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: Cap Stack Woes

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TenantSee Weekly: Cap Stack Woes

Recently, we have written about the importance of understanding the landlord’s “cap stack” (capital stack, meaning equity and debt).  Understanding the cap stack that guides a landlord's decisions is more than just a business detail — it's an integral part of the current real estate landscape. Today, there is a massive chasm between what many owners can afford to do in the current market and what they need to make a deal accretive or even break-even, given the capital stack realities of the underlying market.  In short, many owners simply cannot afford to transact at market. Why? Two primary reasons:

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TenantSee Weekly: Q2 2023 The Tenant's Perspective

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TenantSee Weekly: Q2 2023 The Tenant's Perspective

Occupiers continue to add sublease space to an already saturated market, and to downsize their occupancy requirement at lease expiration.  Market participants, including investors, are now accepting as fact the new ways of using office space will result in less demand for their product.  During the first couple of years of the pandemic, investors, enjoying record high levels of occupancy and strong cash flow, naturally chose to believe in a future narrative that included a rebound to 2019 demand levels.  Their optimistic (if not realistic) outlook had them waking up in 2023 with 7m to 10m square feet of demand and 4% vacancy.  But it’s now clear this is not how things are playing out. 

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TenantSee Weekly: A Game of Confidence

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TenantSee Weekly: A Game of Confidence

Commercial real estate, in all its many facets, has always been a confidence game.  Developers make big financial bets their building will lease as they and their investors spend millions of dollars to build it.  Then, they confidently sell the product, pitching its values to prospective occupiers against the backdrop of fluid markets.  Ideally, they’ve underwritten the market correctly and it moves in their direction, meaning supply of comparable space diminishes, making the product more valuable.  But sometimes the market is moving away from them, forcing them to maintain their confidence despite dwindling prospects for success.

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TenantSee Weekly: Pandora's Office: Part IV - Wearable Work

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TenantSee Weekly: Pandora's Office: Part IV - Wearable Work

Today, we examine the transformative role of Artificial Intelligence (AI) and automation in the workplace.  AI will have broad impacts on work in the information economy, both in how and where work is done.  While it's true AI and automation could lead to significant job displacement, it’s also true that AI will create new jobs.  Studies suggest that AI will affect job transformation more than destroying jobs, altogether. It automates parts of jobs, not whole jobs. The nature of some roles may change, requiring a focus on skills that AI can't replicate – creativity, critical thinking, emotional intelligence, and complex problem-solving.  For those at the top of the food chain, this shift will make jobs more strategic and rewarding, enhancing employee engagement and productivity.  Yet jobs at the lower end of the white-collar spectrum will be susceptible to displacement.

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TenantSee Weekly: Pandora's Office: Part III - Decoding Productivity

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TenantSee Weekly: Pandora's Office: Part III - Decoding Productivity

Productivity. The backbone of a company’s success. For decades, productivity has served as a key determinant of growth and profitability. Measuring productivity, however, is a different beast. Amid the shift towards remote working, understanding productivity dynamics in both office-based and work-from-home environments has become increasingly pertinent.  Unfortunately, the idea of productivity has become one of the battle grounds on which the fight over RTO is being waged.  Too often, companies and employees point to misleading and/or ill-defined measures of productivity as evidence their view is right.  It’s important to be fact-based and sober in assessing productivity.

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TenantSee Weekly: Pandora's Office: Part II - The Psychology of Workspace

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TenantSee Weekly: Pandora's Office: Part II - The Psychology of Workspace

One of the positive outcomes emerging from a more holistic contemplation of work is a better understanding of how the behavioral and design elements of the workplace impact well-being, the psychology of the workplace.  Historically, the physical office and the culture that accompanied it, was largely a one-size fits all, top-down dictate that employees were not encouraged to question.  While this one-dimensional approach may have been easier to conceive, it had the detrimental effect of failing to adequately support some percentage (maybe a large percentage) of the employees.  But it’s a new day, a time when we have increased awareness of neurodiversity and sensory processing, an opportunity to provide optionality in support of the broad spectrum of employee (human) differences.  It’s a moment when we can more fully contemplate the psychology of the workplace.  Indeed, the more thoughtful we are in creating workplaces that cater to diverse employee needs, the better these environments will serve the organization.

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TenantSee Weekly: Pandora's Office: Part I - Cost vs. Value

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TenantSee Weekly: Pandora's Office: Part I - Cost vs. Value

In this first issue of our series, “Pandora’s Office”, we explore a fundamental paradigm. Cost. Expense.  Historically, for most companies, this has been among the top factors defining how office space was chosen.  In all be the rarefied air of tech and high finance, companies must generally be smart about allocating a portion of their budget to real estate spending.  But when the emphasis veers toward achieving the lowest possible cost, the result is often a suboptimal facility, an investment that yields a limited return.

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TenantSee Weekly: Pandora's Office

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TenantSee Weekly: Pandora's Office

In the end, there was hope.  We’ve been thinking lately about the myriad challenges occupiers now face in defining workplace.  For many leaders, addressing this topic is akin to opening Pandora’s Box.  Indeed, there’s a lot at stake and more ways to get it wrong than right. 

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TenantSee Weekly: The Case for Diversity

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TenantSee Weekly: The Case for Diversity

Shawn Achor’s excellent book, “Big Potential” references a study by Alison Reynolds and David Lewis detailed in the Harvard Business Review which measured the performance of teams based on “cognitive diversity”, or the spectrum of thinking styles among the team members.  It was found that more diverse teams consistently outperform their more homogenous counterparts.  Achor notes that, in many cases, despite the benefits of diversity, corporate leaders instead favor like-mindedness among team members. This tendency stems from the misguided belief that diversity breeds discord, hindering the team's overall function. Herein lies a fascinating truth: diversity indeed catalyzes friction, but it's this very friction that fuels better outcomes, sparking innovation and creativity.

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TenantSee Weekly: The Price of Innovation

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TenantSee Weekly: The Price of Innovation

In San Francisco, there’s not much standing between a near-term future in which office vacancies spike to 40% or higher.  By not much, we mean demand for office space.  What’s interesting is the cause.  Many focus on the battle between employer and employee in which employers want the employee back in the office and the employee wants to work remotely.  But it’s not that simple.  Post-pandemic, employees (especially younger generations) are more inclined to embrace the benefits of technology which enable work to be done from anywhere and make it less compelling, even illogical, to commute to the office.  No, this isn’t just about whether you like or don’t like being in an office.  It’s about the ways in which tech has advanced to change work and generational differences in the adoption of and comfort with such technologies.  Technology changes things.  It’s changing the construct of white-collar work, and in the midst of such change there will be winners and losers.  The fate of office markets, indeed of the office building as a product, hinges not on resolution of the remote work debate; but, rather, on the pace at which we adopt existing technologies and innovate new ones

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TenantSee Weekly: AirOffice

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TenantSee Weekly: AirOffice

Have we reached the point at which the office product might be consumed like the hotel, or the homes and rooms rented on platforms like Airbnb?  We’re certainly moving in that direction. Companies like Upflex (a Cushman & Wakefield partner), The Instant Group and others aggregate global facilities for easy access via technology apps. This transition resonates with the growing demand for flexible, location-independent work solutions, allowing employees to effortlessly book an office space wherever required.  I’m in Denver, I go to my app, enter my requirements (much like I would do on Airbnb) and, voila! my space is ready. The question is: are we ready to redefine our workspace consumption in line with the on-demand economy?

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TenantSee Weekly: Unusual Times

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TenantSee Weekly: Unusual Times

Want to know how strange things have gotten in the San Francisco office market?  An empty office building now costs less on a per square foot basis than it will cost to build new interior space in the same building.  Cushman & Wakefield’s Project Development Services team has recently released an Office Fit Out Cost Guide (report is here) which indicates the average cost to build new space from shell in San Francisco stands at $222/SF.  Now consider that a building like 350 California Street is rumored to be getting buyer interest at around $200/SF. 
 

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TenantSee Weekly: Unicorn Farming

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TenantSee Weekly: Unicorn Farming

Unicorn farming is risky business.  I should know.  For the past 30 years, I’ve lived and farmed here on the world’s biggest unicorn farm called San Francisco.  Growing unicorns requires massive investment.  Care must be given almost exclusively to fueling their mythical growth.  They’re highly susceptible to infection by ethics, laws, economic reality, truth and any number of other real-world impediments to growth. 

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TenantSee Weekly: Solve for Experience!

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TenantSee Weekly: Solve for Experience!

US office markets are not healthy.  The symptoms include reduced demand due to remote work, eroding rental economics due to mounting vacancy and broken capital stacks.  The pandemic was the catalyst, but technology is the true source of the suffering.  Technology is where many aspects of white-collar work are now done.   I asked Chat GPT to define the office and then I asked it to define the office in 1990.  Here’s how it responded: 

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TenantSee Weekly: Employee, Save Thyself

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TenantSee Weekly: Employee, Save Thyself

One of the more fascinating aspects of the conversation around where, when and how white-collar workers work is how it breaks through the guardrails of societal norms.  The catalyst for such thinking was the pandemic.  People are quick to point out that technologies have been around for decades which enable people to work from anywhere, and that many workers preferred remote work long before the pandemic - - - it’s also true some people preferred not to work even before the pandemic.  Yet absent the Black Swan Event that was the pandemic, we simply would not be having this conversation about work.  It takes a powerfully disruptive force to cause so much change. 

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TenantSee Weekly: The Restructure

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TenantSee Weekly: The Restructure

In markets like San Francisco where availability stands at ~30% and continues to rise, landlords of all stripes have either experienced or are poised to experience gaping holes in their occupancy.  At the same time, occupiers having remaining term and paying pre-pandemic rents (meaning rents that are way above current market) are watching the building bleed tenants and seeing the landlord market comparable space at a substantial discount to their in-place cost with massive concessions.  This is the perfect environment for restructure transactions.

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TenantSee Weekly: Why Are You Doing That?

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TenantSee Weekly: Why Are You Doing That?

We’re excited to promote our upcoming event at Café TenantSee, “Why Are You Doing That?”.  For the uninitiated, Café TenantSee is an intimate quarterly in-person event designed to provide highly relevant, useful insights and perspectives for office occupiers.  The café opens at 8:45 am on Tuesday, April 25, 2023.  Come and order a specialty coffee or tea drink from our expert baristas.  Light breakfast is also provided. Our program runs from 9:30 to 10:30.  Unfortunately, our café is small.  We can only accommodate 50 attendees, so space is limited.

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TenantSee Weekly: A Few Thoughts on the State of San Francisco Office Market

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TenantSee Weekly: A Few Thoughts on the State of San Francisco Office Market

We normally reserve discussion of market fundamentals for our Quarterly market updated, “The Tenant’s Perspective” (which we release just after the close of the quarter).  However, as we near the close of Q1 2023, there are several narratives playing out which we deem significant in shaping the near and mid-term market dynamic.  We think it’s important to share these now.

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TenantSee Weekly: What Happens When...

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TenantSee Weekly: What Happens When...

This week we’re exploring what happens when companies define their own bespoke approach to the office vs. when they default to their pre-pandemic office construct, despite significant changes in how they work.  To date, many small to mid-size organizations have chosen not to formulate a definitive new approach, instead relying on the old office design and a loosely defined hybrid approach.  In a time when the mere discussion of corporate office policy has the potential to trigger highly negative reactions among employees, it takes courage and leadership to advocate a new plan that reflects a vision for the future.  Understandably, as we’ve crept out of full pandemic mode and begun to look to the future, many companies have been uneasy about taking a definitive position.

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TenantSee Weekly: It's Tricky

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TenantSee Weekly: It's Tricky

Despite being awash in available space, the San Francisco office market can be tricky to navigate.  By now, everyone knows the market is distressed.   When companies explore leasing options, they do so with the expectation they will be able to trade up for better quality space at substantially reduced pricing; or, they expect to significantly decrease the cost of their existing space with a lease extension.  These are reasonable expectations, yet they can be elusive for several reasons.