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: 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: Leverage
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: Taxis and the Offices
Technology replaces that which it improves.
Not long ago, the streets of San Francisco were full of taxis. Simply by raising your arm, you could hail a taxi in minutes. Then, Uber and Lyft created their apps. Their intention was always to disrupt an industry that hadn’t changed in decades. Initially, many taxi drivers transitioned to become Uber and Lyft drivers, likely anticipating the technology would shift, not replace their work. But that’s not how this is turning out. Autonomous vehicles will replace human-driven, human transport solutions in major cities where taxi drivers once thrived.
TenantSee Weekly: Disbributed (but only a little)
Surveys indicate most workers favor a distributed workplace in which they can work from anywhere, any time. When it comes to work, individuals focus (mostly) on their own specific benefits, as opposed to thinking about how the ways in which their work gets done affects the broader organization. This makes sense, as one of the key benefits of our economic system is how it permits the individual to get ahead, to maximize its value. Employees realize value in a variety of ways, including compensation and other variables. Flexibility in where and when people work is high on the list of non-compensation related variables.
TenantSee Weekly: Sell Your Occupancy by Leveraging Options
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: 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 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: 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.
TenantSee Weekly: New Year, More Leverage
n March, we’ll hit the 4-year anniversary of the date when offices all over the city first shut down due to the pandemic, a time when just 5% of the city’s office inventory was available. Today, despite having more office workers now than we had then, just under 30m sf of our total supply sits vacant, and even more than that is available. Citywide average asking rental rates declined 17.5% during this period. We expect this trend to continue, possibly to accelerate in 2024. Sublease supply is pulling rates down as companies increasingly view any recovery as a net positive. There’s little on the near-term horizon to suggest we’ve begun (or will even begin in 2024) the long march toward recovery. The market dynamic is considerably worse than that which we experienced in the dot-com recession when it took 63 quarters to get from bottom to peak. We’ve not yet reached the bottom.
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: Knowledge, Leverage, and Opaque Markets
An office lease is a unique financial transaction. While supply data is widely available, the values associated with completed leases are not so readily available, nor is the financial position of the landlord and its partners. In effect, despite the preponderance of available data in residential markets (e.g., Zillow, etc.), office markets remain opaque. The educated occupier can certainly access more information today than in decades past. But it’s not enough to merely know available spaces. Achieving a complete understanding of the markets can only be accomplished by partnering with a firm which is engaged in the market in a variety of very specific contexts. You need an intimate understanding of landlord motivations, capital structures, and even the intricate dynamics of tenants within a building. Yet many real estate service firms don’t have this information because they lack the practice groups.
TenantSee Weekly: The Restructure
What may not be readily apparent to some occupiers is the extent to which the San Francisco office market presents an opportunity to restructure leases. What does it mean to “restructure” a lease, you may ask. Well, it can mean a lot of different things, but in this case we’re talking about negotiating new terms ahead of an expiration such that the tenant receives immediate benefit. For example, say a lease has 3 years remaining at rents that are significantly above market and the tenant requires improvements to modify the space. If the tenant is willing to commit to the building for a term extension beyond the existing expiration, depending on the circumstances at the asset level, there may be an opportunity to recast the lease. The trade for the landlord is one of near term pain for long term gain. The trade for the tenant is one of near term gain for (potentially) less future gain. In a perfect world scenario, timing would work just right and the tenant would make the trade early, only to see the market turn less favorable thereby making the restructure look genius.
TenantSee Weekly: Landlord Strategies, Oppositional Landlords and Leverage: Random Thoughts
Rent, or net operating income, is 100% correlated with value. When an owner lowers the rent, they reduce the value of their building. This is why many investors will do all sorts of things before lowering rent. For example, the most common approach is to provide big allowances and/or large amounts of free rent in exchange for rate preservation. It doesn’t feel great, but since it protects asset value, it’s in chapter one of every institutional owner’s playbook.
TenantSee Weekly: How Time Affects Negotiating Strategy
San Francisco Bay Area office occupiers are entering one of the best negotiating environments since the dotcom crash of 2001. Yet benefiting from this market is less straight forward than in past downturns because of uncertainties around how to plan post-COVID occupancy. Getting your real estate “right” requires a level of pre-planning not typically associated with the acquisition of office space. The first question you should ask is not where but why. As in, why have an office?