By DEREK TRULSON and BOB MOONEY The Staubach Co.

The global high-tech frenzy is sweeping through Seattle, as software, dot-com and tech-related companies are driving our commercial real estate market. These companies are growing faster than the market can supply space, as dozens of high-tech businesses are doubling and tripling in size in a single year.

Many tech companies are located in the heart of the city because of the conveniences of downtown. This concentration of leased space contributes to low vacancy rates (2 to 4 percent in the downtown central business district core and less than 2 percent in other submarkets), and it creates a challenge for companies seeking more than 30,000 to 50,000 square feet of contiguous space. High-tech companies and landlords are forced to come up with strategic ways to meet evolving real estate needs. Technology companies must predict the future of their businesses and determine how much space to lease to accommodate either astronomical growth or a quick demise. This unpredictability also requires landlords to find creative ways to securitize lease transactions associated with the technology companies’ lack of operating history and credit risk.

The high-tech domination of Seattle began about two years ago when Amazon.com set the standard for growth and investor returns. Seeing the potential for investor rewards, the capital market flooded the industry with funds, fueling unprecedented growth for innovative start-ups. As Seattle’s high-tech industry grew, so did its place in the downtown real estate market. Microsoft cofounder Paul Allen’s 505 Union Station office development started the high-tech real estate revolution in Pioneer Square. The trend continued in Smith Tower, which is almost completely occupied by high-tech companies. Other hot spots include South Lake Union and the waterfront and Elliott Avenue. Seattle is now one of the most active high-tech real estate markets in the country.

Because of the potential for dramatic growth in a very short period of time and the unpredictable nature of their business, high-tech companies must carefully plan for their real estate needs. This causes a problem for many high-tech companies because initial business plans usually look in terms of months, not years. This short outlook forces some high-tech companies to take too little space that later cannot accommodate their growth. To avoid the cost of moving from building to building, many start-ups must plan up to two to five years in advance of a move (depending on the lease term) to adequately meet their real estate needs.

Many high-tech companies now rent up to 100 percent more space than they currently need. This shifts the control of the extra space from the landlord to the tenant, who consequently has more flexibility to handle potential growth. By subleasing the extra space, the tenant minimizes the cost of holding the vacant square footage. If it appears they will need the pocket space, the company already has available space once the sublease is up, and they eliminate the cost of moving.

Landlords are faced with a Catch-22 when it comes to high-tech companies because it is difficult to predict how the potential tenant’s business will develop. If the landlord elects to take on a high-tech start-up as a tenant, it is possible that the business will fail and be unable to pay rent. On the other hand, by turning away a high-tech company, the landlord may miss out on a dependable tenant with a bright future.

Because of their situation, landlords are coming up with very aggressive securitization requirements for high-tech companies. Some landlords require high-tech tenants to prepay 12 to 24 months in advance, which will be applied over 48 months, minimizing the landlord’s risk in case the company folds. However, this places extra pressure on the tenant to have that additional funding at precisely the time funding is hardest to come by. Companies want to spend their investors’ money on building the business, not real estate.

Other landlords require letters of credit to ensure payment from their high-tech tenants. This secures the cost of the transaction with a bank in case the tenant’s business shuts down, covering the landlord’s expense of finding a new tenant and marketing the space. Although this is the preferred method of securitization for technology companies, it poses a challenge to find banks and landlords experienced in this form of securitization.

Warrants are another increasingly popular method of securing payment. Savvy landlords are noticing that there is an opportunity to profit from some of the hot companies in the high-tech industry. Rather than using letters of agreement, many landlords opt to secure the lease by securing stock options with the tenant’s company. This way, landlords can benefit from their tenants’ growth in valuation. This is also a good option for high-tech companies because it does not require additional capital expenditure for up front costs required by some transactions.

Seattle has never seen anything like the growth of its high-tech companies. In fact, the continued stability of Seattle’s commercial real estate market depends on how well these companies perform, because of their domination here. At the same time, the future of high-tech companies depends on the continued growth in capital markets and investor appetites for high-risk, high-reward investment. As companies continue to grow, so will the amount of investment dollars. The future of high-tech companies also depends on how long landlords are willing to continue to take on these businesses as tenants. Space may soon become very difficult to come by in the downtown area, because more companies are moving to the heart of the city for the conveniences and employee amenities associated with urban spaces.