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?

#marketdata

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TenantSee Weekly: Buy Services, Not Fear

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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.

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TenantSee Weekly: How a Building Sale Affects Lease Negotiations

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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.

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TenantSee Weekly: Leverage

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TenantSee Weekly: Leverage

The concept is simple.  It’s the thing you use to make the deal better.  But in real estate negotiations, the extent of a tenant’s leverage and how best to exercise it, is less than obvious.

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TenantSee Weekly: Men's Fashion - A Random Commentary

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TenantSee Weekly: Men's Fashion - A Random Commentary

In the 1990s, my pants fit more loosely.  They were often pleated.  Then, seemingly overnight, loose fitting, pleated pants were out of fashion.  To be fashionable required an entirely new product, a new look.  My now out of fashion, yet still perfectly serviceable, pleated trousers were initially (optimistically?) relegated to the back of the closet, ultimately to be unceremoniously delivered to Goodwill. 

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TenantSee Weekly: No Free Lunch

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TenantSee Weekly: No Free Lunch

The office product offering is shifting to provide an array of hospitality-inspired experiences that, in some cases, rival those of a 5-Star hotel.  San Francisco landlords have lagged other markets in providing such high-end amenities because in the 2 decades prior to the pandemic, the supply/demand dynamic favored landlords, making it easier to lease space  (e.g., they didn’t have to).  For the past several years, however, San Francisco landlords have begun to spend millions on targeted amenities.  The typical playbook calls for some combination of health/fitness, conferencing and events, club/lounge/bar spaces, and specialty spaces, like golf simulator rooms and podcasting studios.

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TenantSee Weekly: What Do You See?

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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.

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TenantSee Weekly: How Investor Exit Options Affect the San Francisco Office Market

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TenantSee Weekly: Do Cities Still Matter?

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TenantSee Weekly: Do Cities Still Matter?

I grew up in a small town but I always dreamed about big cities.  I sensed they were special places where, given the right amount of drive, the right mindset, one simply could not fail.  Sure, there would be ups and downs, but cities provided access to a robust network of opportunity.  This was in stark contrast to the small New England towns of my childhood, many of which never fully recovered from the demise of the textile mills in the early 1900s. 

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TenantSee Weekly: Middle Manager on the Shelf

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TenantSee Weekly: Middle Manager on the Shelf

Our young children, now 8 and 9, have formed a special bond with Lucy and Jack, two elves assigned by Santa to watch over them.  For the past several years, Lucy and Jack have demonstrated extraordinary commitment to our family.  They’ve traveled during the holidays, magically appearing at our vacation destinations.  They’ve even stayed on after Christmas, despite being needed at the North Pole.  Just the other day, I found one of our children covering them in cinnamon (apparently this helps them get their magic back after being touched by humans).  To be sure, their presence has sharpened our children’s focus, causing them to think twice about being naughty, providing a welcome assist on the parental front. 

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TenantSee Weekly: Contradictions in Logic

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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).

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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: Taxis and the Offices

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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.

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TenantSee Weekly: Sell Your Occupancy by Leveraging Options

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TenantSee Weekly: Sell Your Occupancy by Leveraging Options

Negotiating a great office leasing outcome requires engagement with multiple prospective landlords over multiple rounds of negotiation.  It’s not just about having options; it’s about using them to create leverage.

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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: From Blend and Extend to End and Extend

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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. 

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TenantSee Weekly: Knowing Your When

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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. 

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TenantSee Weekly: Where Does It Hurt?

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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.

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TenantSee Weekly: The Great Reset and Rent

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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. 

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TenantSee Weekly: The Lingering Fog of a Bull Market

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TenantSee Weekly: The Lingering Fog of a Bull Market

The Lingering Fog of a Bull Market.
 
Advisors on the right side of a bull market end up looking good, no matter what they do.  This was certainly the case for landlord advisors in the San Francisco office market for the ~10 years leading up to the pandemic, a time when you could win for losing, as the deal you failed to make was often (quickly) replaced by a new deal at better rental economics due to rapidly appreciating rents.  Today, both landlord advisors and the investors they advise are, in some cases, suffering from the lingering effects of the bull market.