Real Estate Options for Small Businesses in the Washington D. C. Metropolitan Area

Introduction

Anyone who has ever started or attempted to start their own business has encountered their fair share of “Oh, yeah, I need to figure out <insert critical business function here>” moments.  Whether it is coming up with a distribution channel for your wonderful, can’t fail widget or determining the appropriate level of legal support to sustain your business, challenges abound for the startup and early stage business.  Coming up with the fundamental business idea is usually the easy part of the business ownership adventure.

One aspect of startup business operations that gets little attention in contemporary business media and literature is that of the real estate options for such firms.  Founders of new businesses normally have to rely on their own knowledge of available places of business or rely on commercial realtors.  If their own knowledge is sufficient, the best real estate option for the business and the business’s bottom line may be attained.  However, if the founder must rely on a realtor, options in the best interest of the business may not be presented.  To show an example of this point, consider a situation where a new software development business contracts with a commercial realtor to find office space in the Washington, D.C. area.  The realtor’s incentive is a percentage fee of the first year’s gross rent, paid by the owner of the property.  If the realtor finds a space matching the criteria of their client and the client rents the space, the realtor is paid their fee.  This realtor/client relationship is effective at identifying the standard office space options available on the open office space market.  However, other real estate options exist for the new software development firm.  In fact, several better options exist. 

The new firm could utilize a Serviced Office that provides many typical office support features all included in their monthly rent.  The serviced office option could provide space and services on an “as needed” basis thus turning normally large fixed costs into lower scale variable costs.  An even better option would be to win acceptance into a business incubator location.  Several exist in and around Washington, D.C.  The incubator offices provide heavily discounted office space and standard office services like high-speed internet access, printers and meeting rooms.  Incubators also provide free or discounted business assistance services like business model development and marketing advice.  All things considered, both the serviced office and incubator options would be more advantageous for the new firm but since the realtor’s incentives would never drive the realtor to these options, the new firm may never learn of them.

This research paper will elaborate on the full set of real estate options for new and small businesses.  The paper will focus on options in the Washington, D.C. area but many concepts and options presented are relevant in other large metropolitan areas throughout the United States.  The focus will also be primarily on businesses requiring office space as opposed to retail, manufacturing or warehousing space.  The ultimate goal of the paper is to provide a short guide for startups and small businesses that will help them choose the most effective real estate option.

Options

The Home Office

            A frequent starting point for businesses is the home office.  The benefits of the home office include the savings on rent, electricity, insurance and other costs associated with setting up a business at another location.¹ Business owners in the US can also deduct from their personal taxes the portions of household expenses that the home office accounts for.² If your business is suitable for home based operations and if you can maintain productivity while working from home, a home based business can be an inexpensive, low risk option.   However, one obvious downside of a home based business is that it will not support many, if any, employees.  If business plans include growth of personnel, a home based business will not sustain a business for long. 

Shared, Lent or Sub-leased Space

            Depending on the nature of your industry and the strength of your professional network, it may be possible to secure space in a colleague’s office.  If you are lucky, you might even get the space for free.  In non-profit industries it is not uncommon for businesses to share office space.³ The businesses share in the expenses of the office space but also in the benefits.  A shared office space also provides firms with increased networking opportunities.  Often the sharing companies will complement each other’s business operations.⁴  For instance a title attorney might sublease within a real estate agent’s office.  Sub-leasing on an existing tenant’s rental agreement is the most common strategy for shared office space.  A benefit of a sub-lease over a normal lease is that the time frame of the sub-lease can be negotiated to be much shorter than a typical office lease.  This provides additional flexibility for new businesses that likely need it.

            Possibly the best shared space options available to any business in the DC metro area are the handful of Business Incubators in the region.  The list below notes the websites of the various incubators in the area. 

Business Incubators

Virginia Department of Business Assistance: www.vbia.org
Fairfax Innovation Center: www.fairfaxinnovationcenter.org
Maryland Business Incubation Association: www.mdbusinessincubation.org
Montgomery County Department of Economic Development Business Innovation Network: www.mcinnovationnetwork.com
DC Business Incubator: www.dcbusinessincubator.org

Each of these incubators are non-profit organizations that provide free and low-cost services to fledgling businesses.  The services at each incubator vary but typically consist of:

-          Full or part time, furnished office space including:

o   Conference rooms

o   Office equipment

o   High-speed internet access

o   Phone service

o   Kitchen or break room

o   All utilities included

-          Business plan evaluation and assistance

-          Marketing execution guidance

-          Access to additional free or discounted business services like legal advice, accounting support, payroll assistance, etc.

-          Access to potential investor communities and other networking possibilities

The costs for use of business incubator office space are extremely low when compared to commercially available space in the area.  The DC Business Incubator provides space for as low as $200 a month.  In cases where the business can maintain a home office location, the other support services provided are done so free of charge. ¹⁰  The Fairfax Innovation Center in Fairfax, Virginia (near George Mason’s campus) offers space and all inclusive access to business service amenities for $400 to $1200 per month.⁷  Since the fee charged by these incubators covers the costs of several other business services, business incubator office space can be the most effective real estate option for a small business. 

            Of course there is one catch to utilizing a business incubator to solve your real estate needs.  All incubators in the area have an application process which a business must complete before receiving a tenancy opportunity.  In evaluating an application, incubators are generally looking for businesses that have a sound business plan and at least one documented client/customer.  Thus business incubator office space is not typically going to be an option for day one of a business’s life.  Startups will need to prove themselves first.

The Serviced Office

            Serviced Offices are another attractive option for startup and small businesses.  Like business incubators, they offer companies more than just office space.  Most serviced offices include features like:

-          Furnished or unfurnished space

-          Fully furnished and equipped conference rooms

-          Kitchen area and catering options

-          Receptionist and typically a high end lobby

-          High-speed internet and phone service

-          Print and fax support

-          Mail box and mail forwarding services

-          Custodial services

Rental packages in serviced offices typically include all of these features in their standard offerings.  Some firms also offer a-la-carte pricing on additional business support services.  For instance, Intelligent Office offers a Virtual Receptionist service which provides receptionist services that promise to “act just as a member of your staff.”¹²  Callers will be greeted with the name of the firm and calls can be forwarded to any phone.  The receptionist will even hold calls and take messages per your request.  Additional receptionist services like reservation taking, appointment scheduling and minor data entry can also be purchased. 

            Serviced offices can also provide small businesses with prestigious office locations at affordable prices.   For example, Regus, the oldest and one of the largest serviced office firms in the world, markets a 2200 Pennsylvania Avenue address in DC.¹³   Servcorp in turn rents an 1155 F Street address.¹⁴  These options give small businesses the possibility to create stand-out addresses well before they could actually afford real estate at the location. 

Most serviced office providers in the DC area sell Virtual Office solutions that give the business a professional address and other office services including:

-          Mailing address and mail forwarding

-          Fax support

-          Receptionist services

-          Monthly office and conference room usage allowances

Virtual office rates start as low as $150 per month for the most basic services and nondescript locations.¹¹  The features and low costs of virtual office solutions can be ideal for an early stage small business that can operate from a home office a majority of the time.  And even with the non-virtual solutions offered by serviced office vendors, a small business can attain a strong business location at a lower cost than would be possible on the normal commercial market.

            Another attractive aspect of serviced offices is the flexibility of lease terms.  Since serviced office vendors target the needs of young companies and companies that are only temporarily in need of space, lease terms can be negotiated for very short periods of time.  This stands in stark contrast to the demands of the typical commercial office space owners who demand multi-year leases.   In addition, many services can be used and paid for on an as-needed basis.  This allows firms to keep their office space and office services needs variable parts of their cost model.  In short, serviced office solutions will likely be a very attractive option for any new or small business in the DC area.  The box to the left lists the websites of a sample of the 

serviced office vendors available in the region.

Standard Leases

            There are plenty of options for normal office space leasing in the DC area.  The market for commercial space has been tough on owners in the past few years.¹⁵  A high vacancy rate means deals are out there and owners are willing to negotiate.  Whereas in the past when lease terms of 3+ years were common, it may be possible to get terms as low as a year.  While finding a good commercial real estate agent or broker is essential in finding the perfect spot for your business, there are other resources in the area that can assist you in your lease search. 

Arlington BizLaunch promotes business opportunities in Arlington Virginia and aids new businesses getting started within the county.  If your plan is to do business in Arlington, BizLaunch recommends you contact the Arlington Economic Development office first to ensure you target the right area and complete the business application process correctly.¹⁶  They also recommend you start your search for office space at least 6 months in advance if possible.  Arlington’s available commercial space is more limited than most other counties in the area and finding the perfect spot for your business can often be difficult.  For other neighborhoods in the region, the business incubators mentioned earlier can provide guidance and contacts with effective commercial real estate brokers. 

When considering leases, it is imperative that the lessee carefully review the terms of any lease contract.  In fact, those unfamiliar with commercial leases should have their leases reviewed by an attorney that is familiar with commercial leases.  Key clauses that must be validated in any lease include:¹

-          Zoning restrictions (particularly if your business needs more than just office space)

-          Signage

-          ADA compliance (Disabled access)

-          Renewal

-          Sublease

-          Remodeling

If remodeling of the space is planned, building permits and other licensing steps will be necessary before the remodel can commence and prior to occupancy by the business.  Also note that significant state, county or city fees may be required for any remodel.  Given the time and cost required to remodel, it will likely be best for a new or small business to simply find space that works for them as-is.

Buying

            Although the purchase of real estate is very likely not in the early plans for most small businesses, there are some points worth considering on the topic.  Before making a purchase offer, consider the expandability of the property.¹  If your plans are to grow the size of the company(which should be the case!) you should consider that planned growth in your purchase decision.  In addition, any owner should ensure the business property is adequately separated from personal assets.  The property should be purchased in the name of the company.  If the company should go under at some point, owners will want to keep their personal assets separate from their business assets. 

            Along with the slow down in the residential real estate market in the past several years, commercial real estate in the DC area has taken a hit.  Similar to the commercial rental market, this means opportunities are available for buyers.  Hot spots like Tysons Corner, Bethesda, Georgetown and several other spots in the area still demand high rental rates but now is the time to buy if buying is the appropriate decision for your business. 

Conclusion

            The Washington, D.C. area provides many real estate options for new and small businesses.  If a home office does not work for your business, business incubators can provide you with the office space you need at affordable rates.  Incubators will also provide you with free or low cost business services you can not find with other real estate options. 

            If incubators are not an option for your firm, the various serviced office vendors in the region provide low cost, variable term spaces in various locations.  With serviced offices, you do not have to wait until you are a Fortune 500 firm to acquire a swanky Pennsylvania Avenue address.  Serviced offices can also provide your firm with several office support services on an as-needed basis allowing your firm to keep costs low and variable.

            Of course there are always going to be options in the standard lease and purchase markets as well.  Currently DC is an attractive market for business owners seeking new space.  Rates are low and vacancies are high.  If your small business can foot the bill, this is as a good a time as there has recently been to pull the trigger on a new lease or purchase.

References

1. Burk, Jim, and Mark Warda. How to Start a Business in Maryland, Virginia, or the District of Columbia. Naperville, IL: Sphinx Pub., 2004. Print.
2. "Work From Home? Consider the Home Office Deduction." Internal Revenue Service. 15 Mar. 2011. Web. 16 Apr. 2011. http://www.irs.gov/newsroom/article/0,,id=108138,00.html
3. Dickman, Autumn. "Project Manager - Juvenile Law Center." Personal interview. 16 Apr. 2011.
4. Landers, Jeff. "Sharing Office Space -- Subleasing -- Going Solo -- Sole Proprietor." Inc. Small Business and Small Business Information for the Entrepreneur. Web. 17 Apr. 2011. http://www.inc.com/resources/solo/articles/20061101/landers.html
5. Montgomery County Innovation Network. Web. 17 Apr. 2011. http://www.mcinnovationnetwork.com/
6. DC Business Incubator. Web. 17 Apr. 2011. http://www.dcbusinessincubator.org
7. Fairfax Innovation Center. Web. 17 Apr. 2011. http://www.fairfaxinnovationcenter.org/
8. Virginia Business Incubation Association (VBIA). Web. 17 Apr. 2011. http://www.vbia.org/
9. MBIA – Maryland Business Incubator Association. Web. 17 Apr. 2011. http://mdbusinessincubation.org/
10. Giordano, Alfredo. "Research Inquiry." Message to the author. 10 Apr. 2011. E-mail.
11. "WSJ Explains Serviced Office Space Best." ABetterOffice - USA Office Space and Executive Suites. 25 Nov. 2008. Web. 17 Apr. 2011. http://www.abetteroffice.com/office-space-advice/wsj-explains-serviced-office-space-best/
12. Virtual Offices, Executive Offices, Shared Offices, Serviced Offices, Virtual Receptionist | Intelligent Office. Web. 17 Apr. 2011. http://www.intelligentoffice.com/
13. "Regus | Virtual Offices and Virtual Office Solutions." Regus Virtual Office Services and Virtual Office Space for Meeting Venues. Web. 17 Apr. 2011. http://virtualoffices.regus.com/default.htm
14. Executive Suites Virtual Office Space | Servcorp. Web. 17 Apr. 2011. http://www.servcorp.com/
15. CCIM 2011 Forecast. Investors search for clarity in a divided market. Web. 18 Apr. 2011. http://www.ccim.com/cire-magazine/articles/2011-forecast
16. "BizLaunch, Arlington's Small Business Assistance Network." Arlington Economic Development - Arlington Convention and Visitors Service Home Page. Web. 18 Apr. 2011. http://www.stayarlington.com/index.cfm/7012

Pickupball website would be perfect ! (for me)

The pickup basketball website idea was the most intriguing idea to me.  Admittedly this probably more due to the benefit I personally could get from using such a site.  When I moved into this area I had no contacts to play ball with and no good way to make any.  I could search around for good courts to play on...which I did...but that took a lot of trial and error.  The value proposition of giving me a site where I could go to quickly determine the set of locations, number of courts, their quality and how crowded the courts would be is exactly what I needed.  Add on the features that support leagues and tournaments and I can see this site being the one stop shop for helping out the pickup baller all the way up to the gym manager who is trying to organize his league.  The problem is how do you effectively monetize all this?

One idea presented was to team up with gyms and try to acquire sponsorships.  I can see this generating a small amount of revenue.  In addition there should be some advertising revenue.  However, the advertising revenue will not be significant until a very large amount of users are on the site.  This means that early operations that only target local DC areas will likely not be sustainable and will likely not payoff the initial costs of developing site in any reasonable amount of time.  This suggests a few things from my perspective:

1. Seed funding will be necessary to create the site.  The site will need to be high quality to attract the younger audience that will be the users of the site.
2. The site should support as many locations around the country as possible as quickly as possible.  A strong marketing push would help to rapidly raise awareness.  I could see marketing sessions on college campuses, popular malls and highschools helping to quickly spread the word.  Access to the site by users has to be free.
3. This idea has a low barrier to entry so I think it will be important to quickly storm the market and get deep penetration into as many areas of the country as possible.

I think there are opportunities to partner with all kinds of sports related companies out there too.  Once a solid 18-35 user base is demonstrated, tons of companies will want to advertise on the site.  

Prediction markets are only effective if a lot of people participate. What are the best ways to encourage more traders and trading within internal company prediction markets?

The Google case on prediction markets argues that monetary gain is not very effective at getting people to participate in prediction markets.  I think money can be persuasive but the scale has to be sufficient.  Google's $10,000 pool was simply to low to motivate many to participate.  What did motivate the participants were the prizes that improved their reputation among their peers.  Simple t-shirts were more important to the winners of  the "10 most active trader" awards than the $1,000 prizes.  However if the awards were $50,000 or $100,000  or if there were the ability to earn money without winning an award, motivation to participate would certainly have been higher. 

In the context of your typical large company, setting up a prediction market with cash rewards sufficient to motivate is not likely to be an option.  For this reason, non-monetary motivation will be the most effective motivating strategy.  From Google's example, participants seemed to be motivated to participate because of the bragging rights they would earn by winning one of the prizes.  Googlers valued the awards and were proud to win the awards.  The challenge for anyone who sets up a prediction market will be creating a sense of value to any awards provided.  Participation in the market needs to be exciting and people need to be motivated to participate.  Companies can setup non-monetary awards like Google did with t-shirts and quarterly announcements of  winners.  Companies can also try to make participation a part of the corporate culture.  Management can help to instill the need to participate by participating themselves and encouraging their teams to participate.  Weekly emails can be sent out which summarize the ongoing results of various markets and the trending of those markets to help get people interested in the life of the markets. 

Companies should also not limit their marketplace to company relevant markets.  Google created markets for the world cup and NBA Finals.  Non-work related market opportunities should help keep employees interested in checking out the various markets that are available.

What are the similarities and differences between a community-driven product development process and a traditional product development process within a firm?

Traditional product development processes require a strategic plan that sets in motion research into ideas to satisfy the needs of the customers targeted by that strategic plan.  Once a product idea is determined, typically approvals of that product idea and the various features are acquired.  This includes the allocation of a budget to develop the product.  Typical traditional product development processes would then include prototype-evaluate-test-implement-test.  Finally the product is ready to market and sell...and the business must cross its fingers and hope for a winning product solution.  The process, however, can be lengthy and require many managerial signoffs before deployment of the product can take place.  The costs for traditional development are often substantial even though only a small number of individuals might contribute to the product's development.

Community based development often still includes prototype, evaluate and test phases but doesn't include most of the other aspects of traditional development.  Since the community provides their talents and effort, managerial approvals to transition from one stage of a project to another do not exist.  A significantly larger set of individuals will typically contribute to the development process of a community based project than in traditional product development.  If there is compensation for a community based project, this compensation is either small or limited to a few contributors(for instance the winner of a contest).  This limited compensation makes the cost of community based development often lower than traditional development.  Because of the sheer number of contributors, development time can often be shorter as well.  In addition the community will often provide extremely effective testing and market validation results.  If the product design and implementation makes it through the community development process, it by definition satisfies the needs of the community and likely satisfies the needs of the target consumers as well. 

LinkedIn recently hit 100M users. If you were in charge at LinkedIn, what would be your strategic goals for the next several years? How would you achieve them?

Clearly LinkedIn needs to prepare for the inevitable razing of the garden walls.   Since the time of this case, Facebook (among other sites) has opened up a login api that permits other sites to receive authentication credentials from Facebook.  Once authenticated, the sites also have access to some profile and network information.  Sites then list Facebook information on their own pages.  This helps provide even more access to Facebook and drives more traffic to Facebook. 

LinkedIn can follow a similar model.  They may want to restrict access to this API to only those organizations that pass a certain "Professional in Nature" test but the additional exposure will clearly drive more traffic to their site and increase the value of their service. 

Another area of seeming opportunity is on the Job Postings front.  LinkedIn seems poised to take control of the job postings/job search market.  Their user base already represents most of the companies in the US and I have heard that most, if not all, recruiters now use linkedIn heavily during recruiting efforts.  LinkedIn could take a larger chunk of this market without major efforts in terms of feature development.  A heavy marketing campaign may be able to win over a large portion of that market.

How do Wikipedia’s processes for creating and modifying articles ever lead to high-quality results? In other words, since anyone can easily edit Wikipedia, how is it that good (and usually accurate) content emerges?

I think the primary factor at play that helps produce generally solid results is the ratio of "good" contributors to "bad" contributors.  By "bad" I don't necessarily mean contributors with bad intentions.  Those folks certainly qualify as bad.  But I'm also referring to those contributors who provide erroneous or inaccurate information with no malice intended.  The bottom line is that the results of the contribution are of poor quality.  As long as there are significantly more contributors interested in accuracy and factual information than there are contributors that deteriorate the quality of entries, wikipedia will generally be an accurate encyclopedia.  Therefore wikipedia essentially depends on that ratio favoring the "good" contributors.  What that ratio actually needs to be to ensure quality entries, is a good question!

In general, how should organizations deal with issues posed by user-generated content and other information spread over social media?

I think active monitoring of social media outlets like Twitter and Facebook is becoming a business operations requirement.  Proactive monitoring will help ensure potentially damaging user generated content is identified early enough to implement a damage control strategy.  Should the content be inaccurate and/or slanderous, the firm should actively publicize (through social media and potentially elsewhere) their defense.  If the content is factual, as it was with the United Breaks Guitars case, the firm can utilize social media to express their plan of action to address the issues at hand.  The rapid information spreading capabilities of social media can ultimately help the firm to assuage customer concerns. 

Firms can also leverage social media sites to improve their service to customers.  As United planned in the United Breaks Guitars case, content and feedback from social media can be used to educate employees and even aid in training programs.  Firms could actually extend the use of social media even farther by enlisting social media sites as another form of customer support.  For instance, firms could add their facebook page as another form of customer support input (in addition to home page, in person and phone support).