What's Possible?
When it comes to negotiating with landlords for office space, today the San Francisco market and many like it officially fall in the “…it doesn’t hurt to ask” zone. In this rare market space, occupiers have the luxury of translating their concerns as challenges for landlords to solve, or not. This includes many challenges that stood zero chance of being addressed (or even considered) in the years prior to the pandemic.
Examples include things like termination rights, contraction and expansion rights and even future downward adjustments to rent if the market for comparable space and/or space in the subject building declines in value. Indeed, these types of challenges may prohibit a tenant from transacting, or from transacting for a longer term commitment, creating even stronger headwinds in an already difficult market. Take the scenario in which the occupier is uncertain about the amount of space it will require over a 5+ year time horizon (by the way, nearly every occupier we talk to is struggling with this uncertainty). They can estimate the current need, but it’s often based on low usage. So they attempt to project a more stabilized occupancy need. But to do so, they have to make assumptions about return to office which they fully recognize may play out differently than projected. They need a lot of flexibility to adjust the amount of leased space over time. The winning landlord may thus be the one that provides the greatest amount of size flex. Then there’s the question of rent. It’s hard for companies to execute long term lease commitments today when the market has turned, but is clearly poised to drop more (possibly much more). Nobody wants to sign a lease only to see the value of comparable space fall precipitously. The investor who can help the tenant avoid this outcome stands a better chance of securing the tenancy. Why would a landlord provide so much flexibility? Because they have to.
It’s important to note how unusual these times really are. This is a moment in time when occupiers can just say “no thanks” and walk away, unburdened by a lot of the traditional pressures that drove decisions, including the need to solve for an expiring lease. With reason to believe the near term market will only get better, meaning it will offer more options at lower costs, there’s limited incentive for occupiers to sign long term leases. This is why we believe the realm of what’s possible is about to get a whole lot more expansive. Don’t get me wrong, it won’t come easily. But when the challenges are thoughtfully presented as opportunities for competing landlords to provide solutions, and the absence of such solutions stalls leasing activity, we believe the landlord market will get creative. So don’t assume your problem can’t be solved. Odds are it can.