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: 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: 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: 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 Weekly: Pandora's Office: Part I - Cost vs. Value
In this first issue of our series, “Pandora’s Office”, we explore a fundamental paradigm. Cost. Expense. Historically, for most companies, this has been among the top factors defining how office space was chosen. In all be the rarefied air of tech and high finance, companies must generally be smart about allocating a portion of their budget to real estate spending. But when the emphasis veers toward achieving the lowest possible cost, the result is often a suboptimal facility, an investment that yields a limited return.
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: The Case for Diversity
Shawn Achor’s excellent book, “Big Potential” references a study by Alison Reynolds and David Lewis detailed in the Harvard Business Review which measured the performance of teams based on “cognitive diversity”, or the spectrum of thinking styles among the team members. It was found that more diverse teams consistently outperform their more homogenous counterparts. Achor notes that, in many cases, despite the benefits of diversity, corporate leaders instead favor like-mindedness among team members. This tendency stems from the misguided belief that diversity breeds discord, hindering the team's overall function. Herein lies a fascinating truth: diversity indeed catalyzes friction, but it's this very friction that fuels better outcomes, sparking innovation and creativity.
TenantSee Weekly: The Price of Innovation
In San Francisco, there’s not much standing between a near-term future in which office vacancies spike to 40% or higher. By not much, we mean demand for office space. What’s interesting is the cause. Many focus on the battle between employer and employee in which employers want the employee back in the office and the employee wants to work remotely. But it’s not that simple. Post-pandemic, employees (especially younger generations) are more inclined to embrace the benefits of technology which enable work to be done from anywhere and make it less compelling, even illogical, to commute to the office. No, this isn’t just about whether you like or don’t like being in an office. It’s about the ways in which tech has advanced to change work and generational differences in the adoption of and comfort with such technologies. Technology changes things. It’s changing the construct of white-collar work, and in the midst of such change there will be winners and losers. The fate of office markets, indeed of the office building as a product, hinges not on resolution of the remote work debate; but, rather, on the pace at which we adopt existing technologies and innovate new ones
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: Solve for Experience!
US office markets are not healthy. The symptoms include reduced demand due to remote work, eroding rental economics due to mounting vacancy and broken capital stacks. The pandemic was the catalyst, but technology is the true source of the suffering. Technology is where many aspects of white-collar work are now done. I asked Chat GPT to define the office and then I asked it to define the office in 1990. Here’s how it responded:
TenantSee Weekly: Employee, Save Thyself
One of the more fascinating aspects of the conversation around where, when and how white-collar workers work is how it breaks through the guardrails of societal norms. The catalyst for such thinking was the pandemic. People are quick to point out that technologies have been around for decades which enable people to work from anywhere, and that many workers preferred remote work long before the pandemic - - - it’s also true some people preferred not to work even before the pandemic. Yet absent the Black Swan Event that was the pandemic, we simply would not be having this conversation about work. It takes a powerfully disruptive force to cause so much change.
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.
TenantSee Weekly: Why Are You Doing That?
We’re excited to promote our upcoming event at Café TenantSee, “Why Are You Doing That?”. For the uninitiated, Café TenantSee is an intimate quarterly in-person event designed to provide highly relevant, useful insights and perspectives for office occupiers. The café opens at 8:45 am on Tuesday, April 25, 2023. Come and order a specialty coffee or tea drink from our expert baristas. Light breakfast is also provided. Our program runs from 9:30 to 10:30. Unfortunately, our café is small. We can only accommodate 50 attendees, so space is limited.
TenantSee Weekly: A Few Thoughts on the State of San Francisco Office Market
We normally reserve discussion of market fundamentals for our Quarterly market updated, “The Tenant’s Perspective” (which we release just after the close of the quarter). However, as we near the close of Q1 2023, there are several narratives playing out which we deem significant in shaping the near and mid-term market dynamic. We think it’s important to share these now.
TenantSee Weekly: What Happens When...
This week we’re exploring what happens when companies define their own bespoke approach to the office vs. when they default to their pre-pandemic office construct, despite significant changes in how they work. To date, many small to mid-size organizations have chosen not to formulate a definitive new approach, instead relying on the old office design and a loosely defined hybrid approach. In a time when the mere discussion of corporate office policy has the potential to trigger highly negative reactions among employees, it takes courage and leadership to advocate a new plan that reflects a vision for the future. Understandably, as we’ve crept out of full pandemic mode and begun to look to the future, many companies have been uneasy about taking a definitive position.
TenantSee Weekly: It's Tricky
Despite being awash in available space, the San Francisco office market can be tricky to navigate. By now, everyone knows the market is distressed. When companies explore leasing options, they do so with the expectation they will be able to trade up for better quality space at substantially reduced pricing; or, they expect to significantly decrease the cost of their existing space with a lease extension. These are reasonable expectations, yet they can be elusive for several reasons.
TenantSee Weekly: Unpleasant to Existential
When the pandemic hit in 2020, emptying San Francisco office buildings, landlords were mostly unfazed given high levels of occupancy and income. As the pandemic gained momentum, some owners began to quietly wonder if this could be bad enough to render their buildings empty for a prolonged period. Yet it wasn’t until late 2021/early 2022 that investors began to fully grasp that appetite for their product had changed in significant ways.
TenantSee Weekly: Maybe The Office Isn't So Bad After All
There’s been a lot written over the past 3 years about the negative aspects of office life, about how it harms our health, distracts us from what really matters and makes us less productive. The freedom to choose where and when we work, it’s argued, is transformative, enabling us all to create our own perfectly tuned work-life balance. It sounds nice, the idea that no one (at least no white collar worker) will remain oppressed by the constraints of working at an office, or working on a fixed schedule. Turbo-charged gig workers, calling our own shots. What could go wrong? Maybe a lot.
TenantSee Weekly: Swimming Naked: The Risk of Non-Performing Vacancy
Over the past decade the San Francisco office market was among the most desirable global markets for institutional office investment. Valuations increased by 100%+, and many assets traded…some multiple times. Even those that didn’t trade were often refinanced at substantially higher values, enabling the equity partners to take out significant amounts of capital. Today values are dropping as demand for office space in San Francisco is at historical lows, causing rental economics to decline rapidly. This presents unique challenges that are (typically) not entirely obvious to occupiers; namely, a full understanding of the debt and equity stack and the landlord’s ability to perform.
TenantSee Weekl: Change is Hard
While change is generally a constant state, big changes in one area can have the effect of spurring many additional changes in related areas. In most cases we’re not very good at forecasting all the add-on changes that may follow the initial change. We’re like low skill chess players, unable to see the full spectrum of opportunity and vulnerability created by our moves. And when big change requires us to take action, we often seek the comfort of doing what everyone else does as opposed to formulating our own approach. In the business world, this is a byproduct of risk aversion, or what can be called CYA at scale. Our corporate structures don’t typically provide incentive for creative, individualized responses to business challenges.
