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.
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.
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.
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:
This is a common question for tenants looking to negotiate lease extensions in the current market environment. Intuitively, they expect their occupancy cost to decrease due to the effects of the pandemic (e.g., higher vacancy, less demand, etc.). However, they often fail to realize the point of impact, or the base values on which market softness has its affect, are values that were in place just prior to the pandemic, not values from 5+ years ago when they signed the original lease…
In his book by the same title, Nassim Nicholas Taleb writes about the “hidden asymmetries in daily life”. In Chapter One, Taleb writes, “Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him”. Taleb’s book makes me think about the business of tenant advisory. I can’t think of a business that fits more squarely into this narrative, especially here in the US where tenant advisors are paid by the landlord, not the tenant they advise.
Occupiers often think pricing for office space is one dimensional. Sure, they understand that different quality buildings and spaces translate to different prices. But pricing is actually complex and dynamic, based on many variables, including specific owner motivations. And motivations vary significantly from one owner to the next.
This San Francisco office market report is provided compliments of Samantha S. Low and Greg Fogg, Co-Founders 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.
Nope. You can’t tell me my space is worth more now than it was pre-COVID. you can’t tell me there’s limited supply. You cannot tell me the market isn’t going to crash. Aren’t we still in the midst of a global pandemic? Didn’t your research team just publish a report indicating vacancy is north of 20%? Aren’t companies cutting back on the amount of space they lease? Aren’t landlords eager to negotiate, at any price, in order to keep their tenants? You can’t tell me we’ve paid rent all through this pandemic even though we’ve barely used our space, and now, when our lease is expiring, we’re facing costs that are comparable to or worse than those we would have faced before this mess ever happened. No way.
There’s always been a large gap between what companies need from an office and what the market offers. Over the past decade, as the coworking market rapidly evolved, landlords were forced to rethink customer experience, resulting in an “amenity war” that has made many office buildings more valuable and attractive to occupiers. But despite new lounge spaces, high quality exercise facilities and other project-based amenities, the nature of the office lease commitment in major US metros has remained unchanged. The product is still designed to lock in tenants for the longest possible term at the highest possible price, while minimizing the amount of capital the landlord must spend to win the tenant. Addressing the gap between occupier and landlord objectives may be what’s next in the evolution of the office.
Coworking, hoteling, benching, cubicles, private offices, phone booths, all-hands and collaboration space, game rooms, food service, sit/stand desks, hybrid, remote, exercise facilities, outdoor space, technology…the way we work has been rapidly changing for the past decade. The pandemic merely accelerated these changes.
Wit all the news about the high vacancy rate and ongoing uncertainty around return to office, companies beginning to explore the San Francisco office market expect to select from a wide range of site options and to realize substantial savings over their pre-pandemic lease costs. yet for tenants seeking certain types of space, the market experience is decidedly different, characterized by limited options and relatively modest levels of landlord concessions. Why?
Habits dictate so much of our behavior. This past week I’ve been returning to my office. Cushman & Wakefield has a beautiful office on the 23rd floor of a downtown high-rise. My personal space there affords me a view of the San Francisco bay. I have every reason to rush back to the office - not the least of which is that helping companies lease office space is my business.
For over a year, most companies have survived with limited or no use of their office space. Now that the pandemic is beginning to subside in the US, office occupiers are planning a return to office. Many are planning to modify elements of their space usage to meet the changing demands of their employees. The most common approach is the hybrid office wherein employees have the flexibility to use the office on a periodic basis to fulfill specific work-related needs. In the hybrid office, employees can choose to gather for team collaboration, for culture building or client facing events/meetings and to secure quiet “head down” space for work they may not be able to accomplish at home. On the other hand, employees have the flexibility to choose to work from home or remotely at least some of the time.
San Francisco Bay Area office occupiers are entering one of the best negotiating environments since the dotcom crash of 2001. Yet benefiting from this market is less straight forward than in past downturns because of uncertainties around how to plan post-COVID occupancy. Getting your real estate “right” requires a level of pre-planning not typically associated with the acquisition of office space. The first question you should ask is not where but why. As in, why have an office?
This San Francisco office market report is provided compliments of Samantha S. Low and Greg Fogg, Co-Founders 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.
To our clients and loyal followers…In a departure from our normal practice, we’ve chosen to write a letter to close out what has been a most unusual year. With respect to office space, it’s no stretch to describe 2020 as the most impactful year of the past century. What changed? In a word: everything.
This San Francisco office market report is providedcompliments of TenantSee. TenantSee is a tenant realestate product combining a team of subject-matterexperts with powerful technology to make tenantreal estate smarter, faster and better. Our report isintended to provide you, the tenant, with meaningfulinsights, not raw data.~
The Covid-19 pandemic is not only the most significant public health challenge of our time, it is also massively disrupting the way we live, socialize and work. While corporations navigate a rapidly changing business landscape, they’re also forced to solve for new operational challenges they’ve never seen before. This is a highly complex time. Among the most significant challenges is that of creating optimal workplace solutions that foster employee health and wellness, are sensitive to the differentiated employee needs and maximize employee engagement/productivity.
