Landlords More Skeptical About Dot-Coms

S A N  F R A N C I S C O, July 21, 2000 -- The days of love at first sight are overfor Internet startups in their search for office space.

As recently as four months ago, practically anything related tothe Internet had tremendous appeal to commercial landlords, whoaccepted stock options as rent and sometimes didn’t even seekletters of credit.

The online industry still holds sex-symbol status in theeconomy, but mere looks aren’t everything anymore in California.Since the tech-heavy Nasdaq cooled, landlords have begun to worrythey could be left in the lurch if today’s hot dot-com companybottoms out.

Now commercial property owners are taking the time to carefullysize up a potential Internet business tenant, seeing if it has agood head on its shoulders and a profitable business plan.

Landlords Inspect Internet Companies

And in some cases, landlords are just saying no from the start.

“Landlords were happy to take dot-coms if they delivered stockoptions. Now landlords are getting more concerned. They’re askingfor more financial data. They’re also looking at financialprojections. They’re almost acting like Wall Street financialanalysts,” said David Oppenheimer, chief financial officer ofDigital Impact, a San Mateo, Calif.-based e-mail marketing companythat went public Nov. 22.

Oppenheimer, who is always shopping for more space for hisgrowing 2-year-old Internet company, said landlords or their agentsare demanding more than business plans. Some also want face-to-facemeetings with company principals.

“Space doesn’t lease overnight like it did before,” said MeadeBoutwell, a director in the San Francisco office of Cushman &Wakefield, an international property management firm. “Things havetaken a more reasoned, calm approach instead of the rampantgot-to-have-it-tomorrow approach.”

As a result, some Internet tenants are being forced to give upmust-have California addresses and shop for space in lessattractive areas.

“Dot-com tenants are starting to look at other submarkets likedowntown L.A., where there’s still a double-digit vacancy rate, oneof the few places in the country that still has that,” said HuntBarnett, a senior managing director for Insignia/ESG, one of thenation’s leading commercial real estate services providers.

Nasdaq Plunge Prompted Skepticism

The love affair ended around April after Nasdaq stocks took aplunge and the tech-heavy stock market sobered up, bringing about amore cautious approach in all high-tech deals.

“The Nasdaq correction threw cold water on it, and everybodysaid, ‘What are we doing here?“‘ Barnett said.

The correction has done nothing to ease pressures on thecommercial leasing market. Single-digit vacancy rates have drivenrents in the San Francisco region to as high as $70 to $85 persquare foot per year.

“The real challenge for the young company is getting selectedto lease space,” said David Churton, senior managing director forthe San Francisco region for Insignia/ESG. “Historically, theperson who pays the most or the one who pays the most options wouldget selected, but now it’s whoever has the strongest company withthe secondary focus on who pays the most.”

No Dot-Coms Allowed

Some buildings have pulled themselves off the dot-com marketcompletely.

“Even though we have excellent tech-company clients, we’ve beentold, ‘We’re not going to deal with the tech companies anymore,”Churton said.

The chilling effect certainly didn’t help Thirsty.com, aninfotainment Web site geared for teens.

The Los Angeles-area startup had been looking for office spacesince late 1999. It moved into a building in Westwood this month,but only after a bit of strong persuasion.

“The landlord was saying we have had enough of the dot-coms,and I said, ‘No.’ I told him we deserved a day in court,” saidBarnett, who set up a meeting where Thirsty.com had to make a pitchsimilar to one it made to its angel investors.

“My client is personable and persuasive,” Barnett said, “so it went well.