TenantSee Weekly: Translating the Lease
Recently, we completed a lease for a client in a small San Francisco building. The transaction was negotiated to provide our client with a tenant improvement allowance, and the right to manage their construction. Because the client is a design firm, this approach suited them well. They understand design and construction and can leverage relationships to mitigate cost. The ownership of this building is not an institution, its management team lacks the sophistication you would otherwise see with professionals working for larger institutional owners. The lease provided the landlord with the right to approve the plans prior to construction, but it notably lacked a specific mechanism for communicating such approval. Our client provided detailed plans. They received a few minor comments/questions to which they responded promptly. Otherwise, the landlord agreed to the project schedule and let them commence their construction – implicit approval. During the construction, the client invited the management team to attend weekly meetings, to walk the space and generally sought to keep them informed (under no obligation to do so). Despite a few bumps along the way (the building had non-compliance in a few areas and a small amount of hazmat was discovered), the project was successfully completed. However, after moving into the space, the landlord sent a letter stating numerous elements of the construction had been completed without its approval, and the space must be restored at the end of the lease term (an undertaking which would cost hundreds of thousands of dollars). Naturally, our client was concerned. Thankfully, they sent us the letter and asked for our guidance.
TenantSee Weekly: The Great Reset and Rent
The so called “capital stack”, the money investors and lenders have put into an office building investment, has recently been the subject of much discussion in markets like San Francisco. In many cases, the stack is broken, meaning the investor has lost all its equity and the value of the lender’s position is compromised, as well. We’ve reached a point at which these financial partners have concluded there is no path forward for the investment, leaving only one option: sell. This is how the Great Reset begins. It’s exemplified in the sale of buildings like 350 California Street, an asset that would have traded in the $800/sf+ range prior to the pandemic, but which traded in the $250/sf range this year.
TenantSee Weekly: Wayne Gretzky and the Young Generation
Wayne Gretzky attributed his success, in part, to his ability to “…skate to where the puck is going, not where it’s been”. This was among the skills that made him a great hockey player. This same skill can help companies and individuals be more successful in business. Yet it’s not what comes natural to us. Have you seen young children play hockey, soccer, or similar sports? A child’s first instinct is to go where the puck or the ball is, resulting in a highly ineffective throng of players. In business, it can also be hard to go where others are not. It requires instinct, thorough analysis and understanding of a market; and, most importantly, confidence to stay the course.
TenantSee Weekly: Reconnecting Work to Place
Lately I’ve been contemplating Enrico Morreti’s 2012 book “The New Geography of Jobs”. In it, Morreti makes the case that urban winners and losers are determined, in large part, based on the extent of geographic concentrations of high-tech employment. San Francisco was perhaps the most prominent example of the thriving economic ecosystems that can emerge when tech employment is aggregated in one region. I believe Morreti’s core thesis remains correct. But his ecosystems are more fragile than we may have anticipated. In fact, it seems they can unravel in much less time than they took to build.
TenantSee Weekly: Social Facilitation
Here’s how ChatGPT defines social facilitation: “Social facilitation is a psychological phenomenon that refers to the influence of the presence of others on an individual's performance of a task. It describes how the mere presence of other people, whether they are spectators, colleagues, or competitors, can affect an individual's behavior and performance.” In 1898, Indiana University’s Norman Triplett studied cyclists to determine differences in performance when racing other humans vs. the clock. He found, “…bodily presence of another contestant participating simultaneously in the race serves to liberate latent energy not ordinarily available…” I’ve experienced my own version of this in training for and running marathons. Without fail, I was always able to run faster and farther when in the presence of others. It turns out we have the capacity to do better, to do more, but reaching that next level is not easily accomplished alone.
TenantSee Weekly: Timing the Downturn
Since the pandemic, the cost to lease San Francisco office space, but for the most premium segment of the market, has steadily declined. The pace of decline is beginning to accelerate as more landlords capitulate to unprecedented vacancy and reduced demand, just as more companies are (finally) taking a longer-range approach to workplace. For occupiers, this provides a welcome respite from the relentless effects of a decades-long dynamic in which the office market was both too tight and too expensive.
TenantSee Weekly: Can We Talk About Work?
Can We Talk About Work?
Have you noticed that people are very passionate about work? Not necessarily about what they do as much as how and where they do it. These days, talking about work has become a bit like talking about politics or religion. This is especially true in the world of social media, even in the tamer waters of LinkedIn, where if you post about the benefits of working in an office, or you appear curious about the longer-range impacts of remote work, you will most certainly be attacked. The attack comes from people vehemently opposed to return to office mandates, really to any concept of work that does not permit the employee a wide range of freedom in deciding where and when to work. Some of them have financial interests in shifting work patterns, for example as purveyors of coworking solutions. Others are anti-establishment, with echoes of the Occupy movement. The more reasonable voices in favor of remote work are academics like Nick Bloom. They conduct research and study work patterns, adding valuable balance to the discussion.
TenantSee Weekly: It's About Trust
Getting More for Less.
Companies aren’t families. The employer/employee relationship is governed more by economics (math) than trust. This is at the heart of the ongoing struggle between employers and employees over return to office and asynchronous work. Let us explain.
TenantSee Weekly: The Lingering Fog of a Bull Market
The Lingering Fog of a Bull Market.
Advisors on the right side of a bull market end up looking good, no matter what they do. This was certainly the case for landlord advisors in the San Francisco office market for the ~10 years leading up to the pandemic, a time when you could win for losing, as the deal you failed to make was often (quickly) replaced by a new deal at better rental economics due to rapidly appreciating rents. Today, both landlord advisors and the investors they advise are, in some cases, suffering from the lingering effects of the bull market.
TenantSee Weeky: It's Not Really About the Office
It’s Not Really About the Office
We’re experiencing a behavioral shift which is changing one of the most pervasive social institutions of our time; namely, how, and where white-collar workers work. Few societal constructs impact individuals, or society, as much as where and how we work. The collective dialogue about this change, especially between employer and employee, has at times been challenging. However, we’re now entering a more hopeful phase of the conversation, one which promises to finally move us to a new place, letting go of the idea that we must revert to pre-pandemic norms.
TenantSee Weekly: What Could Go Right?
Mass psychology is literally contagious (that’s how it becomes “mass”). This is especially true in times of change, when a significant event has precipitated such change (e.g., the pandemic). These events can be positive or negative. In our current state, the catalyst was negative, and, in many ways, has resulted in a decidedly negative outlook. When things turn negative, there will always be market casualties (just as a rising tide lifts all boats in the positive context). For example, the impact to investors in the domestic office sector has been mostly negative. As change unfolds, it can have knock-on impacts that weren’t necessarily anticipated. For example, the demise of urban downtowns due to shifts in daily worker population. Collective sentiment tends to aggregate around a view and stay there until some brave souls dare to take the contrarian view. As these contrarians see success, it spurs others to jump on board and the collective sentiment begins to shift, once again, in the other direction.
TenantSee Weekly: The Disconnected Worker
I read an article recently about layoffs in the tech sector. In it, one worker shared her story of being laid off by 3 companies in less than a year. The first was a startup where she had worked for several years. She questioned why she had been selected – it clearly felt personal. The next 2 employments were each of short duration, the last being merely a month long. In the end, she was left questioning whether she wanted to continue working in tech. The tech sector, especially the startup segment of the tech sector, has never been a great place to seek job security because of its inherent volatility. Yet it has long been a place in which employers seek to espouse winning and attractive cultures that are all about “the people”. This got me thinking about job security in the post-pandemic workplace. Has employment in the information economy become more unstable because there is less connection between employer and employee? Is the relationship between employer and employee becoming more transactional?
TenantSee Weekly: Sublease, Terminate, or Restructure
Subleasing is the most common approach occupiers take in mitigating the cost of underutilized space. Yet in San Francisco, it has become increasingly difficult to sublease office space. With recoveries ranging from 0 to 25%, companies must consider the full spectrum of options. Remember, too, sublease recoveries can be expensive to execute (fees and concessions); and, in subleasing, the occupier takes on a variety of risks that can prove costly (e.g., subtenant default).
TenantSee Weekly: Knowledge, Leverage, and Opaque Markets
An office lease is a unique financial transaction. While supply data is widely available, the values associated with completed leases are not so readily available, nor is the financial position of the landlord and its partners. In effect, despite the preponderance of available data in residential markets (e.g., Zillow, etc.), office markets remain opaque. The educated occupier can certainly access more information today than in decades past. But it’s not enough to merely know available spaces. Achieving a complete understanding of the markets can only be accomplished by partnering with a firm which is engaged in the market in a variety of very specific contexts. You need an intimate understanding of landlord motivations, capital structures, and even the intricate dynamics of tenants within a building. Yet many real estate service firms don’t have this information because they lack the practice groups.
TenantSee Weekly: A Game of Confidence
Commercial real estate, in all its many facets, has always been a confidence game. Developers make big financial bets their building will lease as they and their investors spend millions of dollars to build it. Then, they confidently sell the product, pitching its values to prospective occupiers against the backdrop of fluid markets. Ideally, they’ve underwritten the market correctly and it moves in their direction, meaning supply of comparable space diminishes, making the product more valuable. But sometimes the market is moving away from them, forcing them to maintain their confidence despite dwindling prospects for success.
TenantSee Weekly: Pandora's Office: Part IV - Wearable Work
Today, we examine the transformative role of Artificial Intelligence (AI) and automation in the workplace. AI will have broad impacts on work in the information economy, both in how and where work is done. While it's true AI and automation could lead to significant job displacement, it’s also true that AI will create new jobs. Studies suggest that AI will affect job transformation more than destroying jobs, altogether. It automates parts of jobs, not whole jobs. The nature of some roles may change, requiring a focus on skills that AI can't replicate – creativity, critical thinking, emotional intelligence, and complex problem-solving. For those at the top of the food chain, this shift will make jobs more strategic and rewarding, enhancing employee engagement and productivity. Yet jobs at the lower end of the white-collar spectrum will be susceptible to displacement.
TenantSee Weekly: Pandora's Office: Part III - Decoding Productivity
Productivity. The backbone of a company’s success. For decades, productivity has served as a key determinant of growth and profitability. Measuring productivity, however, is a different beast. Amid the shift towards remote working, understanding productivity dynamics in both office-based and work-from-home environments has become increasingly pertinent. Unfortunately, the idea of productivity has become one of the battle grounds on which the fight over RTO is being waged. Too often, companies and employees point to misleading and/or ill-defined measures of productivity as evidence their view is right. It’s important to be fact-based and sober in assessing productivity.
TenantSee Weekly: Pandora's Office
In the end, there was hope. We’ve been thinking lately about the myriad challenges occupiers now face in defining workplace. For many leaders, addressing this topic is akin to opening Pandora’s Box. Indeed, there’s a lot at stake and more ways to get it wrong than right.
TenantSee Weekly: Unicorn Farming
Unicorn farming is risky business. I should know. For the past 30 years, I’ve lived and farmed here on the world’s biggest unicorn farm called San Francisco. Growing unicorns requires massive investment. Care must be given almost exclusively to fueling their mythical growth. They’re highly susceptible to infection by ethics, laws, economic reality, truth and any number of other real-world impediments to growth.
TenantSee Weekly: The Restructure
In markets like San Francisco where availability stands at ~30% and continues to rise, landlords of all stripes have either experienced or are poised to experience gaping holes in their occupancy. At the same time, occupiers having remaining term and paying pre-pandemic rents (meaning rents that are way above current market) are watching the building bleed tenants and seeing the landlord market comparable space at a substantial discount to their in-place cost with massive concessions. This is the perfect environment for restructure transactions.
