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Friday, February 27, 2015 |  Madison, WI: 14.0° F  Fair
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Second thoughts over the StartingBlock tech incubator for Madison
Concerns focus on costs and East Wash location
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The vision for the five-story Kleuter Building includes a new home for Sector67, IT startups and market-rate office space.

Let's give the skeptics their say.

Sure, they acknowledge, the StartingBlock Madison proposal seems like a powerful idea that, in theory, could galvanize the downtown tech scene. It would gather in one place, at the old Mautz paint warehouse at 925 E. Washington Ave., the seeming ingredients of a successful startup community.

You'd have the newly expanded Sector67, the maker space that puts geeky software innovators next to hardcore metal tinkerers using drill presses and lathes. You'd see a new home for the rotating IT startups funded by gener8tor, the edgy Milwaukee-Madison venture-capital firm. You'd have satellite offices for venture capitalists, lawyers and UW types who want to be close to the action. There would be an auditorium for teaching and tech gatherings. Also cheap co-working space. A health-care tech incubator, aimed at leveraging the extraordinary success of Epic Systems, would be launched. Plenty of market-rate office space would be offered in the upper reaches of the five-story Kleuter Building.

Altogether, we're talking 86,000 square feet of new and rehabbed space, with almost 30,000 square feet aimed at those market-rate tenants.

Sounds marvelous, and very much in line with the east-side tech district idea that Bendyworks' Brad Grzesik floated awhile back. But is the 900 block of East Wash the right site? Is it close enough to catch the downtown and campus synergy? Is there sufficient demand to fill that market-race space? And perhaps most important of all, will the total investment -- early estimates range from $15 to $20 million -- produce an adequate payoff?

On all of these fronts, the skeptics are worried.

The money thing is complicated. The techy Ald. Scott Resnick, who's vice president of the mobile app firm Hardin Design & Development, lays it out like this. Rehabbing the former Kleuter warehouse into class B office space would cost, in a ballpark estimate, $8 to $12 million. Improvements for Sector67, which is cramped at its current home at 2100 Winnebago St., would carry a big $2 million tab because of its requirements for a light-industrial footprint. Resnick figures another $1 million for public spaces like the auditorium. And if StartingBlock buys, rather than leases, its quarters, add another $1 million. Plus another $3 million for professional services.

All these numbers are written in chalk. Numbers written in ink are expected by Nov. 1. Whether they're firm or tentative, downtown tech leader Matt Younkle is worried.

"We have to do it lean," he says of StartingBlock. "When you look at this kind of money, you have to ask how many startups could you invest in for that? You really have to start asking questions about the profits and cost of that kind of capital. I think the community could do this on a leaner basis."

Joe Boucher, a tech industry attorney who chairs the city's Economic Development Committee, worries about StartingBlock's proposed location, which is a mile from the Capitol Square. That's too far away to catch the downtown buzz the tech crowd likes, he feels.

"These kids want to be within two or three blocks of the Capitol for practical matters," says Boucher. The Mautz site "is just a little too far away for 25-years-olds. I know it sounds crazy, but they don't want to go out eight or 10 blocks -- a mile out on East Wash."

He adds: "If they don't hit the sweet spot on location, they better hit the sweet spot on everything else -- the quality of the building, the cost of the rent. That has to be perfect."

Craig Stanley, a commercial real estate broker with Broadwing Advisors, shares Boucher's concern. He can't see why tech companies would lease market-rate space on East Wash for $18 per square foot when they could pay the same rate for space one block off the Square and be moments away from five cool restaurants.

Stanley says he likes the concept of StartingBlock, but adds, "I don't see the demand to fill the space." The veteran broker describes a very soft downtown office market with high vacancy rates. Overall it's at 17.2%, but even higher at 21.2% for the class B space StartingBlock would offer, he notes.

Even those numbers understate the problem, Stanley warns, because of what he calls "shadow vacancies." That is, the big tenants, especially law firms, have "empty seats" in their offices, meaning they have excess capacity to accommodate future growth.

His skepticism grows even stronger as he cites other office projects that are in the pipeline, namely Urban Land Interests working with a revived Anchor Bank to add almost 50,000 square feet to the Anchor building and the new offices the city wants built as part of the Judge Doyle Square redevelopment.

"I don't see the job creation downtown that would support all of this," says Stanley. Indeed, the latest job count from Downtown Madison Inc. shows a decline in downtown workers.

This is serious stuff. Just as sobering is the amount of fundraising and investment needed for a project that will feature below-market rents for Sector67 and other tenants.

But it's significant that Younkle, who keeps stressing the need for a "leaner" StartingBlock, also recognizes the powerful pull a successful StartingBlock would have on the tech community.

"If you build these spaces right, they become a place where you just have to be even if there are lots of other available spaces all over town," he says, citing the example of Chicago's 1871, a digital startup hub in the famed Merchandise Mart.

Places like that "are where investors are. That's where the good attorneys keep office hours. That's where the hotshot coders flock when they look for summer internships," Younkle says. "That's the vision for a space like StartingBlock."

Resnick argues that StartingBlock would have a novel appeal in combining a business accelerator (gener8tor) with a product prototyping center (Sector67). He argues this crossover is where tech entrepreneurship and investments are headed.

"We haven't found an example anywhere in the U.S. where someone has pulled this off," he says, noting that the complex ventilation requirements for welding and milling invariably drive light-industrial operations to the outskirts of town.

"Trying to bring a center like that downtown is incredibly unique anywhere in the country," Resnick says.

As for the notion that the Mautz size is too far away from the action, gener8tor cofounder Troy Vosseller says huh? He points out that it's smack dab in the middle of the Capitol East redevelopment district and only a block from the Constellation, the 12-story mixed-use project that rented its 220 apartments even before opening in August.

Says Vosseller: "I see a lot of growth on East Washington in the next 20 years."

StartingBlock is distinct in another important way. Big projects invariably emerge in Madison from a mix of city hall, neighborhood deliberation and then prodding, as with Judge Doyle Square and Central Park. StartingBlock, in contrast, has risen solely from the instigation of Madison's ascending tech class.

Capital Entrepreneurs, the group founded by Madison's young tech leaders, has been developing the StartingBlock concept for more than a year.

"It's led by entrepreneurs for entrepreneurs," notes George Austin, the group's development consultant. "This is not outside-driven. It's not coming from a group of planners or from the business elite, saying 'This is what you should do.'"

Indeed, it's the Madison Chamber of Commerce that's fallen in behind Capital Entrepreneurs and not vice versa. "Our support runs deeps, and we'll do our best to make places like this come to fruition," pledges new chamber president Zach Brandon.

But there are no guarantees that the Mautz site will work. The critics raise questions that have to be addressed. Says Austin: "This project is still in a very early stage."

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