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?

Commercial Real Estate

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TenantSee Weekly: Culture and the Modern Workplace

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TenantSee Weekly: Culture and the Modern Workplace

Culture: noun: the customs, arts, social institutions, and achievements of a particular nation, people, or other social group.

We all want to be part of something great. We want our workplace culture to be worthy of its “Best Places to Work” status. But in many cases, the corporate “cultural persona” does not fully reflect the cultural reality.

Why? Firstly, leadership. Leaders tend to focus on the desired culture as opposed to the existing culture. It’s easier (and more uplifting) to identify the cultural characteristics you want, as opposed to sifting through the complexities of the culture you have. But when the aspirational culture fails to align with the existing culture, it results in an authenticity problem. However, you can’t fully blame leaders. Most companies lack the right incentives for leadership to invest in the hard work and difficult decisions necessary to bridge the gap between existing and aspirational culture. For example, achieving cultural alignment might necessitate terminating individuals who are financially productive but culturally cancerous. There could be entire groups within the company who behave in a manner that is inconsistent with the aspirational culture.

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TenantSee Weekly: Stupid is Easy (and expensive)

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TenantSee Weekly: Stupid is Easy (and expensive)

In tenant-favorable market environments, landlords often provide more concessions to compete for tenants. Concessions come in many forms, the most obvious being, landlord funding for tenant improvements, free rent, reduced rent and more flexible lease terms. But understanding the value of the concession is not always easy, especially relating to tenant improvements, one of the biggest economic variables in leasing.

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TenantSee Weekly: Thinking vs. Doing

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TenantSee Weekly: Thinking vs. Doing

Much of what we “do” every day is driven by long established norms, norms that most of us rarely give much thought. Societies always have outliers who think about things a little differently. Often, these thinkers are entrepreneurs. Their journey usually begins with “why” or “what if”. Why are most people seemingly happy to exist within the status quo? I believe it’s the discomfort created by stepping outside the normalcy bubble to think for oneself. Just spend one day asking yourself why you do the things you do and you’ll see how easy it is to imagine different solutions. Of course, you have to accept that your solutions might be worse. And should you wish to advocate for your new solutions, be prepared for resistance. People resist out of fear of the unknown, or because they have a vested interest in keeping things the same. But resistance is a powerful force against change.

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TenantSee Weekly: Equity and the Hybrid Workplace

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TenantSee Weekly: Equity and the Hybrid Workplace

Workplace equity is a big, important topic. The pandemic has helped advance a better discussion about how to create workplaces that are more inclusive, that support the specific and differing needs of the employee base. It’s not so much that we’ve learned our offices don’t serve all equally well, we already knew this. Instead, companies have been forced to address this reality head on because the concept of the office has been turned on its head. The act of creating equity when everyone was remote has (hopefully) built some institutional “muscle memory” that will serve us well as we embark on what’s next.

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TenantSee Weekly: Where Else Can You Go?

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TenantSee Weekly: Where Else Can You Go?

One of the more interesting outcomes from the pandemic has been the advent of a new competitive factor for landlords to contemplate when negotiating with existing tenants; namely, the possibility of no office, either as a permanent or temporary solution. When a company is willing to let the lease expire without having secured an alternative office solution, it takes one of the landlord’s most effective “levers” out of play. As we’ve written about in prior posts, landlords are very good at using time to their advantage. Historically the closer the tenant gets to lease expiration without having fully negotiated new deal terms, the more leverage the landlord has to command better terms.

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TenantSee Weekly: Underwriting Tax Increases (Before You Lease)

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TenantSee Weekly: Underwriting Tax Increases (Before You Lease)

Over the past decade, may office buildings in San Francisco have been sold, some multiple times. For tenants, these sales translate to material increases in the cost of the lease. Why? Primarily because of taxes.

California has Prop 13, which limits annual increases in real estate taxes to 2%, excepting at the time of a sale or financing of the asset, at which point the tax base is adjusted to market, often causing a big spike in taxes. It’s in these latter scenarios, a sale or financing, when tenants are exposed to potentially large cost increases. This is true because the tax attributable to a sale or financing is passed on to the tenant.

For every $100/sf in increased asset value, the rent increases by $1.50/sf. So if a company leases space in a building that has a tax base value of $400/sf and the building subsequently sells for $800/sf, there is a $6.00/sf/year increase in the lease cost. For a 10,000 sf lease, the added annual cost is $60,000.

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TenantSee Weekly: Sucking More, Not Less: A Modern History of the Office Lease Document

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TenantSee Weekly: Sucking More, Not Less: A Modern History of the Office Lease Document

Ever wonder why the office lease is 60+ pages of single spaced madness? The answer is simple. The “selling” of protection from crafty attorneys and incident-driven drafting. With the former, lawyers craft language and sell it to institutional clients as creative mechanisms for protecting landlord value. Over the years, I’ve seen “gotcha language” buried deep in all sorts of poetic BS. Firms have incentive to create these documents because protection sells. In the latter, incident-driven drafting is what happens when a tenant and landlord have a dispute and the landlord says, “…let’s draft language so that never happens again.” As you can imagine, throughout the decades, there have been many disputes and issues between landlords and tenants, greatly adding to the heft of your lease document.

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TenantSee Weekly: Intent, Policy, and Behavior

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TenantSee Weekly: Intent, Policy, and Behavior

It’s not uncommon to see discrepancies between corporate policy, the intent of the policy and the actual behavior of the leaders who are charged with implementing the policy. Jan Johnson and Jeff Leitner have studied this phenomenon in their work on the power of unwritten rules in shaping human behavior. I was thinking about their work as I recently participated in a panel discussion titled, “The New Geography of Work”, hosted by the Northern California Chapter of CoreNet. The discussion was fascinating, mostly thanks to the contributions of our moderator, Robert Teed of Integri Group, and the smart panel members, Kate Lister of Global Workplace, Chandler Bonnie of Dropbox and Irene Thomas Johnson of JLL.

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TenantSee Weekly: The Space Between

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TenantSee Weekly: The Space Between

Choppy markets lack data that point to a trendline which all participants understand and accept. The San Francisco office market is now in the choppy phase of a broad decline that has yet to fully materialize. The data is lacking both in terms of sustained tenant demand and completed transactions.

During this phase, completed transactions often seem too high or too low; whereas, once the market trend is clear, pricing becomes more unified. Resistance is a real factor. Landlords do not want to lower rent and increase concessions. But the market trend is, ultimately, fed by the supply/demand dynamic. It cares not what an investor paid for the asset, just as the impact of higher rent on the tenant’s bottom line is not a factor in determining how much rent a landlord can charge in a tight market. In the end, everyone has to play in the same sandbox.

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Market Outlook QTR4 2021 - Tenant Perspective

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Market Outlook QTR4 2021 - Tenant Perspective

This San Francisco office market report is provided compliments of Samantha S. Low and Greg Fogg, co-creators of TenantSee. TenantSee is a tenant real estate product combining a team of subject-matter experts with powerful technology to make tenant real estates smarter, faster, and better. Our report is intended to provide you, the tenant, with meaningful insights, not raw data. To learn more about TenantSee, please visit www.lowfogg.com

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TenantSee Weekly: Hub & Spoke: A Suburban Myth

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TenantSee Weekly: Hub & Spoke: A Suburban Myth

In the early days of the pandemic there was a lot of chatter about so called “hub and spoke” real estate strategies that would cause occupiers to establish a city center hub and branch out to the suburbs with smaller satellite offices…the spokes. In the bay area, this trend has not materialized. The absence of consistent levels of demand that characterized the pre-pandemic office market has left a void for speculation. Much of the speculation comes from parties whom have a vested interest in the outcome. Suburban landlords optimistically viewed the pandemic as an opportunity for heightened demand for their product (and this may still turn out to be the case). But the truth is much of the current discussion around office demand is not informed by actual data (e.g., actions taken by tenants).

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TenantSee Weekly: Innovation Is Hard

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TenantSee Weekly: Innovation Is Hard

With the exception of the tech sector (where to innovate is to survive), big companies have a hard time being innovative. Why? Many reasons; but, most notably, the fact that true innovation is the enemy of the status quo. The status quo is a big company’s happy place. Innovation is messy and disruptive. It looks to upset the status quo in search of new, better ways. Most people don’t want change. This is why venture capital and startups exist. They aren’t afraid to “break it”, they’re designed to do so. The bigger the market a startup looks to disrupt, the more valuable it may be.

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TenantSee Weekly: The Limited Value of a Handshake

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TenantSee Weekly: The Limited Value of a Handshake

People aren’t really shaking hands any more. Literally. And the figurative handshake has also seen better days, especially in the context of real estate transactions. To be sure, most office lease transactions are too complex to memorialize with a handshake. However, there’s a more practical factor at play that makes trust and commitment difficult. Specifically, until there’s a deal, there’s no deal.

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TenantSee Weekly: Lacking a Common Narrative

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TenantSee Weekly: Lacking a Common Narrative

Markets are shaped by an ever-changing interplay of influential factors; including, supply, demand, human behavior, data and a collective narrative. In times of relative stability, market participants accept a prevailing collective narrative and the markets perform with a high degree of uniformity. Take, for example, the San Francisco office market of 2019. Characterized by strong tenant demand and limited supply, this market was not difficult to understand. The narrative, while beneficial to landlords and harmful to occupiers, was supported by data and participant behavior.

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TenantSee Weekly: The Tension Between Quality Tenant Advisory Services and Commissions

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TenantSee Weekly: The Tension Between Quality Tenant Advisory Services and Commissions

he overwhelming practice in all major US Metro markets is for landlords to pay the tenant advisor’s fee. While it’s true the landlord cuts the check, the tenant is actually the payor, as leasing fees are built into the building operating budget and recouped by the landlord through rent in the same way other transaction costs are passed on to the tenant (like landlord-funded tenant improvements, free rent and other concessions). In past issues we’ve written about how this arrangement can create opacity, making it harder for tenants to align advisory fees with specific services. But this unorthodox arrangement can also create unusual negotiating dynamics where certain landlords look to leverage tenant confusion about leasing fees to cause the tenant to sign up for less favorable terms and/or to keep fees otherwise budgeted for the tenant’s advisor.

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TenantSee Weekly: Connecting Fees to Services: Identifying the Best Tenant Advisor

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TenantSee Weekly: Connecting Fees to Services: Identifying the Best Tenant Advisor

The tenant advisory business was built on the premise that the advisor holds essential knowledge about where your office should be located and how to negotiate market-favorable lease terms. Yet much of the details surrounding what the advisor knows, how they know it and why they advocate a specific strategy are unknown to the client. Importantly, in the US, the advisor’s compensation is often misunderstood by the client since the advisor is paid by the landlord (the tenant actually pays the fee through rent). In fact, with tenant advisory fees being “at risk”, meaning they are earned only if a transaction is completed, there is ample incentive for tenant advisors to hold a strong bias toward transacting quickly, even when it may not be in the client’s best interest. Further, when the service offering is mostly opaque, the provider can increase the value of fees by limiting the amount of service required for their acquisition. This is not a cynical view of the sector. It is a reality based discussion of the structural challenges that make hiring the best advisor difficult.

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TenantSee Weekly: Nasdaq vs. San Francisco Office Rents: Uncorrelated

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TenantSee Weekly: Nasdaq vs. San Francisco Office Rents: Uncorrelated

Way back in 1995 we began tracking the correlation between San Francisco office rents and the Nasdaq. This has become a throw away datapoint since it rarely reveals anything new. That is until Q2 2020. This is when, for the first time in a quarter century, the Nasdaq and San Francisco rents have become uncorrelated. What does it mean?

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TenantSee Weekly: Why Do We Have Offices

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TenantSee Weekly: Why Do We Have Offices

This is the question every company should be asking before it establishes a formal plan for returning to the office. How does office space serve the company and its employees? Many years ago, when the first offices were built, they reflected the factories of the Industrial Revolution. Employers needed to bring employees together to facilitate and monitor their work. Today technology allows people to work productively from anywhere. But for special purpose spaces (e.g., lab space), companies and employees don’t need office space to do their work. So the office has long since stopped serving its original purpose. But there are other reasons for its existence.

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TenantSee Weekly: Risk vs. Reward in a Shifting Market

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TenantSee Weekly: Risk vs. Reward in a Shifting Market

When tenant and landlord negotiate to extend a lease, each party must manage a distinct risk/reward calculus against the backdrop of the market. But irrespective of market, a successful negotiation will always hinge, in part, on identification and exercise of leverage. Of course, this is easier when the market is skewed heavily in favor of one of the participants. To be sure, there’s a lot more to success than just maximizing leverage. Yet now, when the market has undergone a material shift, it’s a good time to ponder the risk/reward relationship.