Dot-Com Era Space Banking Is Back, But Landlords May Not Suffer This Time

Office tenants in Boston are starting to act as they did in the years leading up to the dot-com bubble burst, but the city’s real estate analysts say history won’t repeat itself.

Taking more office space than currently needed in anticipation of future growth, known as "space banking," is not a new concept. It was prevalent in the late 1990s when dot-com companies signed leases that could accommodate far more workers than were on the company payroll.

“With the market being as tight as it is, landlords are looking to capitalize and sign leases for as long as possible,” Cushman & Wakefield Executive Vice Chairman Bob Richards said. “Today’s tenants are really being forced to think long and hard to take some additional space to accommodate growth over a 10-year time frame.”

The practice has begun once again in Boston, with space banking taking place by companies like PTC and education firm Cengage. This time, however, the companies aren’t keeping the space for themselves.

PTC is moving its global headquarters from Needham to 250K SF at 121 Seaport in the Seaport District. Cengage is taking 117K SF at Tishman Speyer’s Pier 4 office building. Both companies don’t need the entirety of their respective offices, and they have already put a combined 80K SF on the sublease market.

The bigger leases provide opportunities for seamless growth, and they allow the company to have more control in matters like signage on the building they occupy, sources close to the transactions said. Representatives with PTC and Cengage did not respond to calls for comment.

“The market is so hot right now, and there’s a dearth of new product,” Colliers International Director of Research Aaron Jodka said. “Take the space now and grow into it, but having a subtenant in the meantime makes a lot of sense.”

Subleasing is the differentiating factor between contemporary space banking and when it took place during the dot-com boom. While he says it is a little early to say if the practice will become widespread in Boston, Newmark Knight Frank Executive Managing Director David Martel said today’s space banking is far more risk-averse than the days of companies like Breakaway Solutions signing a big lease that was vacated after the company’s stock tanked. 

“You would see guys walking in with $30M of venture capital funding and four employees and say they wanted space for 250 employees, and you’re on the frontline wondering ‘are you serious?’” Martel said. “Brokers loved it, but more often than not, those tenants were a disaster for the landlords.”

The bigger leases of today are more appealing. Companies are disciplined, and the venture capital money behind them is more disciplined, Martel said. But that doesn’t mean companies have become less competitive.

Some aren’t shy about taking excess space even if it means elbowing out another company from getting an office. Those familiar with Rapid7’s right of first refusal deal at Hub on Causeway say the software company could be close to signing on for additional space at the Boston Properties development to protect their ability to grow in the future — and prevent other firms from moving in. 

Representatives with Rapid7 declined to comment for this story.

Boston’s booming economy has put space at a premium, especially new construction. With roughly 200 companies with a combined 6.5M SF in space needs actively looking in the city, according to Colliers, tenants feel it isn’t a risky move to sign a bigger lease. 

“Our clients want a strong indication from us that subleasing is not going to be an issue. On the lab side, that isn’t a problem at all,” Richards said. “Frankly, a lot of times, we’ve been able to identify subtenants for lab space before the larger deal is fully executed.”

Space banking occurs in a different form across the river in Cambridge, where the lab vacancy rate is nonexistent and tech companies are limited with opportunities for growth. The office and lab crunch has motivated companies to pre-lease space years in advance, bucking the usual practice in tech and life science of inking deals much closer to when they want to move in.

Philips North American signed on to Cambridge Crossing in January and isn’t moving in until 2020. Google is said to be attached to a 19-story Boston Properties tower that wouldn’t even start construction until mid-2019.

“The competition for space remains very intense, and rents are continuing to escalate,” Jodka said. “It’s not uncommon for tenants to be looking for space three to four years in the future.”

The practice also plays a key role in talent recruitment. It is easier for a company to woo younger talent when it has an urban setting with the amenities that demographic of the workforce is seeking. To make that office a reality, it can mean signing a lease today for the needs the company may not have for several years.  

“Being in non-contiguous locations is not good for an organization,” Richards said. “At some point, people are forced into creating little campuses because it’s hard to have enough space in one contiguous block in a tight market.”