Office lease negotiations are complex, and tenants who lack strong representation are often at a serious disadvantage—they don’t know what they don’t know. One key area where this shows up is the tenant improvement allowance (TIA).
TenantSee Weekly: Is ChatGPT Better Than You (Me)?
If you’re a business professional—accountant, lawyer, engineer, or even (gulp) an office broker—you’ve probably wondered: Can AI do my job better than me?
As a broker who advises office tenants, I tested ChatGPT in a domain I know well. I asked it for average Class A office rents in downtown San Francisco over the last 30 years, including supply and demand dynamics. In less than a minute, it delivered a surprisingly accurate answer.
TenantSee Weekly: What's Missing
Negotiating office leases is like any other complex financial decision in that more information leads to better decisions. Yet companies face challenges acquiring the right information at the right time. Why? Because the services typically offered by real estate brokerages are centered on transacting based on site selection and the negotiation of basic rental economics. This is not enough. Sometimes, these services (at least) include a level of multi-building negotiation, exercising a degree of leverage, but too often they lack the proper structure to gather and assess critical data, data that will have a big impact on outcome.
TenantSee Weekly: Buy Services, Not Fear
Fear sells. But that doesn’t mean you should buy it. So called “tenant only” firms sell the idea that they, alone, offer tenants conflict-free advisory. To be clear, the potential for conflict does exist in commercial real estate advisory (more on that later). Yes, as a consumer of such services, it’s important to be aware of how conflict can manifest. However, the conflict narrative being peddled by the tenant only firms is more myth than reality. It’s a clever sleight of hand, designed to distract the consumer from realizing the big gaps in knowledge that limit the tenant only firm’s ability to properly advise, while simultaneously suggesting great risk in hiring a full-service competitor.
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.
TenantSee Weekly: Contradictions in Logic
These days, the resetting of capital stacks (the ownership structures for office buildings) is most often facilitated through selling the building. The current market sale dynamic typically involves one set of financial partners (equity, lenders) taking big losses to permit a new set of investors and lenders to “reset” the capital stack on economic terms that provide a pathway to success (e.g., a productive investment).
TenantSee Weekly: A Good Desk
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.
TenantSee Weekly: In a Vaccum
Office leases are complicated undertakings comprised of many variables. The markets offer a variety of solutions, ranging from coworking to subleases to long and short-term direct leases. It’s always important for corporate leaders to understand the primary objectives they seek to achieve in leasing office space. But even when these objectives are well defined, it can be tricky to assess which solution is best.
TenantSee Weekly: Encumbrances
An encumbrance is a burden or impediment. Office leases often contain rights which are exclusive to a specific tenant and which place constraints on the landlord’s ability to lease space to other, 3rd party tenants. These rights are referred to as encumbrances. When tenants consider leasing space in a building, one of the first things they should qualify is the extent to which the landlord’s ability to lease the subject space is subject to any encumbrances. If so, the specific terms of these encumbrances must be understood before proceeding.
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.
TenantSee Weekly: How Your Landlord's Tax Reduction May Cost You
Over the past several years, the market value of San Francisco office buildings has dropped by more than 30%. Indeed, in some cases, asset values have declined much more, as evidenced by valuations associated with vacancy-challenged asset sales over the past couple of years. Importantly, a large percentage of the San Francisco office market either traded or was financed in the years prior to the pandemic, when valuations were high and debt was cheap. These activities created increased tax revenue for the city.
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: 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:
TenantSee Weekly: From Blend and Extend to End and Extend
The so called “blend and extend” deal structure has a number of applications, among them a scenario in which a landlord might account for a downward adjustment to a tenant’s rent by amortizing the value of the adjustment with interest into a new term. Say, for example, a tenant has 3 years remaining on a lease and the market value for the space has dropped from $75/sf to $60/sf. The landlord would adjust the rate to market ($60/sf) and spread the $15/sf differential over the new term. If the interest rate were 8%, and the term 7-years, this would add $2.80/sf to the rent.
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: 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.