2019 Archives
TenantSee Weekly
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.
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.
