Incubator buildings the latest trend for start-ups

We've read about trophy buildings and specialty buildings, but only recently has anyone written about the success of "incubator buildings" in today's market. "Incubator buildings" are buildings that house small companies, often start-up firms, that lease, on average, under 2,000 square feet and often less than 500 square feet.

At 110 W. 40th Street, a 26-story incubator building that Adams & Co. manages, 93 percent of the building is leased at an average rate of $28 per square foot, which outperforms the market. Some spaces lease for as high as $32 per square foot. Just five years ago, rents in this building were a mere $16.

This year, we've completed 23 leases at 110 W. 40th St. The building features a new lobby, new elevators, new bathrooms and new hallways. But most significantly, none of the leased spaces were more than 2,400 square feet. Many were less than 500.

We're no longer in the "dot-com bust" era. And as the economy grows, start-up companies are gaining increased business and often need to expand. At 110 W. 40th St., RT Sourcing, a noted cosmetics packager, has doubled its space to 2,400 square feet. Meanwhile, Internet theater ticket retailer Entertainment Link grew its space to 1,600 feet.

Of course, the sizzling incubator space market also allowed us to bring in new tenants. This year, we've managed to bring in exciting small companies such as Cassandra Consulting Services, Advanced Fashion Technology, Ltd. Nitro Sportswear and Media Training Worldwide, Inc.

If a company hits hard times and needs to downsize their space, we're there for them too. In August 2001, Entertainment Link leased 1200 square feet of space at 110 W. 40th St. Shortly thereafter, the company, like many others, quickly realized they needed to downsize their space to 800 square feet. Because their office needs were met, company officials could focus on their business. Entertainment Link's founder Tim Hawkins recently told Crain's New York Business that getting the company's space needs met was one of the reasons "we've done quite well."

In addition to the economic factors encouraging the growth of small companies, incubator spaces are popular because they add flexibility to new business. As more businesses get started, they don't want to lock themselves into long-term leases.

A typical lease in an incubator building carries a term of three to five years--rather standard for commercial purposes. However, the difference between an incubator lease and a regular lease is that an incubator lease commits the tenant to the building rather than the space itself. As the businesses grows, Adams & Co. can adjust to their needs accordingly. If the tenant needs more space, we'll find it for them. If they need to downsize, that's usually not a problem either.

But the size of the leased space isn't the only flexible factor. Layouts are flexible too, as the typical incubator space usually contains no more than a couple offices and a conference room. Tenants can move right in.

As the economy continues to grow, keep an eye on 110 W. 40th St. and other incubator buildings. You'll see a trend emerging as new companies open for business.

DAVID LEVY

PRINCIPAL, ADAMS & CO.

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