Start at Why

Technology has had a growing impact on how corporations think about labor, facilities and cost. In particular, companies have found that they don't always need to have a physical presence to be present. And where they are physically present, they seek deeper understanding of how to design their facility to maximize employee engagement. In short, the scale and design of the modern workplace is rapidly changing in response to technology.

The contemporary real estate process starts at "why?". Why do we need to hire new employees? Why do we need to be in INSERT CITY NAME HERE. Why did we design our facility as we did? It then transitions to "what?". What is the demographic profile of our labor force? Then on to "which?". Which city is best suited to address this labor need? And, finally, to "how?". How do we get the optimal facility in the designated city? Only then is the occupier ready to pursue a local market real estate strategy. Interestingly, the vast majority of real estate service providers (whose core competency is finding space) are ill-equipped to address the new, broader-scope needs of corporate occupiers.

In fact, only a handful of global real estate firms are capable of taking a customer through the full service life cycle. Cushman & Wakefield is one such firm. Characterized by tenant capabilities that address every facet of a complete tenant process, from labor analytics to employee engagement to global market dynamics, Cushman & Wakefield has continuously evolved over its 100+ year existence. TenantSee is a great example. The sophisticated TenantSee technology platform arranges and delivers essential Cushman & Wakefield services in order to address specific needs at exactly the correct time. TenantSee is the only real estate service model that begins serving its customer at "Why?".

If you'd like to learn more about how TenantSee reveals the connection between business drivers, labor, labor markets, facilities design, real estate markets and beyond, please visit www.lowfogg.com.

Five Critical Advisor Ingredients For Office Leasing Success

In my 30-year career in commercial real estate, I’ve seen all kinds of marketing strategies. In my experience, tenants are often unaware of the key qualities in an advisor that reliably predict success, making them susceptible to selecting the wrong advisor. To achieve optimal office leasing outcomes, occupiers need to engage a service provider who possesses the following critical ingredients:

1. Market intelligence.

2. Planning.

3. A full-scope team.

4. Thought leadership/strategy.

5. Experience.

Tenants commonly fail to achieve optimal leasing solutions because the market for tenant advisory services is confusing, characterized by a broad spectrum of service providers, not all of whom are well equipped to provide all the essential ingredients necessary to achieve high-quality results. Tenants' primary source of knowledge is typically commercial brokers. But market participants vary by size, experience, services, focus and many other important ways. The market is hyper-competitive, forcing brokerages to craft marketing narratives that support their strengths and defend against their weaknesses.

For example, a firm that specializes exclusively in tenant representation may promote a message that centers on the importance of “conflict-free” advisory, seeking to build fear that the retention of a full-service firm (one that also has landlord advisory and other services) will result in suboptimal outcomes because the full-service firm is beholden to the landlord and will fail to negotiate effectively for the tenant.

In contrast, the tenant-only firm may avoid discussion of market data and its importance in generating quality outcomes because its business model does not enable it to fully participate in the market. If the tenant-only firm succeeds in making the tenant think it will be exposed to conflict if it hires a full-service firm, the marketing approach is highly effective because, in one fell swoop, the tenant-only firm can eliminate most of its competition.

Market Intelligence

Not all real estate service firms share the same level of market intelligence. In fact, the spectrum is significant, with small boutique firms generally having the least, and full-service, global firms having the most. Full-service firms that have a robust landlord advisory and capital markets practice enjoy access to significantly more real-time, highly relevant market data. They not only know more about where transactions are being completed; they also have a strong pulse on demand, with specific knowledge of which tenants are interested in which spaces.

You can’t underestimate the importance of capital markets perspective. It’s critical to know an owner’s cost basis, debt and equity structure and the overall objectives of ownership. Finally, an active property management team can help tenant advisors understand operational issues that can greatly impact a tenant’s experience and cost.

Planning

Planning is generally underemphasized by the real estate brokerage community. Not all service providers offer resources such as workplace strategy, strategic consulting or labor analytics. Importantly, the concept of planning is somewhat antithetical to the traditional brokerage model, which is designed to “engage and transact.” This is, at least partially, due to the strange and high-risk structure of the tenant brokerage business. Tenant brokers earn their living from leasing commissions that are paid by the landlord (the transactional counterparty) when a transaction is completed. You’d be hard-pressed to invent a compensation model that had less alignment with client interests.

Full-Scope Team

A tenant real estate project can easily entail more than six distinct disciplines, including but not limited to brokerage, legal, design, project management, construction and financial accounting.

To achieve maximum value from these disciplines, they must be coordinated with their delivery properly sequenced. All too often, these services are disconnected and introduced to the project too late, resulting in conflicting agendas and reduced value. Many brokerages are simply not designed to deliver expertise in these critical areas. When firms do have a full complement of services, they are often siloed, causing dysfunctional delivery and alignment.

Thought Leadership/Strategy

Good ideas and intelligent thinking matter. The best tenant advisors are thought leaders. Thought leadership is a prerequisite to quality strategic thinking. The thought leader is an advisor who remains curious and constantly evolves their thinking and practice. But thought leaders need data and perspective to thrive.

Experience

Relevant experience makes a difference. Experienced teams will be more skilled and better able to deliver quality results. In the context of office leasing, service providers often seek to accentuate industry-specific experience (e.g., “I specialize in law firms”), but what matters most is that your service provider has deep experience negotiating successful leasing outcomes in a specific market geography for comparably sized tenancies.

How They Relate

To achieve the best results, your advisory team must possess all these critical elements. But how are they prioritized, and how do they fit together? Many tenants would be surprised to learn that things like experience and strategy matter less than planning, market intelligence and a full-scope team. Experience and strategy without planning, market intelligence and a full-scope team will fail to deliver optimal results. It’s relatively easy to find real estate advisors with a lot of experience delivering mediocre results using ill-informed strategies.

I would argue that the most critical ingredients are the full-scope team and planning. Market intelligence would be the next most important ingredient, followed by experience and thought leadership/strategy. In this way, my view of the ideal ingredient mix places less emphasis on the characteristics traditionally attributed to “brokerage” — experience and strategy. Instead, the ideal combination calls for a well-rounded, well-informed team that gets all facets of the process right, not just the rental economics.

When contemplating your next office leasing project, consider potential service providers both in terms of how many of the key ingredients they possess and how they will manage these through the project life cycle.

Total Awareness: TenantSee Market Diagnostics Help Tenants See the Big Picture

Significant Cost Increase

You signed a 10-year lease 7 years ago. Since then, the market value of your space has more than doubled. At this pace, you’re looking at a huge price increase in 3 years. What should you do? Today in the San Francisco Bay Area marketplace, this is the single most common discussion we have with tenants. Since our approach to this question is always the same, we thought it made sense to describe it here today. The question “What should we do?”, is really comprised of 3 questions:

1.      How will the market perform between now and our lease expiration?

2.      How should we be thinking about time relative to activating our process?

3.      What actions should we take now, if any?

Of course, no one can predict the future. But it is possible to provide reasonable forecasts of potential leasing outcomes which will inform and support strategy. With TenantSee, we provide a highly specific approach to monitoring the market, which commences 3 years prior to lease expiration and involves the provision of Market Diagnostics, twice annually. Our Market Diagnostics analyze data associated with the specific asset (landlord motivation, lease rollover, cost basis, financing, etc.), the broader market dynamic/trajectory and financial modeling to ascertain whether action is warranted (compare early extension to normalized extension to relocations with landlord indifference sensitivities and projected market sensitivities).

4X Comparison

If you know you will seek to stay in a market, require relatively the same amount of space in a similar building and location, there are 4 transactions you must analyze before making any decisions (a less common 5th and 6th would be purchasing a building and coworking, both of which can be included in our model):

1.      Early lease extension

2.      Disposal of existing space and early relocation

3.      Normalized lease extension

4.      Normalized relocation

We begin the diagnostics phase 3 years out because, for many clients, we will look to activate process about 2 years ahead of expiration. This is because if your lease has a renewal option, it very likely calls for a written exercise to be delivered to the landlord between 18 and 12 months prior to lease expiration. This is known as the renewal option notice window. Knowing whether the renewal scenario is appropriate or attractive necessitates that you know the cost/benefit of all alternative leasing scenarios to the renewal (which also requires analysis since most renewals are tied to fair market value and the true cost is only known once you exercise). Over my 30-year career, I’ve never had a client exercise a renewal option. The primary purpose of the option is to protect you in a market environment in which supply is so constrained that other users, either from within the project or outside, put you at risk of losing your space. This dynamic is mostly associated with very tight market conditions such as we are experiencing now in San Francisco.

The Model

The math associated with analyzing options 1-4 is straight forward, excepting unique corporate finance objectives. These would include, for example, strategies that are highly sensitive to EBITDA. This is not uncommon since many companies are valued on a multiple to EBITDA. It’s important to know this up front because EBITDA sensitive companies may choose a higher cost relocation over a lower cost lease extension due to the specific impact on EBITDA, particularly the scale of tenant improvements.

Accounting nuances aside, the framework for our comparison model is as follows:

1.      Select analysis comparison period. This is the time remaining on the existing lease + the new term. For example, if you have 3 years remaining on the lease you probably want to select a 10-year comparison period to account for a new 7-year term at expiration of the existing lease.

2.      Select 2 future market sensitivities for the model: 1) appreciating and 2) depreciating. These should not be wild swings in either direction; but, rather, percentage increases and decreases that would be within the realm of 10%-15%. It’s best that you plan to high probability outcomes, not black swan events.

3.      Frame out assumptions: 

a.      Early Extension: existing obligation + lease extension value at current market

b.      Early Relocation: disposition value (positive or negative after all costs) + relocation transaction value (including all associated costs)

c.      Normalized Extension: existing obligation + lease extension value at projected market pricing (appreciating and depreciating)

d.      Normalized Relocation: existing obligation + relocation transaction value at projected pricing (appreciating and depreciating)

With this approach, TenantSee clients always know how they should be thinking about the market – they have total awareness. You can learn more about TenantSee and about our team, by visiting www.lowfogg.com or www.tenantsee.co. If you’d like to visit with us about our diagnostic approach, please contact us to schedule an appointment.    

Data Platform TenantSee Strives to Put Decision-Making Power in the Hands of Tenants

By Meghan Hall

For many companies, the process of finding new office space and executing a lease can be daunting, even with the help and insights of a broker familiar with the market. Traditionally, the brokerage and transaction process has remained largely the same over the years, with tenants relying on the knowledge of others in the industry — brokers, landlords, contractors — to help them make the most informed decision when selecting a new property. For Greg Fogg, one of the founders of TenantSee alongside Samantha Low, this was a fundamental problem for tenants seeking space. Those at TenantSee realized many companies started their search for space with little direction and few established parameters despite the myriad of service lines offered by brokerage firms, making the entire process more time consuming and costly. From these observations TenantSee, a tenant real estate product offering, was born in an effort to create a new brokerage-based service model, allowing tenants to make more informed decisions before they sign a lease.

“We’re in a world of data now, and what we’re trying to do with TenantSee is begin to intelligently harness that data and aggregate it for our customers to build a new service model,” explained Fogg. “Landlords have a distinct advantage in negotiations because they know every facet of their property, and the tenant is not typically as well prepared; they end up transacting at an [information] deficit.”

In Fogg’s experience, many companies begin looking for office space based on only a couple of basic facts: location and the projected number of employees. Many companies, added Fogg, have little knowledge as to how much the final space will cost after adding in additional expenses such as tenant improvement and brokerage fees.

“In many cases, what typically happens in the commercial real estate process is that companies will identify really high-level objectives — location, number of people, size — and then they engage a broker that leads the process based on search and negotiation,” said Fogg. “Those are both valuable aspects of the real estate process, but the problem is that they end up being very inefficient when the company has not been led through a process that allows them to create the optimal outcome they’re searching for.”

For those at TenantSee, that means shaking up the traditional brokerage process, using data to establish specifics on design, layout and cost before even beginning the search for space. Powered by Cushman & Wakefield, TenantSee is designed to leverage the data accrued by large-scale brokerages like Cushman & Wakefield to realize the full scope of an office project from the beginning.

“We want to talk about furniture; we want to talk about construction, whether or not the client wants a custom designed or an existing space,” said Fogg. “We want all of this stuff on the table day one, but generally people have been trained to begin the process with search. We think search should be the second phase of the process.”

According to Fogg, TenantSee also grew out of the desire to more effectively utilize the service offerings of a brokerage firm, offerings that had become disconnected from one another.

“As the brokerage business changed, both large and boutique firms began to evolve the model a little bit to provide their customers with other services such as project management or design,” explained Fogg. “The impetus for doing this was that firms recognized that there could be additional revenue created by having multiple service lines. But those service lines became silos. We wanted to establish a more full-scope offering.”

TenantSee is designed to bring all of those offerings, plus the data that powers them, together on one platform. The platform uses Microsoft Power BI technology, which was chosen, said Fogg, because of its flexibility and easy-to-use interface, allowing clients to see the information relevant to their property search in one place. The platform is comprised of two primary elements: “CREATE” and “GET.” CREATE allows clients to hash out the metrics of their potential future space and how much that space might cost using market intelligence collected by Cushman & Wakefield. GET helps TenantSee’s users to make that optimal office space a reality by organizing each step in the leasing office from design to budgeting to timeline development, legal and brokerage.

“Cushman and Wakefield is a global firm that has deep resources in all of the markets we participate in,” said Fogg. “We’ve taken the power of a global firm and pulled it together in a way that hasn’t been done before, and we’re pushing that to our customers in a more intelligible platform so they can make better decisions.”

TenantSee claims that it can mitigate overall spending by 25 percent, as well as reduce up-front capital spending by 35 percent. The platform’s website also states it can shorten project delivery timelines by up to 45 percent and condense the number of contacts needed to move a client to a new office.

“What we want our customers to do is take a step back and ask what the optimum office environment looks like, and how that impacts their people and their financials. Because that is what real estate is all about,” said Fogg of TenantSee, which has already landed several major clients since its launch in the fall of 2018.

While Fogg was hesitant to name the clients, he was confident in the continued growth of the platform—and the changing nature of commercial real estate services.

“We see TenantSee as one of the only pure expressions of a true tenant real estate process using technology,” said Fogg. “Brokerages will figure out how to take the data they have and express it, and it will evolve to mean brokerage is something totally different than it is today.”

The Future of Office Buildings

The playbook for speculative office development hasn't changed in years. It centers on quality location, architecture and project amenities; all viewed through the lens of cost to build and projected return on investment. Attention is paid to design details relating to the floor plate, core areas, building systems, project amenities; and, generally, all facets of the core and shell. But the analysis stops at the tenant's front door. At that point, landlords tend to shift their focus to market-based estimates of the total tenant improvement contribution necessary to attract tenants. Today market factors, notably, co-working and prop tech, have emerged that create an expectation among occupiers that their occupancy can ultimately be understood in terms of data. This trend will continue.

Recognizing that their customers increasingly value data and feedback from the built environment, forward-thinking developers and landlords will begin to market their buildings on the basis of impact on productivity ("IOP"). These landlords will express building value in terms of comparative IOP, not rental economics. Space will be a service, complete with technologies that measure performance. Data will be aggregated and fed back to the tenant through a proprietary building portal. IOP landlords will provide detailed information about air quality, temperature, wellness features and other project amenities. Sensors will be built into the space that link to the customer portal and provide real time data on space usage. Periodic assessments will be made to evaluate design performance. To the extent elements of the space are under-performing, the IOP landlord will collaborate with the occupant to solve for better performance. To facilitate periodic design change management, spaces will be constructed with greater flexibility in mind, including movable walls and raised floors. All of this will increase the cost to develop and lease office buildings. Yet IOP landlord returns will be higher as tenants will choose increased employee productivity over lower rental economics, every time. This is true as small percentage increases in employee productivity are worth far more than large percentage decreases in the cost of space.

If you think about it, the office building is among the least evolved asset classes in commercial real estate. Factories, labs, warehouses, apartments and hotels all offer better feedback to owners and users. Co-working, in particular, has given office tenants a taste of space offerings that are designed to more accurately match their space needs. The market has shown that users are willing to pay more for products that better address their need. Layer into this the near-term reality of access to vital data to measure the impact of the built environment on employees, and there's no turning back. Rather than incrementally adjust to changing times, it won't be long before bold landlords bring together all these forces in the form of a truly modern office building. This is the future of office buildings.

Filling The Knowledge Gap: TenantSee Gives Tenants Data, Insight For Leasing Decisions

PropTech continues to change how commercial real estate services are handled, and new advancements are a key focus of large brokerage firms that are seeking an edge in the space.

One of those approaches is TenantSee, powered by Cushman & Wakefield, which provides data and expert insight to help guide tenants in leasing decisions.

Greg Fogg and former electrical engineer and project manager Samantha Low co-founded TenantSee. The company won a 2018 #RETAS award for Tech-Enhanced Brokerage from CREtech.

Fogg, an executive managing director with Cushman & Wakefield who has spent 30 years in the industry, will be among the panelists at Bisnow's San Francisco CRE Tech Summit on May 9.

Bisnow caught up with Fogg to talk a bit about TenantSee and the future of PropTech.

Bisnow: What is your elevator pitch for what TenantSee offers?

Fogg: TenantSee offers tenants one place to see and manage all data related to their leased real estate. It combines a team of subject matter experts with sophisticated technology to make tenants smarter, complete projects faster and achieve better outcomes.

Bisnow: What was the unmet need you saw that TenantSee helps fill?

Fogg: The need is for a tenant real estate product that bridges the knowledge gap that exists between tenants and landlords — a product that gives tenants all the essential data to make better decisions. Historically, tenants transact at a knowledge deficit. Landlords come to the negotiating table understanding how proposed economics fit their budget, they understand design, they understand construction costs and they have a better understanding of the legal clauses that comprise a lease. This knowledge deficit is solvable, but traditional brokerage models have failed to do so because they were not designed to provide full-scope advisory. And as brokerages evolved to include additional critical services, they have generally created soiled offerings that fail to properly organize the services to deliver timely guidance and maximize impact on value.

Bisnow: Are we seeing more demand from tenants to have actionable data when seeking office space?

Fogg: Yes. Modern consumer behavior has shifted as technology makes data readily available. Why should commercial real estate be any different? Consumers expect service providers to organize and analyze data in a manner that matters to them — that will enable them to make better decisions. Commercial real estate brokerage used to be characterized by brokerage firms trading access to proprietary data for fees. Increasingly, tenants are demanding transparent provision of data. The value they seek from service providers is in how to interpret the data to create optimal outcomes.

Bisnow: One aspect you emphasize is having subject matter experts. Why is that human element important when offering new tech tools?

Fogg: I recently wrote an article for Forbes on this subject. Leasing office space is a complex undertaking that requires knowledge of design, construction, project management, FF&E, legal matters and markets. Most companies have limited expertise in all facets of the process. I'm not saying we won't one day get to a place in which we have AI-based tech that can do a lot of what the experts do today — we may. But in its current state, real estate technology offerings cannot adequately address the full knowledge spectrum. That's why we bring together subject matter experts at the beginning of a project and marry their input with technology. The technology makes the entire process smarter, faster and better. But it's the marriage of the two (experts and tech) that make TenantSee special.

Bisnow: Any features or aspects you've added since starting TenantSee that are in response to tenant demand? Anything you didn't initially anticipate as a demand?

Fogg: We underestimated the value of TenantSee as an analytics resource to help drive insights across large portfolios of leased space. Customers having multiple offices across broad geographies are looking for tools to help understand their real estate spend. Frankly, we did not appreciate how lacking mid-cap companies are in terms of useful, scalable resources that provide critical perspective, allowing them to slice and dice data across the portfolio.

Bisnow: What do you see as the biggest trends that will affect the next stages for PropTech in CRE?

Fogg: The holy grail of the built environment is translation from cost to [return on investment] in terms of productivity. We are seeing this shift across the entire landscape. For example, companies no longer seek to buy the cheapest insurance plan. Instead, they are trying to figure out how different plans impact the health and wellness of their employees positively such that they can realize gains in productivity. Same for office space. It used to be viewed as an expense that must be mitigated. Today it's more common for companies to want to understand how a given office environment will impact employees, in particular productivity. The race is on to create a feedback loop between the user and the office environment — it is data-rich and those who offer the best mechanisms for harnessing and interpreting this data will win.

Bisnow: Any challenges or concerns on the horizon that will need to be addressed?

Fogg: We're in the early days of tech's impact on the CRE sector. I'm constantly surprised at how many in our industry are resistant to change. I suspect the pace of change will accelerate and some may be left behind. If you look at the top three real estate service firms in the world, JLL, CBRE and Cushman & Wakefield, all of them have technology initiatives among their top priorities. And all three have the scale and resources to innovate. But what of the rest of the industry? How will it adapt? I think there will be some choppy waters over the next decade as technology fundamentally changes the sector.

Seeing the True Value of Your Office with TenantSee

Traditional “tenant representation” is heavily influenced by procurement strategies – strategies that focus on lowering cost. The simple idea?  Create competition among a subset of landlords for the  tenancy. The advisor’s value is in how low it can drive down the cost of space. But office space is more than an expense. It’s an investment that impacts productivity (revenue). Comparatively small percentage increases in productivity are worth much more than large percentage decreases in cost. 

Even as more companies shift away from analyzing cost reduction in favor of ROI, real estate brokerage services continue to offer one-dimensional, cost reduction strategies. The true value of your space is expressed in terms of design, construction, FF&E, IT, budget, demographics, rent, location, legal elements of the lease, timeline and more. TenantSee provides a modern, full-scope service centered around a team of subject-matter experts delivered at the right time and aided by the use of powerful technology.   

Eventually, all tenants come to understand that creating the optimal space solution involves much more than just negotiating a good rental rate. They realize that many of the subject matter experts who entered their process after they signed a lease would have been useful to have around beforehand, when they could have added significant perspective and value. Simply having all the right experts on the project is not enough - - - they must be properly orchestrated, engaged at the right time to create maximum value. The TenantSee team is assembled and ready to go, day one. Critical intelligence is learned early, when it can have a material impact on value. The client experiences the essential services as one well-orchestrated process, as opposed to a series of disparate and sequential inputs, delivered without consideration to each other.

We often refer to TenantSee as a CREATE – GET approach. To illustrate the approach, we built CREATE OFFICE on the TenantSee.co website.  Although this is a “create light” expression of our actual CREATE OFFICE process, when compared to a typical tenant process that includes little more front-end analysis than how many people and where, CREATE OFFICE is a very useful resource. The logic behind first creating your optimal outcome is that it forces dialogue around the interplay of all the variables that will, ultimately, translate to ROI. It also saves time as the search phase of the project is more targeted.

The true value of an office is measured in term of its impact on people and financials. These are not mutually exclusive, they cannot be properly analyzed independently. In the end, it’s about data. TenantSee enables tenants to see and manage all data relating to their real estate, helping create a feedback loop between the built environment, the people and the financials. 

The Fallacy Of Finding Your Next Office Online

Technology investment in the commercial real estate sector is higher than ever. One of the areas garnering strong investor interest is web search. In the context of commercial office space, the consumer value proposition of web search centers on making the otherwise complex process of finding your next workspace easy. And in an age when we increasingly transact for goods and services using our mobile device, the promise of an easier way to secure office space is inherently compelling.

However, as a 30-year practitioner in the office leasing arena, I view this promise as a fallacy for two primary reasons. Firstly, direct-to-consumer search sites only present tenants with a fraction of the available office space supply. Secondly, successful tenant leasing outcomes require a far more complex process than search-find-lease. Whether it's a startup company leasing its first office or a mature company expanding into a new market, the quality of an office lease will have a material impact on a business's employees and financials. Oversimplification of the process in favor of making it “easy” will generally result in a low-quality outcome. It’s important for companies, big and small, to more fully understand the larger picture of searching for office space.

Real estate search sites are compelling for investors because search is easy to scale and offers multiple sources of revenue, such as paid advertising, subscription or user fees, participation in transactions and/or commissions earned by transitioning site visitors to brokerage customers. For tenants, the process of leasing office space is challenging, time-consuming and often frustrating. Add to this the general expectation that transacting online is smarter, faster and easier, and the uneducated consumer may conclude that search sites make leasing as easy as buying groceries.

But the world of office space data is controlled by one company, CoStar, which has been around — and earning landlord trust — since the late 1980s. It is not a direct-to-consumer model, but rather data provided to the industry, to companies including my own firm and countless others. Landlords provide data to CoStar because they understand that in all major U.S. markets, brokerage firms largely rely on it to search for site options for their tenant customers. It might seem logical that landlords would push their availability data to anyone willing to promote it online, but that’s not the case. Landlords tend to be more protective of proprietary information relating to their asset and want to control how and where it appears.

Crafting The Search For Your Next Office

But for the tenant, isn’t leasing an office mostly about searching for the right space? In a word, no. At my firm, we advocate an approach where tenants must first create their ideal outcome, then build strategy and go get it with the help of subject-matter experts for the individual tasks. To ensure an optimal outcome, tenants must first fully assess the trade-offs associated with different variables, ranging from the type of building to the location to the amenities offered and much more. Once they have reconciled the cost/benefit of these variables, they can frame out the qualities of their ideal outcome. This framework becomes their target outcome, the achievement which is earned by implementing a specific market strategy.

Among the many front-end considerations are things like space design, construction, lease structure and flexibility, impact on financials and demographic alignment with a given market. A thoughtful tenant leasing process will look to create leverage by negotiating with multiple landlords to fuel competition. And the process will usually involve several rounds of offer-counter-offer before determining that a landlord has reached their point of indifference.

During the process, a good tenant advisor will inform every phase of the project with data. For example, understanding a landlord’s motivation and perspective requires knowledge of building-specific drivers that influence leverage. These may include debt and equity structure, lease rollover or submarket dynamics. Even in the self-service age of the online transactions, teaming with a trusted broker is still an essential step for tenants in search of new office space, because none of this data can be gleaned from a search site.

At best, direct-to-consumer search sites offer visitors a level of market perspective, albeit fragmented. But visitors should be wary of sites masquerading as an easy place to find an office, with the real purpose being to generate new customers for poorly executed, old-economy real estate brokerage. At their worst, search sites cause tenants to assess only a fraction of the available supply and transact with limited knowledge and planning, resulting in low-quality leases.

Searching available supply is one small part of the overall process required to lease office space. For tenants, it's the most recognizable and identifiable element of the process; however, real estate brokers know that search is the lowest-value element of the space procurement process. The real value lies in properly defining what to search for and then engaging in a process that levels the playing field between landlord and tenant. Until a search site can offer all of this, tenants should proceed with caution and, generally, view web search as one of many potential sources of data.

Three Essential Steps To Combat A Tight Office Market

We are nearing the longest period of economic expansion in U.S. history. At this stage of the cycle, some U.S. office markets are extremely tight, resulting in reduced occupier leverage and more expensive leases — none more so than the San Francisco Bay Area. As of the fourth quarter of 2018, according to Cushman & Wakefield (our parent company), the San Francisco office market is 6.4% vacant, the lowest vacancy of any major U.S. market. The average asking rent is $75.57, the highest in the country, and office rental rates increased 41% from 2013 to 2018. Similarly, JLL's Q4 Office Insight reportestimates total vacancy at 7.1% and average asking rent at $80.97, and Newmark Night Frank notes in its San Francisco Office Market research for Q4 2018 that overall vacancy is 8% with asking rental rates averaging $82.51. The bottom line: Space options are limited, and rental economics are at all-time highs.

Navigating these markets to achieve successful leasing outcomes is a challenge. Market results generally fall within a spectrum of good and bad defined by the overall environment. However, good leasing results are always measured in terms of how well they address non-financial considerations (i.e., employee wellness and productivity) and mitigate costs. In tight markets, leasing outcomes priced at the top of the spectrum and achieving comparatively little of a company's non-financial objectives are common. Yet some still manage to transact at 10–25% below the top and get much more of what they want. Over the 30 years of my practice, I've been on both sides of the negotiating table and learned firsthand the three essential steps occupiers must take to combat tight markets. The following steps won't make a hot market seem reasonable, but they will protect against lease economics that set a new record high.

Analyze The Trade-Offs

Firstly, tenants must prioritize the desired outcomes of a leasing transaction at least 12 months prior to the notice date for a renewal option (most leases have such options). This means analyzing the trade-offs associated with different leasing outcomes to fully understand what matters most to the firm. Leasing decisions affect people and financials. In tight markets, most companies can’t afford to “have it all.” Maybe near-term financing activities necessitate a hyper focus on earnings before income taxes, depreciation and amortization (EBITDA), a key financial metric often used in valuation. Or, perhaps the company's main goal is capital preservation. Maybe it’s time to create a new facility that enhances employee wellness, happiness and productivity? Every company has unique drivers that, when prioritized, will dictate the appropriate leasing strategy. Getting this resolved well ahead of any market engagement is crucial.

Strategy Development

Once the desired outcome has been prioritized, a company can set strategy and timeline for market engagement. Strategy development is the second essential step. An effective tight market strategy must ensure that exercise of the renewal option is preserved as one possible course of action. In San Francisco, for example, we have seen instances in which other tenants have identified space having a future lease expiration and arranged with the landlord to lease such space if the existing tenant fails to exercise its renewal option. The space has effectively been leased out from under the existing occupant without its knowledge, and the only lever that remains for the existing tenant to maintain control of the space is to exercise its option. We rarely encourage the exercise of options, as they are typically not structured to create the most favorable outcome. Usually, a better result can be achieved by negotiating outside the option. However, highly constrained markets call for greater awareness and strategy.

Market Engagement

The final step is market engagement. Here, companies must consider leasing alternatives to the existing facility, negotiate with these alternatives and run comparison models that clearly show how well each option fits with the desired outcome defined in step one. The strategy and timeline noted in step two should provide for at least six months of market engagement ahead of the renewal notice date. During this market engagement phase, occupiers must also seek to negotiate with the existing landlord outside of the formal renewal option. While not always possible, this can be a very effective way to gain insight into the landlord’s perception of value and to flush out whether the landlord has third-party interest in the space.

Failing to properly plan for a tight leasing market can result in significant negative outcomes, including the loss of a lease. These market conditions necessitate clearly defined objectives, coupled with thoughtful strategy and appropriate allocation of time. The margin for error created by softer markets, which often permits companies a second chance to get it right, is simply nonexistent in tight markets. By following these essential steps, corporate occupiers can plan for the best possible outcome.

Prioritize then Lease

Every company understands that real estate solutions impact people and financials. This is obvious. Yet given this simple truth, it's remarkable how many companies fail to prioritize the impacts before implementing a leasing strategy. In fact, the strategy itself should be informed by these priorities. The world of tenant real estate services is fundamentally organized into the categories of space procurement, space design and space construction. These services are mostly geared toward execution, often lacking meaningful pre-execution consultation.

But companies must challenge service providers to help them discover their priorities beforeinitiating a space acquisition process. This exercise involves prioritizing the ways in which you want your leased space to impact the company. It requires executives to assess the trade-offs of different approaches and to commit to outcomes that, while typically not perfect, are well aligned with the most critical corporate objectives. Absent such planning, it's possible, even probable, that leased real estate will fall short. The market is littered with the carcasses of bad leasing strategies. Consider the company that leases new space based on a specific design scheme but ultimately learns that it can't afford to build the space. It's left with a choice between a space design that may negatively impact its people or an expense that is misaligned with its financial objectives. Or, consider the firm that absorbs critical timeline negotiating for a space only to submit business terms to senior finance executives for approval and have the proposal rejected for failing to meet key financial targets. This company must now scramble to solve its real estate need, resulting in lost leverage and higher cost.

When impacts are prioritized before engaging in a leasing process, the result is a clear mandate. It looks something like this:

We are seeking to secure new office space that is pre-existing and reflects a contemporary, open plan design that will promote collaboration and serve to increase employee productivity and overall happiness, while also being attractive to recruits. The office will be located in the financial district, close to all public transit and providing employees with access to vast amenities within a short walk from the building. The building will be class A, positively reflecting our culture. We will not seek to design and construct new space. That approach requires substantial capital investment and at this stage of our company's growth, it's vital that we deploy our working capital toward hiring new talent. We will remain sensitive to the new lease's impact on our valuation as we anticipate raising equity over the next 36 months. Given our projections for significant growth over the next 3-5 years, we will seek to negotiate a shorter term arrangement, providing greater flexibility.

Simple, yes. But it reflects a full consideration of the various trade-offs impacting the firm's people and financials; and, it demonstrates total clarity around how these impacts are prioritized. In turn, the mandate informs the internal messaging that should accompany an office leasing process. The strategy is set. Now the company can go forth and execute a procurement process. Of course, the targeted outcome can be modeled against available supply to level-set against the market backdrop and ensure accurate project budgeting. This type of front-end consultation is baked into the TenantSee model. It's one small example of how we're evolving tenant real estate services.

Greg Fogg is an Executive Managing Director at Cushman & Wakefield and a Founding Partner in TenantSee, www. tenantsee.co.