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?
Bay Area, Commercial Real Estate, Op-Ed
greg fogg
TenantSee Weekly: I Digress...

A little AI distraction to cheer your day (and relieve us of yet another discussion about workplace). Ever wandered through the streets and felt like you've stepped into the future? With their undeniable presence here in San Francisco, the driverless car is quickly becoming the most prominent representation of AI in our daily lives. If you spend any time in San Francisco neighborhoods, you can’t miss them. The other day, as I chatted with a neighbor, I counted 6 autonomous vehicles casually cruise by our front door within a span of 10 minutes. Intriguing, right? And today, in a twist of irony, I was held up by one. Blocked by a double-parked UPS truck, the driverless car hesitated, unsure about navigating into the lane of oncoming traffic. Of course, all the drivers in the opposing lane weren’t too keen to make space for the driverless car, as one normally would (or at least the more decent among us would) for a human-driven vehicle. Hence, we waited.

TenantSee Weekly: I Digress...

Op-Ed

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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: 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: Mo Data Mo Better

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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.

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Market Outlook Q3 2021 - Tenant Perspective

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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.

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TenantSee Weekly: Who's On First

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TenantSee Weekly: Who's On First

View this email online.

Forward to a colleague

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.

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TenantSee Weekly: Rental Rate: A Poor Proxy for Value

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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:

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TenantSee Weekly: Market What?

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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.

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

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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?

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TenantSee Weekly: Why Institutional Investment Keeps Rents High

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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.

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

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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.

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TenantSee Weekly: A Level Playing Field

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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.

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TenantSee Weekly: Less Space, More Uncertainty

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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: