Wave of startups fills up Downtown Crossing offices

By Thomas Grillo, Boston Business Journal | June 7, 2013

The available office space in Downtown Crossing plunged by nearly 40 percent in two years as a wave of startups priced out of Kendall Square and the Seaport arrived in search of real estate bargains.

Despite the big collective impact, the startups are each generally leasing small spaces. Mobee, the mystery shopper company, leased 3,600 square feet at the Old City Hall on School Street, for example. Meanwhile, Apptopia, an app marketplace, rented 2,200 square feet at 71 Summer St., and Quantopian, a quantitative finance firm, inked a 3,000-square-foot deal at 77 Summer St. These and dozens of other startups have discovered a section of the city that is better known for stores and restaurants.

The influx is filling up space in the 1.4 million-square-foot Downtown Crossing submarket, where the availability rate has slipped to 9 percent in the first quarter, down from 14.3 percent for the same period two years ago, according to Jones Lang LaSalle (NYSE: JLL). As available space dwindles, rents have increased. Average asking rents for office space there have increased by nearly 15 percent to $32.49 per square foot a year in the first quarter, up from $28.30 three years ago. But that’s still a far cry from $50-plus figures seen on the South Boston waterfront and in Cambridge’s Kendall Square.

Jon Frisch, a vice president at T3 Advisors, a Waltham real estate brokerage, said many startups are looking for space after graduating from incubator programs like TechStars and Mass Challenge as well as co-working spaces such as Workbar, the Cambridge Innovation Center and Intrepid Labs. When the companies are in their infancy, he said, paying $250 per desk is a viable option. But as they grow, they need more space. While many prefer Cambridge and are attracted to the emerging Seaport area, he said, these cash-strapped firms simply can’t afford it. "It’s sticker shock," Frisch said. "It’s not only expensive in Cambridge and Seaport, but it’s also terms. Seaport landlords never imagined such high rents, so they want to lock them in for at least five years. But if you’re a startup, there’s no way you can look ahead five years and figure out where you’ll be. These tenants are seeking much shorter leases that they can get in Downtown Crossing."

The district is slowly seeing a transition. A 54-story tower is planned for the former Filene’s block. Down the street, Millennium Partners is completing work on 256-unit luxury condominiums and the Kensington will soon open with 381 luxury apartments.

Localytics, a mobile app marketing firm became the latest startup to arrive downtown after outgrowing shared quarters at One Cambridge Center.

"We would have loved to have stayed in Cambridge at Kendall, Central Square or Harvard Square, but quickly realized that rents were super expensive and availability was limited," CEO Raj Aggarwal said. "Paying $50 per square foot was unthinkable. And when I compared it to being in Downtown Crossing, where we knew companies that were paying $20 to $30, we realized it was the right move."

While Downtown Crossing was not initially on Aggarwal’s radar, he quickly became enamored with the location. His firm leased an entire floor, totaling 6,000 square feet, at 141 Tremont St. in the mid-$20s. Aggarwal liked the idea of Seaport and its funky space in older buildings, but steered clear because of the cost and the competition for office tenants.

"Besides, Downtown Crossing offers three MBTA Lines, the Red, Green and Orange, a better option than Kendall Square for our employees," he said. "And the food options are better in the downtown."