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?
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: I Digress...

A little AI distraction to cheer your day (and relieve us of yet another discussion about workplace). Ever wandered through the streets and felt like you've stepped into the future? With their undeniable presence here in San Francisco, the driverless car is quickly becoming the most prominent representation of AI in our daily lives. If you spend any time in San Francisco neighborhoods, you can’t miss them. The other day, as I chatted with a neighbor, I counted 6 autonomous vehicles casually cruise by our front door within a span of 10 minutes. Intriguing, right? And today, in a twist of irony, I was held up by one. Blocked by a double-parked UPS truck, the driverless car hesitated, unsure about navigating into the lane of oncoming traffic. Of course, all the drivers in the opposing lane weren’t too keen to make space for the driverless car, as one normally would (or at least the more decent among us would) for a human-driven vehicle. Hence, we waited.

TenantSee Weekly: I Digress...

#officemarket

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TenantSee Weekly: Encumbrances

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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.

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TenantSee Weekly: Friday

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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!

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TenantSee Weekly: How Your Landlord's Tax Reduction May Cost You

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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.

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TenantSee Weekly: Thinking About Physical Spaces

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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.

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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: TenantSee Team San Francisco Market Predictions: 2024

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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.
 

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TenantSee Weekly: Wayne Gretzky and the Young Generation

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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. 

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TenantSee Weeky: It's Not Really About the Office

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TenantSee Weeky: It's Not Really About the Office

It’s Not Really About the Office
 
We’re experiencing a behavioral shift which is changing one of the most pervasive social institutions of our time; namely, how, and where white-collar workers work.  Few societal constructs impact individuals, or society, as much as where and how we work.  The collective dialogue about this change, especially between employer and employee, has at times been challenging.  However, we’re now entering a more hopeful phase of the conversation, one which promises to finally move us to a new place, letting go of the idea that we must revert to pre-pandemic norms.

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TenantSee Weekly: What Could Go Right?

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TenantSee Weekly: What Could Go Right?

Mass psychology is literally contagious (that’s how it becomes “mass”).  This is especially true in times of change, when a significant event has precipitated such change (e.g., the pandemic).  These events can be positive or negative.  In our current state, the catalyst was negative, and, in many ways, has resulted in a decidedly negative outlook.  When things turn negative, there will always be market casualties (just as a rising tide lifts all boats in the positive context).  For example, the impact to investors in the domestic office sector has been mostly negative.  As change unfolds, it can have knock-on impacts that weren’t necessarily anticipated.  For example, the demise of urban downtowns due to shifts in daily worker population.  Collective sentiment tends to aggregate around a view and stay there until some brave souls dare to take the contrarian view.  As these contrarians see success, it spurs others to jump on board and the collective sentiment begins to shift, once again, in the other direction.