#hybridworkplace

TenantSee Weekly: Planning for the Future, not the Moment

TenantSee Weekly:  Planning for the Future, not the Moment

Urban planning can go horribly wrong.  It often fails the test of time.  1950s America brought a surge in suburban development and car transportation.  It also led to one of the single worst American urban design decisions (my opinion), the development of the Embarcadero Freeway, originally intended to connect the San Francisco Bay Bridge to the Golden Gate Bridge by extending along the northeastern edge of the city as it hugs the bay -- effectively blocking the views along one of the most scenic corridors in any US city. 

TenantSee Weekly: I Was Told We'd Be Discussing the Office...

TenantSee Weekly: I Was Told We'd Be Discussing the Office...

AI has summarized capitalism for me as follows:

“…an economic system where private individuals and corporations own and control the means of production, such as property, businesses, and industries. In capitalism, the core principles are profit motive, private property, and market competition. The government's role is limited to taxation and standard regulatory laws, and individuals are given the freedom to operate their businesses and manage their income as they choose.” 

TenantSee Weekly: Friday

TenantSee Weekly:  Friday

Walking the near empty streets of downtown San Francisco on this beautiful August Friday, inspired us to ask our friend ChatGPT to craft a poem about the economic impact of workless Fridays.  Enjoy!

TenantSee Weekly: What Comes Next For Office

TenantSee Weekly: What Comes Next For Office

We’ve noticed an interesting shift in how companies are thinking about their offices.  For some time now, many companies have resolved to employ a hybrid approach to workplace, having employees work in office for a designated number of days each week.  In many cases, this solution was chosen more for how it seemingly struck a compromise between employers who wanted employees in the office and employees who sought freedom to choose.  To date, companies have been relatively lax in enforcing their workplace plan.  What’s changed?   Leadership is now becoming increasingly frustrated at spending on underutilized real estate.  Companies track space usage, and they don’t like what they’re seeing.  The occupancy reality is often way below what it would otherwise be if employees were following the hybrid work policy.  The company leasing 10,000 sf to accommodate an average of 10 workers each day is (painfully) aware of the wasted spend. 

TenantSee Weekly: Work

TenantSee Weekly:  Work

Over the past several years the concept of work has undergone more change than at any point in recent history.  While there’s many narratives, one common discussion centers on changing where and when we work to make work less harmful to our health.  This is exemplified by remote work. 
 
Work can certainly be harmful.  Yet few among us can avoid harm.  Indeed, harm often comes to us in ways we cannot and do not anticipate.  Sometimes what seems good turns out to be bad.  The very world in which we live is full of harmful realities.  I’m not convinced the absence of work brings less harm.  Nor am I convinced the changes we’re seeing now around how and where we work are as good for us as we hope they will be.  I think we’re generally failing to account for a variety of negative consequences that are slowly becoming more apparent.

TenantSee Weekly: Active Listening, the Skilled Negotiator's Secret Weapon

TenantSee Weekly: Active Listening, the Skilled Negotiator's Secret Weapon

Office lease negotiations are complex, involving numerous parties (the principals and their advisors), and covering a wide range of issues, from economic to legal.  The most effective negotiators are those who possess both a deep understanding of the markets, and the ability to actively listen while negotiating. 

TenantSee Weekly: Thinking About Physical Spaces

TenantSee Weekly:  Thinking About Physical Spaces

I suspect most of us are caught off guard by change at scale.  When thinking about the pace of change over the last 15 years, it’s clear we’ve entered a new era, one in which technology is enabling us to rethink EVERYTHING.  Change in how we design and occupy physical space is inevitable.  The skyscraper boom began in the late 1800s and the product playbook in urban core office markets has remained mostly unchanged for decades.  Similarly, the ways in which the office product has been developed and owned, the investment thesis, has been largely unchanged in how it relies on capturing the best occupants in leases that reflect the highest possible pricing and the longest possible term to generate stable net operating income and bankable future value.

TenantSee Weekly: Bottom?

TenantSee Weekly:  Bottom?

Have we hit bottom in the pricing of San Francisco office assets?  Maybe. 
 
The historical measures by which office buildings were valued, a function of capitalized net operating income, doesn’t apply to assets having large vacancy and limited
weighted average lease term (“WALT”).  These assets are trading at a simple cost/sf metric.  Investors take a long-term view of the investment, betting the value for San Francisco office will, ultimately, recover.  They may or may not use debt to finance the acquisition – where there is limited occupancy, they may not be able to secure debt.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VII: Design and Construction

TenantSee Weekly: Modern Workplace Planning:  Solving for Experience  Part VII: Design and Construction

One common mistake tenants and their advisors make when negotiating the office lease is failure to properly account for design and construction implications.  These are important considerations.  Space design plays a vital role in determining the efficacy of the space, how it translates in terms of value to the employees.  Construction is expensive, representing a material component of the tenant’s total occupancy cost.  Gaining understanding about design and construction at the right time in the transaction process provides useful data in the context of effective negotiations.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

TenantSee Weekly:  Modern Workplace Planning:  Solving for Experience  Part VI:  Negotiating the Lease

Leases vary by building, by market, and by market circumstances.  In most major metros, when dealing with larger buildings, the lease document is sophisticated and complex, addressing a broad range of variables that will have a material impact on the occupier’s experience at the building, as well as its cost of occupancy.  If you’ve done a good job negotiating the letter of intent, you should begin the lease negotiation phase from a position of relative strength.  However, even when the letter of intent is fully maximized, there’s still a lot to negotiate in the lease.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part IV: Implementing an Effective Market Process

TenantSee Weekly: Modern Workplace Planning:  Solving for Experience  Part IV:  Implementing an Effective Market Process

You’ve identified the purpose behind your physical space needs, you’ve created a thorough project budget and schedule, and you’ve developed the right strategy.  It’s now time to implement a market process. 
 
What is “…a market process”?  In the context of office leasing, market process is how you engage the market.  It ties to your strategy, with sensitivity to the objectives you seek to accomplish.  The market is where you implement your strategy, where you take it from theory to reality.
 

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part III: The Right Strategy

TenantSee Weekly: Modern Workplace Planning: Solving for Experience  Part III:  The Right Strategy

Once you’ve established the purpose of your physical workspace, and given careful thought to budget and schedule, it’s time to develop the right strategy. This is a vital step prior to market engagement. Good strategy is not always obvious.  At a minimum, any effective real estate strategy will include simultaneous assessment of multiple deal scenarios. Why would this matter? For starters, negotiation outcomes are not known.  At the beginning of the process, the favored outcome may be to stay in the existing space. However, as the process evolves over multiple rounds of negotiation, we often find that things change in ways that may cause the desired outcome to shift. For example, when the existing landlord offers terms that are materially less favorable than those achievable through relocation. 

TenantSee Weekly: The Office as Hotel

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.

TenantSee Weekly: TenantSee Team San Francisco Market Predictions: 2024

TenantSee Weekly:  TenantSee Team San Francisco Market Predictions: 2024

Let us lend our TenantSee perspective to the coming year.  Despite green shoots from 2 large AI sector leases (Open AI and Anthropic), demand for San Francisco office space remained low throughout 2023, yielding 4 more quarters of negative net absorption.  We finished the year with vacancy at >35% - an historical record.  The market is under significant stress, creating sizable opportunities for occupiers.
 

TenantSee Weekly: Translating the Lease

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

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

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

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

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

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.