Expanding Into a Second Market: A Real Estate Playbook

Your first office was chosen in a city you know. You understood the neighborhoods, the commute and the reputation of the buildings without being told. In a second market you know none of that, and the people who will use the office may not have been hired yet.

The second office also changes your company from a single-lease tenant into one with a portfolio. Two leases mean two expiration dates, two landlords, two sets of obligations and two places where a change in headcount can leave you with the wrong amount of space. Decisions made in the new city affect the old one, particularly when the team is shifting between them.

For those reasons the playbook below is weighted toward keeping commitments small until you have evidence, and toward managing both locations as one plan.

The first space in a new market should be easy to leave and easy to grow out of. You are buying information: can you hire here, do people come in, does the location work.

• Coworking or a flexible private office gives the shortest commitment and requires no build-out. It costs more per person and offers less control over security and branding.
• A furnished sublease can offer real private space for a limited term, often with furniture and cabling in place. The term is fixed by the sublandlord’s lease and may not be extendable.
• A landlord-built spec suite on a shorter lease gives you your own front door and a direct relationship with a landlord, with a moderate commitment.

For an AI or technology team, check two things before choosing shared space. First, whether your security commitments to customers allow work in a shared environment, and what controls the operator can document. Second, whether the work involves hardware or equipment that needs a room of its own. Either can rule out coworking from the start.

Resist sizing the first space for the headcount in the hiring plan. Size it for the people you have and the next few hires, with a clear route to more space when the hires arrive.

A trial without criteria tends to drift. Before you open, write down what would justify a longer commitment and what would tell you to stay small or close.

• ✓Are we hiring in this market at the pace we expected?
• ✓How many people use the office on a busy day, and is the pattern stable?
• ✓Is the neighborhood right for where our people actually live?
• ✓Have we outgrown the rooms, the privacy or the security of the first space?
• ✓Is there a local leader who will own the office?
• ✓Does the business case for this market still hold?
• ✓Is the cost per person of flexible space now higher than a lease would be?

Review the answers at a set point, not when the flexible agreement is about to end. Notice periods on coworking agreements and expiration dates on subleases arrive quickly, and the search for the next space needs to be under way before they do.

Every market has its own conventions. How space is measured, how operating expenses are passed through, what concessions landlords offer, how leases are documented and which owners are easy or difficult to deal with all vary from city to city. A founder cannot learn this from listing sites, and a broker from another city cannot know it by instinct either.

There are two common ways to get local knowledge. One is to hire a separate broker in each city. The other is to work with one tenant rep who coordinates the whole portfolio and partners with a locally licensed broker in each market. Real estate licensing is handled state by state, so the local partner is a practical necessity as well as a source of market knowledge.

The coordinated model has specific advantages for a growing company.

• One advisor knows your business, your lease standards and your risk tolerance, and does not need to be briefed again in each city.
• Someone is looking at both leases together, including how their dates and obligations interact.
• Proposals from different cities arrive in the same format and can be compared.
• Lessons from the first negotiation, such as a clause that caused trouble, carry into the second.

Whichever model you choose, ask who the local partner is, how they were selected, and who is accountable to you for the result.

Once you are negotiating a lease in the second market, treat it as part of a set. A short list of company standards saves time and prevents one office from carrying obligations the other does not.

• Sublease and assignment rights, including the ability to transfer the lease in a sale or reorganization of the company without the landlord blocking it.
• The form and size of security you are willing to post, and who signs. Decide in advance whether the parent company or a local entity is the tenant and whether any guarantee is offered.
• Expansion and exit rights that fit the uncertainty of a newer office.
• Requirements for security, access control, equipment rooms and connectivity, so IT can run both offices the same way.
• Expiration dates. Consider whether you want the leases to end close together, which concentrates your leverage and your risk, or staggered, which spreads both.
• Restoration obligations at the end of the term.

Have your attorney review how the tenant entity is set up and what registration or tax steps apply in the new state. Those questions are outside the lease, but they affect who can sign it and when.

1. State what the second office is for and how you will know it is working.
2. Engage a coordinating tenant rep and confirm the local partner in the new market.
3. Open in flexible space or a short sublease sized for the people you have.
4. Track hiring, attendance and cost against the criteria you set.
5. Begin the search for longer-term space well before the flexible agreement ends.
6. Run a competitive process in the new market with written proposals from several buildings.
7. Negotiate the lease to your company standards, with flexibility suited to a young office.
8. Add the new lease’s critical dates to a single calendar that covers every location.
9. Review the whole portfolio whenever headcount plans change in either city.

TAG is based in Chicago and coordinates searches in other markets for technology, software and data companies, keeping one point of contact for the client across locations.