Op-Ed, Commercial Real Estate, Bay Area
greg fogg
TenantSee Weekly: What Do You See?

When you look at an office building, what do you see?  Maybe you see the architecture.  Maybe it’s the neighborhood, the restaurants, and amenities.  Perhaps, you see the views from within the building.  This is what most people see.  They’re all important.  But it’s what you don’t see that matters most.

TenantSee Weekly: What Do You See?
Op-Ed, Commercial Real Estate, Bay Area
greg fogg
TenantSee Weekly: Knowing Your When

We see a lot of confusion in the market around when to begin negotiations.  It’s not an insignificant consideration.  In fact, when you begin can make a huge difference in the outcome.  It’s understandable that tenants would not know when to start.  Brokers are not always keen to start at the right time, since compensation is derived by transacting and the closer the tenant is to lease expiration, the faster it will need to transact (and the fewer options it will have).  Good for the broker, bad for the tenant.  This creates a misalignment of interests that discourages thoughtful consultation on the front end – the more time a broker spends on a project, the lower the compensation. 

TenantSee Weekly: Knowing Your When
Op-Ed, Commercial Real Estate, Bay Area
greg fogg
TenantSee Weeky: A Big Decline in Rents, Four ...

Throughout 2020, the prevailing sentiment among investors in the San Francisco office market was one of relative optimism.  After all, despite the fact tenants were prohibited from occupying their buildings, they continued to collect full rent.  The buildings were full, with vacancy hovering around 4%.  Sure, companies weren’t happy about paying for space they couldn’t use, but business was good.  In many cases the tech sector (which makes up most of San Francisco’s office occupancy) was booming due to an even greater reliance on and usage of tech caused by pandemic driven changes in how people were living.  Throughout the course of 2020 there was no reason for San Francisco investors to panic, as few (if any) office occupiers were showing signs of developing long-term hybrid or remote-first strategies.  Most were simply focused on solving for ongoing operations as a temporary reaction to the pandemic.  Yet early indicators did point to a future in which companies would be shedding office space, as some expiring leases were not replaced.  This, coupled with the addition of new supply, caused a big increase in vacancy to nearly 12% by year end.  Despite this large uptick, the brunt of the sluggish demand dynamic was being felt in the sublease markets, where rental economics more accurately reflected the true state of the market.  Despite a total closing of the office market in 2020, average asking rents ended the year off just 6% from the pre-pandemic high.

TenantSee Weeky: A Big Decline in Rents, Four Years in the Making
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: Modern Workplace Planning: ...

In the years leading up to the pandemic, most medium and small companies defined their office space need based on headcount (current and projected), space programming, and industry/sector norms.  The exercise was mostly formulaic.  The primary differences in the offices of a small, regional law firm compared to those of an AM Law 100 firm would be scale, the cost of finishes, and the quality of the building and views.  It was planning for the same outcome, just at different levels on the cost spectrum.  Companies having a larger portfolio of offices would typically create a “workplace strategy” that included guidelines around programming (e.g., space layout, office size, critical adjacencies, growth factor, finishes, FF&E, etc.).  These guidelines could then be used to inform the real estate process across geography.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: This, or That?

Negotiations are always about (or should always be about) this or that.  There’s always something else, maybe that something else is nothing (as in sometimes the best thing to do is nothing at all).  Decisions made without proper consideration of all relevant alternative scenarios are decisions made poorly.  As important, in the context of office lease negotiations, the best negotiated outcomes are directly correlated to the extent to which we understand the alternatives of the landlord counterparty.  This is a bit counter intuitive, allow us to explain. 

TenantSee Weekly: This, or That?

#NOI

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TenantSee Weekly: What's the Rate

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TenantSee Weekly: What's the Rate

If you look at the quarterly market reports provided by all major real estate service firms (Cushman & Wakefield, included), you will find that rent data is typically expressed in terms of “Asking Rents”.  Reports will cite the trend in Average Asking Rents by submarket, or by building class.  This is a somewhat misleading indicator.  Why?  Because it does not reflect the rent after negotiations, which often includes reductions in rate from the Asking Rate and potentially significant landlord-funded concessions.  In other words, Asking Rents reflect what landlords are asking, not what they’re getting.

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TenantSee Weekly: A Good Desk

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TenantSee Weekly: A Good Desk

Did you know the modern desk dates to 2000 BC?  It was used by ancient Egyptian scribes.  Over the centuries, the desk has evolved, often to keep pace with new technologies.  For example, the steel desks of the early 20th century were designed, in part, to provide better support for heavy typewriters.    

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TenantSee Weekly: The Value of Your Lease

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TenantSee Weekly: The Value of Your Lease

People sometimes (mistakenly) think office building values are based on location and architectural design (appearance).  These are contributing factors, however, in most urban centers, investors use the income capitalization approach to valuation.  Here, the building is valued on current and projected net operating income (“NOI”).  To be sure, location and design will translate to differing levels of NOI.  But other variables play a key role, as well.  For example, the landlord’s cost basis which impacts its ability to lease space at market pricing.  Where a landlord has paid too much for the asset, the underlying rental economics of the market may result in net negative leasing outcomes, causing the landlord to lose deals to other assets which have a lower cost basis and can productively transact at market.

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TenantSee Weekly: It's What's Inside That Counts

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TenantSee Weekly: It's What's Inside That Counts

If you’re like me, growing up your mother told you no less than twice a day “…it’s what’s inside that counts” or “…don’t judge a book by its cover”.  I’m grateful for that advice, as it helps me be more mindful of bias, more open minded.  Did you know the same is true for office buildings?  That it’s not just about how the building looks, or where it’s located.  The nuanced details of the ownership, debt, and occupancy also matter…a lot.

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TenantSee Weekly: The Ingredients Matter

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TenantSee Weekly: The Ingredients Matter

Strategy is to occupier real estate what a recipe is to a great meal.  A recipe is more than the sum of its parts.  It’s about how each ingredient is prepared, how and when it’s added to the mix.  As with any recipe in which there are primary ingredients, vital to its success, similarly, every great strategy requires 3 main parts:

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TenantSee Weekly: The Office as Hotel

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TenantSee Weekly: The Office as Hotel

I participate in a lot of “conversations” on LinkedIn in which people argue that office buildings should be as flexible as hotels.   I love to explore the possibilities, the idea the office can be something different, something better.  But sometimes these conversations are so detached from reality it makes my head hurt.

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TenantSee Weekly: The Negative Deal

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TenantSee Weekly: The Negative Deal

Investors invest in office buildings to generate a positive return on their investment.  Return is created in 2 primary ways, one is through ongoing profits generated from the individual leasing transactions completed within the project, and the other is through financing activities (taking on debt which allows the investor to pull equity from the investment or selling the asset).  This TenantSee Weekly is focused on the first of these 2 scenarios, the one in which the landlord seeks to create positive cash flow through its leasing activities.

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TenantSee Weekly: The Artificial Floor

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TenantSee Weekly: The Artificial Floor

Currently, there’s a lot of downward pressure on rental rates in the San Francisco office market.  This is caused by a massive uptick in available space  (4% to over 30+%), the proliferation of subleases in which the sublandlord is motivated to mitigate cost, not achieve target NOI, and the presence of owners having a materially lower cost basis, either through a long-term hold strategy, or a recent acquisition at steeply discounted pricing, both of whom can compete at much lower rental economics.  Indeed, the economics being offered by these parties stands in stark contrast to those offered by landlords who bought or refinanced in the years running up to the pandemic.  This latter category, by the way, encompasses a large swath of the market.  These investors are struggling against a confluence of factors, including rising interest rates, maturing debt, rising insurance costs, decreased demand, lack of capital, and valuation outcomes that put equity and debt underwater.