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.
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.
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.
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.
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.
This San Francisco office market report is provided
compliments 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.
For many companies, the process of finding new office space and executing a lease can be daunting, even with the help and insights of a broker familiar with the market. Traditionally, the brokerage and transaction process has remained largely the same over the years, with tenants relying on the knowledge of others in the industry — brokers, landlords, contractors — to help them make the most informed decision when selecting a new property. For Greg Fogg, one of the founders of TenantSee alongside Samantha Low, this was a fundamental problem for tenants seeking space. Those at TenantSee realized many companies started their search for space with little direction and few established parameters despite the myriad of service lines offered by brokerage firms, making the entire process more time consuming and costly. From these observations TenantSee, a tenant real estate product offering, was born in an effort to create a new brokerage-based service model, allowing tenants to make more informed decisions before they sign a lease.
The playbook for speculative office development hasn't changed in years. It centers on quality location, architecture and project amenities; all viewed through the lens of cost to build and projected return on investment. Attention is paid to design details relating to the floor plate, core areas, building systems, project amenities; and, generally, all facets of the core and shell. But the analysis stops at the tenant's front door. At that point, landlords tend to shift their focus to market-based estimates of the total tenant improvement contribution necessary to attract tenants. Today market factors, notably, co-working and prop tech, have emerged that create an expectation among occupiers that their occupancy can ultimately be understood in terms of data. This trend will continue.
Traditional “tenant representation” is heavily influenced by procurement strategies – strategies that focus on lowering cost. The simple idea? Create competition among a subset of landlords for the tenancy. The advisor’s value is in how low it can drive down the cost of space. But office space is more than an expense. It’s an investment that impacts productivity (revenue). Comparatively small percentage increases in productivity are worth much more than large percentage decreases in cost.
This San Francisco office market report is provided
compliments 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.
