Lately, something has been bothering me (IRL). I’m losing sleep. I don’t understand how life can be IRL and URL. To me, life is only IRL – there is no such thing as URL. Technology is merely a construct that we created, presumably to make IRL better. What began slowly, now rapidly causes big shifts in how we experience life, IRL. Not all change is good. The modern office is among the high value social constructs which technology seeks to upend. The office IRL is fast becoming the office URL. Is this a good thing?
TenantSee Weekly: Unpleasant to Existential
When the pandemic hit in 2020, emptying San Francisco office buildings, landlords were mostly unfazed given high levels of occupancy and income. As the pandemic gained momentum, some owners began to quietly wonder if this could be bad enough to render their buildings empty for a prolonged period. Yet it wasn’t until late 2021/early 2022 that investors began to fully grasp that appetite for their product had changed in significant ways.
TenantSee Weekly: Maybe The Office Isn't So Bad After All
There’s been a lot written over the past 3 years about the negative aspects of office life, about how it harms our health, distracts us from what really matters and makes us less productive. The freedom to choose where and when we work, it’s argued, is transformative, enabling us all to create our own perfectly tuned work-life balance. It sounds nice, the idea that no one (at least no white collar worker) will remain oppressed by the constraints of working at an office, or working on a fixed schedule. Turbo-charged gig workers, calling our own shots. What could go wrong? Maybe a lot.
TenantSee Weekly: Swimming Naked: The Risk of Non-Performing Vacancy
Over the past decade the San Francisco office market was among the most desirable global markets for institutional office investment. Valuations increased by 100%+, and many assets traded…some multiple times. Even those that didn’t trade were often refinanced at substantially higher values, enabling the equity partners to take out significant amounts of capital. Today values are dropping as demand for office space in San Francisco is at historical lows, causing rental economics to decline rapidly. This presents unique challenges that are (typically) not entirely obvious to occupiers; namely, a full understanding of the debt and equity stack and the landlord’s ability to perform.
TenantSee Weekl: Change is Hard
While change is generally a constant state, big changes in one area can have the effect of spurring many additional changes in related areas. In most cases we’re not very good at forecasting all the add-on changes that may follow the initial change. We’re like low skill chess players, unable to see the full spectrum of opportunity and vulnerability created by our moves. And when big change requires us to take action, we often seek the comfort of doing what everyone else does as opposed to formulating our own approach. In the business world, this is a byproduct of risk aversion, or what can be called CYA at scale. Our corporate structures don’t typically provide incentive for creative, individualized responses to business challenges.
TenantSee Weekly: Market Outlook Q4 2022 Tenant Perspective
TenantSee Weekly: Why Flex is Hard (but Inevitable)
The “flex” in flexible office solutions is about the occupier’s ability to limit commitment. A one-year lease is more flexible than a two-year lease, so on and so forth. With occupier uncertainty about why, where and when they should provide office solutions for their employees at an all-time high, you’d think landlords would be eager to offer high flex options in order to meet demand where it’s at. However, it’s difficult for landlords to provide the flex product, despite its potential to command premium rents and increase demand. Why? Because it’s expensive to build office space, and it’s difficult to design space that has broad residual appeal to a large swath of occupiers.
TenantSee Weekly: Educating vs. Selling
Selling is important. It’s what makes the world go round. But sometimes selling crosses the line and gets a little too close to misrepresenting or worse, lying. After all, there’s always been a healthy dose of deception built into selling. In sports, teams and athletes sell their opponents on the idea they’re going to zig when they in fact zag. Governments seek to sell a vision in order to successfully lead their people. Sometimes the vision is wrong, out of synch with what the people want. Look no further than China’s Zero Covid policy. Companies must sell their products and services to succeed. Startup founders must sell investors on the merits of investing in their companies. Buyers don’t want to buy an “OK” product or service. No one ever said, “…hey, let’s go with those guys, their product seems flawed but they’re really honest about it”. Much of what is sold is imperfect. Sellers have incentive to craft approaches that distract from imperfection while accentuating strengths. Even the salesman with a crappy product has to eat. It’s no wonder we’ve become skeptical. It’s essential to our survival. Storytelling is a form of selling. It often seems the best storytellers are selling the worst products. Sam Bankman-Fried of FTX and Adam Neuman of WeWork come to mind. My family loves the classic Christmas movie “Elf” starring Will Ferrell. There’s this great scene when his character, “Buddy”, first arrives in New York. He passes by a coffee shop with a sign in the window that reads, “World’s Best Cup of Coffee”. He sees the sign and runs inside full of excitement to congratulate everyone, much to their bewilderment.
TenantSee Weekly: Juiced Performance
Sometimes one need only look at the circumstances to determine the results are juiced. Barry Bonds, Lance Armstrong and this guy. Hopefully you’ve not been dieting on bull testicles and dried animal organs for the past couple of years striving to live your best “primal” life, only to be disappointed in the results. I’m no body builder, but at a glance, and absent any knowledge of this man’s history and supposed development of his physique, I’d instantly conclude one thing: juice.
TenantSee Weekly: 40% Office Availability: Why It's Possible and What It Means for San Francisco
40% Availability
The San Francisco office market consists of 86.3M sf. Presently 28% of the market is available for lease, including both direct space and sublease space, for a total of just over 24M sf. We’re on pace to finish the year with available supply of 30%. The trend in demand (downsizing) and the near certainty of continued macro-economic headwinds in 2023 make it likely we’ll add another 3% to 5% to available supply by the end of ‘23, bringing total availability as high as 35%. It’s too early to predict what 2024 will bring (hopefully a hockey stick graph showing increased demand for office space), but I believe it’s quite possible we’ll see available supply at or near 40%.
TenantSee Weekly: The Great Reset
Ever consider how odd it is that “great” is the adjective of choice for some of our most challenging times? The Great Depression, The Great Recession, etc. Reflexively, when I think about what’s happening in the office market, the reset that’s playing out all over the world, the first adjective that comes to mind is “great”. Sorry about that.
TenantSee Weekly: Flexing
Over the past couple of decades the long term office lease has become increasingly challenging for occupiers. Demand for space has always been cyclical, rising and falling with the economy, and technology has continued to make it easier for workers to be productive from anywhere. While shared space, or coworking solutions have been around for decades, the scale of the industry expanded rapidly during the period from 2010 to 2020, especially through the Softbank-funded expansion of WeWork. Coworking is a form of flex leasing that is characterized mostly by spaces that are broken into component parts, offering members shared access to services and amenities. The space between coworking and long term direct leasing of separately demised office space is a relatively new place in which a tenant can secure a flexible lease (shorter term of 6 months+) on a fully demised, prebuilt, furnished space which does not include managed services. This is the latest and perhaps most consequential form of flex leasing.
TenantSee Weekly: It's Time to Take Action
In 2020 most companies forced their workers to a fully remote posture. In 2021 companies started encouraging their employees back to the office, most with limited success. In 2022 this strained dialogue about return to office has continued. While some have sought to fully address the new realities of the workplace by developing and committing to an approach that both clearly addresses expectations for employees and supports these expectations with modifications to the physical workplace, many have chosen to communicate “soft” messaging about return to office while not making any changes to the physical office.
TenantSee Weekly: Suits, Ties, and the Office
I have a lot of suits and ties. The ties are folded neatly in a drawer that I rarely open. Some are solid, some have stripes, some have little animal prints. I also have a lot of suits. These are mostly tucked into the back of my closet. Oh, I have some expensive leather shoes in a variety of styles, as well. These, too, are stored in various states of disuse. I no longer wear this stuff (but for rare exceptions). The ties were the first to go. I stopped wearing them sometime around 2015/2016. At that time, I still wore suits and nice shoes, just no tie. Shortly thereafter, the suits were replaced by sport coats and slacks. These were still tailored, not casual. But then, at some point, everything became more casual. The nice leather shoes were traded in for the new style sneakers that everyone now wears, or Allbirds or some other more casual footwear. These days I may not even wear a sport coat. Vests are a nice option. They’re flexible and nearly always sure to fit in with the prevailing attire of the day. Plus they make me look sporty, or maybe techy. A little more like I get it (even though I probably don’t).
TenantSee Weekly: Tech: Big and Small
For decades the San Francisco office market was a unique and seemingly irreplaceable technology hub. The city had so many variables essential to startup tech success that companies believed they had to be here, regardless of the cost. Proximity to Stanford and UC Berkeley, the epicenter of venture capital on Sand Hill Road, the Silicon Valley - - - home to major tech headquarters, including Google, Apple and Facebook and the abundance of bright young tech talent that flocked here from all over the world to be part of the innovation economy. All this in one place. It was a compelling narrative (and true). The city’s beauty and appeal to younger tech workers was obvious. Like New York City was (and remains) for those seeking their fortune in finance, until fairly recently, if tech was your thing, you had to be in San Francisco.
TenantSee Weekly: Let's Exchange Financials
The price of San Francisco office space is mostly falling. Sure, there’s some outlier examples of premier view space where the price is stable, even increasing. But, on balance, we’re talking about a significantly declining market. A silver lining for occupiers who’ve otherwise endured a long period of limited supply and record high costs. Yet while on paper the cost of the market looks better, the effects of the downturn can (and will) render some landlords incapable of effectively running the building. Because most lease negotiations are set up as a sort of “David and Goliath” battle in which the tenant is David and the landlord Goliath, it’s not necessarily common for tenants to ask too many questions about a landlord’s financial position. Yet like the tenant, the landlord has many obligations under the lease, the performance of which require its financial health. Tenants must share their financials and often provide security mechanisms to secure their performance under the lease. This typically comes in the form of a letter of credit or security deposit. The landlord version of security for the tenant would be things like a self-help provision and/or an SNDA. Self-help enables the tenant to solve for issues the landlord is otherwise obligated to solve, but for which it does not have the capital to do so, by paying to have the work done and deducting the cost from Rent. The SNDA, or subordination non-disturbance agreement, is a legal document that protects the terms of the lease in the event a lender takes over building (e.g., the landlord defaults on the loan). These are examples of protective mechanisms against a failing landlord.
TenantSee Weekly: What's Possible?
When it comes to negotiating with landlords for office space, today the San Francisco market and many like it officially fall in the “…it doesn’t hurt to ask” zone. In this rare market space, occupiers have the luxury of translating their concerns as challenges for landlords to solve, or not. This includes many challenges that stood zero chance of being addressed (or even considered) in the years prior to the pandemic.
TenantSee Weekly: Market Leverage, Mass Psychology and the San Francisco Office Market
In the context of lease negotiations, counter parties seek to leverage market dynamics to maximize their advantage. For office markets, the primary dynamic being leveraged is that of supply/demand. When supply is scarce and demand is strong, the landlord counter party leverages scarcity to increase rents and reduce concessions. Alternatively, when supply is plentiful and demand is low, tenants leverage their options to lower rent and increase concessions. Basic stuff, right? Perhaps more interesting is the mass psychology that evolves around a marketplace which has experienced a prolonged run of one-sided leverage
TenantSee Weekly: Find Your People Then Build Them a Place
Every industry and company has unique labor needs. These needs can be synthesized into target demographic profiles which can be used to evaluate global markets in search of the best places to grow the business. Certainly there is more that goes into where a company elects to establish a presence than just the amount of available talent. Among other factors, companies might consider proximity to key clients, proximity to investors (e.g., venture capital), proximity to educational institutions graduating the target demographic, cost of living, cost of office space, government incentives, even proximity to competitors from whom talent may be poached. Indeed, discovering the best markets is a complex undertaking.
TenantSee Weekly: Why We Write
Why do you get these weekly communications from us? What is TenantSee? We figured it’s time to explain a few things.
Let’s start with the second question first. TenantSee is the name we’ve given to our approach to tenant real estate services. We chose this name because we believe its important for tenants to see more. To see more what, you may ask. To see more of the big picture and the little details that make for better real estate outcomes. To see more of the data and analytics that drive good decision making. To see more transparently, the specific strategies we employ to maximize value. To de-mystify good tenant real estate. For us, the traditional approach to tenant advisory was opaque and failed to get some basic things right, exposing occupiers to an unnecessary knowledge deficit when compared to the landlord counter-party.