Commercial Real Estate

TenantSee Weekly: Mo Data Mo Better

TenantSee Weekly: Mo Data Mo Better

There’s not a single decision we make that isn’t improved by access to more data. The challenge lies in gaining access to data, in prioritizing which data matters and in drawing appropriate insights from the data. For many years the business of tenant advisory involved an opaque transaction between a broker, whom had access to data, and a customer, whom did not. Given that tenant advisors are mostly paid by the landlord counter party, the connectivity between scope of services and fee is muted. This has resulted in the tenant advisory industry being built largely around 2 services, 1) site selection and 2) negotiation of basic business terms (rental economics). These services are easy to stand up and difficult for the customer to measure. Over the past couple of decades, the model has improved; but, frankly, the level of services provided to the tenant customer (in many cases) remains low. Certainly large corporate occupiers benefit from the best service platforms brokerages have to offer. But for medium and smaller companies (5,000 employees and less) there remains substantial room for improvement. Not surprisingly, technology is beginning to play a key role in changing the quality of services being offered by many brokerage advisory firms.

Market Outlook Q3 2021 - Tenant Perspective

Market Outlook Q3 2021 - Tenant Perspective

Mixed messages. Q3 was the best leasing quarter since the pandemic began, with gross leasing activity just under 1.8M SF, above the historical average of 1.6M SF. Vacancy and rental economics were essentially flat. Yet while the overall dynamic implies stability, the fact remains we have 6.8M SF of sublease space available, most of which is scheduled to become the landlord’s problem in the next ~ 2 years. This will do 2 things: 1. it will increase direct vacancy which is currently 12.6%, and 2, it will cause landlords to officially engage in a difficult market where undifferentiated spaces and assets will be forced to compete by lowering rental economics. Where landlords are sitting on assets that lack best in class amenities, they will be underwriting the cost/benefit of investing in such amenities vs. doing nothing; or, where the cost is too high, exiting the investment.

TenantSee Weekly: Who's On First

TenantSee Weekly: Who's On First

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This Week's Topic: Who's On First

Dating myself with an Abbot and Costello reference. But the unnecessary confusion so many companies experience when trying to prioritize key factors that influence their real estate decisions reminds me of that famous skit.

TenantSee Weekly: Rental Rate: A Poor Proxy for Value

TenantSee Weekly: Rental Rate: A Poor Proxy for Value

Historically, rental rates have played an out-sized role in determining where companies lease office space. Today, as companies address leases they negotiated in 2010 – 2015, they understandably do so against the backdrop of the pandemic. The fact that many companies have not yet fully returned to their offices has created a sense among occupiers that rental rates should be substantially lower (e.g., the office market must be very soft since no one is there). But paying for space and using space are 2 different things – landlord rent collections remain high (~98%). San Francisco rents are down. But as of Q3, citywide average rents stand at $73.46, down only 12.4% from the pre-pandemic high; and class A CBD asking rents are $84.91, down just 7.4%. Hence, in most cases, tenants having leases expiring in 2022 and 2023 will find their rent is actually increasing from the in-place rate. This gap between expected outcomes and market reality can sometimes cause occupiers to make poor decisions. Rate, alone, is not a good measure. Total occupancy cost per employee is better. But the real question is what do you get for the cost? How does the occupancy cost impact the following:

TenantSee Weekly: Market What?

TenantSee Weekly: Market What?

One key feature of the tenant advisory platform my partners and I created, TenantSee, is the Market Diagnostic. What is it? In short, it’s an output we provide our clients, at no cost (it’s part of our advisory platform), which draws from a spectrum of subject matter experts within C&W to develop a narrative regarding leverage in a specific asset, in a specific market. It incorporates knowledge from our capital market and debt teams to understand an owner’s debt and equity positions. We engage our asset teams to identify operational variables relating to the asset. We leverage our research group for data regarding lease roll (Landlord exposure) and completed transactions in the asset and the comparable market. We study the owner’s motivation profile. In total, we develop a comprehensive market leverage narrative for our client that is sensitive to the asset, the market and timing.

TenantSee Weekly: When 1 = 1.25: How Your Office Building Continues to Grow

TenantSee Weekly: When 1 = 1.25: How Your Office Building Continues to Grow

A 10,000 sf office space is not actually 10,000 sf. In a high-rise building in downtown San Francisco, the “usable” square footage in a space having 10,000 rentable square feet is likely closer to 8,000 sf. But the tenant pays rent on the basis of 10,000 rentable square feet. Why is the tenant charged rent on 25% more space than it can actually use?

TenantSee Weekly: Why Institutional Investment Keeps Rents High

TenantSee Weekly: Why Institutional Investment Keeps Rents High

When I began my real estate career in San Francisco in the early 1990s, office buildings were mostly owned by private investors using a relatively small selection of institutional capital partners. The Shorenstein Company, whom I worked for from 1990 – 1995, was a great example. At that time, they were the largest owner of office buildings in San Francisco, holding 11M sf. During those days, most owners, including Shorenstein, employed a simple strategy centered on preserving tenants while minimizing cash requirements (funding of tenant improvements, etc.). In most cases, the first choice was to keep the existing tenant by offering a rental rate which was discounted to market. If that failed and the tenant moved out, the next step was to undercut the market by lowering the rental rate to steal a tenant away from another building. The goal was to buy and manage the asset to generate maximum cash flow, which the investors counted on each quarter. Importantly, the majority of assets were owned by this type of investor. But by the mid-1990s, the nature of office ownership was beginning a period of significant change which would materially impact rental economics for decades to come.

TenantSee Weekly: My Landlord Offered Cash To Offset My Rent...Why?

TenantSee Weekly: My Landlord Offered Cash To Offset My Rent...Why?

Landlords seeking to preserve future sale value have to protect the rental rate. The future sale value is tied to the building’s net operating income (“NOI”). NOI is the value achieved by deducting operating expenses and taxes from gross rent. This value is then capitalized using a cap rate to determine asset value. Hence the higher the face value of the rental rate, the greater the NOI and the higher the asset value.

TenantSee Weekly: A Level Playing Field

TenantSee Weekly: A Level Playing Field

This week we’re writing about an old topic that surfaces every now and again, usually when we come across a tenant who has chosen to negotiate a lease or lease renewal on its own. Why would a tenant do so? I think the most common reason is perceived savings. This scenario seems to play out most often in buildings owned by private investors (e.g., not institutions). Buildings where the landlord calls the tenant directly and proposes to renew the lease at a discount if the tenant negotiates without a broker.

TenantSee Weekly: Less Space, More Uncertainty

TenantSee Weekly: Less Space, More Uncertainty

Over the past year our small team based in San Francisco has not worked on a single assignment in which the client is expanding its leased office space. In some cases, the leased footprint remains the same, but many clients are decreasing their leased space. We're doing work all over North America. Client approaches to the office range from the following:

TenantSee Weekly: We're In A Pandemic, Why Is My Rent Increasing?

TenantSee Weekly: We're In A Pandemic, Why Is My Rent Increasing?

This is a common question for tenants looking to negotiate lease extensions in the current market environment. Intuitively, they expect their occupancy cost to decrease due to the effects of the pandemic (e.g., higher vacancy, less demand, etc.). However, they often fail to realize the point of impact, or the base values on which market softness has its affect, are values that were in place just prior to the pandemic, not values from 5+ years ago when they signed the original lease…

TenantSee Weekly: A Short Discussion of Operating Expenses and Taxes (Insert Big Yawn Here)

TenantSee Weekly: A Short Discussion of Operating Expenses and Taxes (Insert Big Yawn Here)

I know. This is painful. But you need to understand it, so here goes. A third or more of a tenant’s occupancy cost is attributed to the operation and taxation of the building in which it leases space. Yet these costs and how they are distributed are often a source of confusion.

TenantSee Weekly: The Math Behind the Motivation

TenantSee Weekly: The Math Behind the Motivation

Occupiers often think pricing for office space is one dimensional. Sure, they understand that different quality buildings and spaces translate to different prices. But pricing is actually complex and dynamic, based on many variables, including specific owner motivations. And motivations vary significantly from one owner to the next.

Market Outlook Q2 2021- Tenant Perspective

Market Outlook Q2 2021- Tenant Perspective

This San Francisco office market report is provided compliments of Samantha S. Low and Greg Fogg, Co-Founders of TenantSee. TenantSee is a tenant real estate product combining a team of subject-matter experts with powerful technology to make tenant real estate smarter, faster, and better. Our report is intended to provide you the tenant, with meaningful insights, not raw data.

TenantSee Weekly: How Time Affects Negotiating Strategy

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?

Market Outlook Q1 2021- Tenant Perspective

Market Outlook Q1 2021- Tenant Perspective

This San Francisco office market report is provided compliments of Samantha S. Low and Greg Fogg, Co-Founders of TenantSee. TenantSee is a tenant real estate product combining a team of subject-matter experts with powerful technology to make tenant real estate smarter, faster, and better. Our report is intended to provide you the tenant, with meaningful insights, not raw data.

Market Outlook Q4 2020 - Tenant Perspective

Market Outlook Q4 2020 - Tenant Perspective

To our clients and loyal followers…In a departure from our normal practice, we’ve chosen to write a letter to close out what has been a most unusual year. With respect to office space, it’s no stretch to describe 2020 as the most impactful year of the past century. What changed? In a word: everything.

Maximizing Employee Engagement Through Total Workplace Ecosystems

Maximizing Employee Engagement Through Total Workplace Ecosystems

The Covid-19 pandemic is not only the most significant public health challenge of our time, it is also massively disrupting the way we live, socialize and work. While corporations navigate a rapidly changing business landscape, they’re also forced to solve for new operational challenges they’ve never seen before. This is a highly complex time. Among the most significant challenges is that of creating optimal workplace solutions that foster employee health and wellness, are sensitive to the differentiated employee needs and maximize employee engagement/productivity.

TenantSee: Modern Solutions

TenantSee: Modern Solutions

Office space is a physical environment in which employees gather to fulfill the goals of the corporation, the most obvious being profit. The way employers use office space has continuously evolved over the years most notably as new technologies emerge. Over the past 2 decades many technologies have been developed that would otherwise enable a significant shift in the way we work, especially in terms of where we work. However, notwithstanding the presence of these technologies, employers have mostly been reluctant to fully embrace their use due to uncertainty around how such changes would affect productivity and culture. The covid-19 pandemic forced everyone to embrace tech, shifting most workers from offices to working from home. Employers have been surprised to find their worst fears unfounded. 

Armed with the knowledge the enterprise can survive, occupiers find themselves having a new conversation about workplace solutions. This is among the more valuable corporate undertakings of the past century. Why? Because office space is not really about buildings, location or even cost…it’s about supporting and promoting employee engagement. Engagement can be defined in a variety of ways but the simplest way to think about it is in terms of how well the employee is thriving.  A thriving employee understands, is connected to and contributes to the corporate culture. She is healthy and happy. She is loyal and disinclined to seek other opportunities. She is productive. There are many drivers that contribute to employee engagement but the workplace is among the most impactful.