Saturday, May 31, 2014

MaRs and the McMaster Innovation Park (MIP)

With recent news over the problems with the second MaRS building and the need for the Ontario government to buy it to prevent MaRS itself failing, I started doing some comparisons with the McMaster Innovation Park on Longwood.

The Star has a good article on the problems renting out the second MaRS building. Some quotes:

"The 20-storey MaRS tower was at risk of becoming a white elephant from the beginning because it was simply too big and too expensive for Canada’s relatively small life sciences sector, Toronto-based commercial brokers say.
Construction forged ahead for several months until late 2008, defying basic Canadian real estate development conventions such as having at least 40 per cent of the space leased before concrete was poured."

"Thanks to a “perfect storm of many things,” in the words of one broker, the gleaming Phase II tower of the MaRS innovation hub now sits almost 70 per cent empty.
The brokers who spoke to the Star said this is because the rents are too high for the northerly downtown location and more in line with the high-demand, high-priced core within walking distance of Union Station.
They also say most of the space is more conducive to labs and medical research facilities than conventional offices.
Significantly, they add, the tower houses Public Health of Ontario’s largest infectious disease testing and research lab.
“That has been a deterrent to other (private-sector office) tenants moving in there,” said one broker." "

"Plus, net rents in the tower were originally set at $30 per square foot, about the same as some core buildings, say brokers. They’ve since been discounted to $22.50 per square foot. But research and medical-type operations more typically like to pay just $16 to $20 per square foot. "

There's also a Scott Stinson piece in the National Post that I thought also had an interesting quote:

"Not that it seems there’s much of a risk of innovation-oriented tenants suddenly clamouring to get in the MaRS doors. Though MaRS isn’t talking, sources in the startup field have suggested that it — or specifically its U.S. leasing partner — was charging rents well above market value, with one person telling me that a venture capital firm considered MaRS-based companies to be risky investments because just being there demonstrated poor fiscal management."

That's basically what I feel as someone part of a now successful software startup. There's little point to paying for premium office space at the beginning. For MaRS the idea was that with all the research hospitals in the area, having lab space for startup companies more in wetware would be useful. Certainly proximity can be useful, but paying big premiums to be right beside the hospitals in the center of Toronto is going to be expensive and frankly these medical startups have quite a feeble success rate anyways.

Now on to the McMaster Innovation Park. Similar idea, although software was also a focus besides medical. Certainly as having been at Mac for around a decade, it has always been disappointing how the science, medicine and engineering faculties haven't produced many spinoff jobs over the last few decades. I understand the idea that government and the university could try and facilitate these companies by renovating and building buildings to rent out. The problem is that these buildings always end up being quite fancy and need to charge premium rents to justify the high renovation and new building costs. That's something you just don't want to pay as a new startup.

Just look at what's going on in the main Innovation Park building today. It has a bunch of governmental, university and NGO offices, but not a lot of private sector companies. Sure there's Fluid Media and Weever Apps, but after the implosion of Trivaris and its associated companies the private sector occupied chunk of the building is rather small. That will hopefully change with time, but the high rents will make things slower than it could be. Frankly at this stage, the Innovation Factory NGO itself looks like a failure and a waste of money.

If I was doing another software startup and was looking at doing it in Hamilton, I'd be looking for some cheap office rent somewhere in an older building downtown. There's the plus of being near a lot of restaurants and other amenities that you don't get out on Longwood.

Doing a software startup in Hamilton also has the plus that wages for software workers in Hamilton seem depressed compared to the rest of the GTA. If a company was willing to pay something closer to the standard, between McMaster and Mohawk and those living in Hamilton but working somewhere else, there's talent out there.


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