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: What Really Matters
In the business of advising office tenants on leasing space, services are provided by a wide range of firms—from solo practitioners to global public companies with thousands of employees. As in any competitive industry, each firm tries to differentiate itself by highlighting its strengths while casting doubt on the competition.
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: Leverage
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.
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.
TenantSee Weekly: How Investor Exit Options Affect the San Francisco Office Market
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.
TenantSee Weekly: A Good Desk
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: Sweet Spot
How do you know when you’ve fully accessed market leverage in negotiating a lease extension? It’s when you find the sweet spot, a place in which the economics of the potential relocation lease match the lowest value the existing landlord is willing to offer. This is not a simple exercise of identifying the asking rents for alternative sites and asking the landlord to match. No, instead, it’s a byproduct of a carefully orchestrated negotiation that involves 2 main elements:
TenantSee Weeky: A Big Decline in Rents, Four Years in the Making
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 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.
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 III: The Right Strategy
Once you’ve established the purpose of your physical workspace, and given careful thought to budget and schedule, it’s time to develop the right strategy. This is a vital step prior to market engagement. Good strategy is not always obvious. At a minimum, any effective real estate strategy will include simultaneous assessment of multiple deal scenarios. Why would this matter? For starters, negotiation outcomes are not known. At the beginning of the process, the favored outcome may be to stay in the existing space. However, as the process evolves over multiple rounds of negotiation, we often find that things change in ways that may cause the desired outcome to shift. For example, when the existing landlord offers terms that are materially less favorable than those achievable through relocation.
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part II: Budget and Schedule
Last week we established the importance of defining “the purpose” behind your workplace, especially those elements of the workplace which are expressed through physical spaces. This is the first (and vitally important) step companies must take before they begin a real estate process (e.g., the process of acquiring space). Once established, the next step is to think carefully about budget and schedule. These considerations, much like the discussion of purpose, are greatly aided by working closely with your real estate advisor. Here, again, companies must shift how they think about the engagement of real estate advisory services. Having the right real estate partner on board from the very beginning facilitates access to critical data and insights. The process of properly defining the budget and schedule are both areas in which the advisor can play a key role.
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: 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: The Negative Deal
Investors invest in office buildings to generate a positive return on their investment. Return is created in 2 primary ways, one is through ongoing profits generated from the individual leasing transactions completed within the project, and the other is through financing activities (taking on debt which allows the investor to pull equity from the investment or selling the asset). This TenantSee Weekly is focused on the first of these 2 scenarios, the one in which the landlord seeks to create positive cash flow through its leasing activities.
TenantSee Weekly: Conflict in Tenant Advisory
Years ago, I was a partner at The Staubach Company, one of the industry’s most prominent tenant-only advisory firms. The Staubach Company was a highly ethical business, full of skilled tenant advisors. One of the firm’s core value propositions was that its advisory services were free of conflict. The conflict narrative is powerful in how it seemingly separates the conflict-free advisor from most other brokerage firms which serve both occupiers and landlords. Tenant-only firms often differentiate themselves with statements like, “…when you hire us, you never have to be concerned that we’re beholden to a landlord who pays us millions of dollars each year in fees”; or “…we fight harder for you because we’re not concerned about our relationship with the landlord”. To the unknowing audience, these statements can make it seem that all so-called “full-service” firms (those with diverse practices) are incapable of providing ethical, conflict-free occupier advisory services. When you consider the spectrum of tenant-only firms is very small, as a sales tactic, this is a brilliant approach in that it significantly narrows the competitive landscape, making it more probably the tenant-only firm will be hired.