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: Subleasing Office Space - What Tenants Need to Know
TenantSee Weekly: The Long Shadow
When companies select a real estate advisor, one crucial yet often overlooked factor is the advisor’s credibility with landlords. It’s understandable why this isn't top of mind — credibility is difficult to measure. But it can be among the most valuable assets your advisor brings to the table. Let's break down what "credibility with the landlord" means and why it matters.
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: AirOffice
For many companies, office space is among a variety of resources they make available to employees to help facilitate work. Other primary resources include technology. In fact, today, technology arguably contributes more to how work is done than the physical office. The diminished role of the office in facilitating work has resulted in changes in how companies look to use office space. One manifestation of this change is in flexible offices, or coworking spaces. This product segment, having grown considerably over the past decade, is tangible proof of shifting consumer sentiment.
TenantSee Weekly: When the Landlord Isn't (the Value of Options)
We’ve written a lot over the past few years about the capital stack, the equity and debt structures that commonly define ownership of office assets. We’ve talked about “broken” capital stacks, situations in which the original equity is wiped out and some portion of the debt may also be under water. We’ve noted it’s very challenging to transact in these assets because the financial partners would need to invest more capital on transactions that would generate negative returns. In other words, good money after bad.
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: How a Building Sale Affects Lease Negotiations
The pace of investment sale activity in San Francisco is accelerating. This is the “Great Reset” about which we’ve written. It’s driven by capital partners (equity/lenders) deciding there is no viable pathway to own their way to an exit and choosing to sell (usually at a steep discount to what they paid and/or the value of the debt). Ultimately, these capital stack resets are healthy as they activate the asset, enabling new capital partners to transact at market.
TenantSee Weekly: A Good Desk
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: 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: 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: 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: 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 V: Negotiating the Letter of Intent
The letter of intent (“LOI”) is a non-binding document (although in unique circumstances they can be binding) which captures the terms and conditions upon which the parties have agreed and becomes the basis for a legally binding document (the lease). The best LOIs are highly detailed and cover a wide range of topics from rental economics to flexibility mechanisms (like expansion, contraction, termination, and extension options) to operating expense inclusions and exclusions, and much more. The occupier’s ability to include more items in the letter of intent varies somewhat by the circumstances of the market. In tight markets like San Francisco circa 2019, landlords could get away with limiting the level of detail covered in the LOI. Why would a landlord want to limit the LOI in this manner? Because they gain leverage. Most tenants don’t enter into the lease negotiation until late in their market process, meaning they’ve burned through a lot of the project schedule and will soon need to transition to design and construction in order to get the space ready on time. In short, limiting the terms of the LOI is a way for the landlord to jam the tenant on timing, forcing them to be more conciliatory to preserve schedule. In this current environment, nearly all tenants can enjoy the benefits of expanding the content of the LOI.
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose
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: Where Does It Hurt?
Office lease negotiations typically cause pain for one party because leverage is rarely balanced such that the outcome is a true win/win. Sure, the actual winner will suggest the other party also won (after all, they got the deal), but sometimes winning feels a lot like losing. That’s OK. Markets ebb and flow. What matters is that you know how you’re hurting the other party.