best parts about my job.  I get to be a part of and assist in someone’s new idea.

Q: What kind of office space or co-working space are firms working in when they approach you?

Chad Leiker: I find that very few work in co-working space.  The majority get funding and are coming out of their homes or growing from a small multi-tenant office suite to a larger space to fit with their growing needs.  Right now there is a lot of talk about co-working so I assume that we will see more companies coming out of this type of space in the future.  However, a lot of start-ups deal with proprietary information and being in shared space allows their new product to be subject to vulnerabilities.  In other words, the security that their home or office provides is a necessity as opposed to an option.

Q: Do you have any rules of thumb for when it’s time to look for your own office?

Chad Leiker:   Yes.  Time is your best asset.  Give yourself ample time to understand the market and make a deal.  The biggest mistake I see new companies make is to get themselves in unfavorable, landlord-centric Leases right from the start.  Usually this is due to them rushing into a deal and not properly utilizing the entire market in their negotiation process. If you want to get educated to commercial leases the best thing to do is invite a seasoned commercial real estate broker over to have a ½ hour discussion about your needs as well as listen to his thoughts and opinion on the current market.  Our market is dynamic.  A good broker will understand your needs and then figure out a way to best position the new requirement within the market.

Q: What are the advantages of working with a commercial real estate broker?

Chad Leiker: The key advantage when you partner with a seasoned commercial broker is that you now have an “outsourced real estate department” within your startup without taking on any additional overhead.  Larger companies such as Apple, Google, & LinkedIn have their own internal real estate department.  They need the resources due to the amount of real estate they have to manage within their portfolio and still, some of them employ brokerage firms to get a better handle on the market.  It doesn’t make sense for smaller companies to take on this overhead, however to utilize a good broker is to have a real estate department at your disposal.

Q: What are the typical costs associated for working with a broker?

Chad Leiker: Usually for a startup there is no cost associated when working with a broker to procure a Lease.  Just about any office suite that is being marketed for Lease by a Listing Broker has a pre-negotiated procuring fee built into the Listing Agreement.  The Tenant will not have to worry about paying the broker a commission or a consulting fee.

Q: What trends do you see at work in the next two or three years? When you look back 10 to 15 years ago how has the landscape changed?

Chad Leiker: A trend that we are hearing more about is the “shared office” co-working space mentioned earlier.  With the heavy capital investments that have been made into companies like WeWork, we will probably see an upswing in this type of product.  Will it be short term or long term?  I don’t know.  My business is based on geography and information, so having someone on your team that studies the market in your area will always be a value add to startup companies bootstrapping their product to market.  Other trends we are seeing are open office as opposed to heavy build out of private office and office space without server rooms.  With the open office trend, companies objectives are to have a collaborative working environment with a “take down the barriers” sensibility.  I think that due to the rising cost of office space in the last several years this has been a necessity just to have more employees in a limited space.   However, I think that we will probably see the market swing back to building more private offices that employees can share.  Not every employee needs to listen to everyone in the company.  Sales and Marketing divisions tend to be louder than engineering, so I think offices will be designed with a good mix ratio of open collaborative and private office in the future.  In regards to seeing less and less server rooms being used, I think this is all due to the cloud.  I am seeing software and tech companies work on their product and upload it to the cloud at night, so the need to server rooms has diminished in the past 5 years.

This is my 16th year in the business and there has been a lot of changes in the landscape; particularly in the last 4 years.  The actual landscape has seen a huge change.  In my first ten years in the industry there was very little complete build from the ground up new commercial real estate construction.  The focus for landlords and developers was solely on rehabbing well located buildings with “value add” specifications.  For example, taking that cement tilt up Industrial building that has ample parking and creating value add by cutting out a larger window line, dropping more ceiling for additional office space and sprucing up lobbies & interiors throughout.  Maybe even adding a façade or relief to the exterior of the building to modernize the look.

In the past 4 years, anywhere you drive in the Valley you can see cranes in the skyline putting up new buildings.  One longtime local developer (who until last year hadn’t built in 15 years) told me last year that the wait time for a crane was 18 months.  They were all in use.  Economic obsolescence has taken hold of a vast amount of 30 year old buildings and has turned them into rubble.  In their place rises fancy, new Class A Office and R&D buildings.  Look at what Apple, Nvidia and Google are doing.  They are tearing down old buildings and replacing them with new structures.

Since a lot of the industrial product has been wiped out, the cost for a 10K-50K Sq. Ft. industrial building in the heart of Silicon Valley has skyrocketed.  There is just not enough supply with this type of product and developers do not see much value in constructing new industrial buildings.  The cost of the land and construction tends to be too high for them to make a profit on, leaving a wide gap in the supply.  With all the new Class A development happening; in the next 3-4 years a trend I see is, “Who will be the first in the market to convert them to a multi-tenant platform?”  All developers want to build a brand new Class A campus and lease it to Apple or Google, however the reality is the market will be overbuilt with too many larger projects.  Quite a bit of Class B Multi-tenant projects have been torn down due to age and there remains a strong demand for a 2K to 20K Sq. Ft. tenant requirement.  The market is not their yet for the conversion but it will be.  Developers don’t want to convert but then again, after carrying empty buildings for so long they will want to get them filled up to offset their cost once the market relaxes.

Q: Chad, thanks very much for your time, this has been very educational.

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