TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

TenantSee Weekly:  Modern Workplace Planning:  Solving for Experience  Part VI:  Negotiating the Lease

Leases vary by building, by market, and by market circumstances.  In most major metros, when dealing with larger buildings, the lease document is sophisticated and complex, addressing a broad range of variables that will have a material impact on the occupier’s experience at the building, as well as its cost of occupancy.  If you’ve done a good job negotiating the letter of intent, you should begin the lease negotiation phase from a position of relative strength.  However, even when the letter of intent is fully maximized, there’s still a lot to negotiate in the lease.

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part V: Negotiating the Letter of Intent

TenantSee Weekly: Modern Workplace Planning: Solving for Experience  Part V: Negotiating the Letter of Intent

The letter of intent (“LOI”) is a non-binding document (although in unique circumstances they can be binding) which captures the terms and conditions upon which the parties have agreed and becomes the basis for a legally binding document (the lease).  The best LOIs are highly detailed and cover a wide range of topics from rental economics to flexibility mechanisms (like expansion, contraction, termination, and extension options) to operating expense inclusions and exclusions, and much more.  The occupier’s ability to include more items in the letter of intent varies somewhat by the circumstances of the market.  In tight markets like San Francisco circa 2019, landlords could get away with limiting the level of detail covered in the LOI.  Why would a landlord want to limit the LOI in this manner?  Because they gain leverage.  Most tenants don’t enter into the lease negotiation until late in their market process, meaning they’ve burned through a lot of the project schedule and will soon need to transition to design and construction in order to get the space ready on time.  In short, limiting the terms of the LOI is a way for the landlord to jam the tenant on timing, forcing them to be more conciliatory to preserve schedule.  In this current environment, nearly all tenants can enjoy the benefits of expanding the content of the LOI. 

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part IV: Implementing an Effective Market Process

TenantSee Weekly: Modern Workplace Planning:  Solving for Experience  Part IV:  Implementing an Effective Market Process

You’ve identified the purpose behind your physical space needs, you’ve created a thorough project budget and schedule, and you’ve developed the right strategy.  It’s now time to implement a market process. 
 
What is “…a market process”?  In the context of office leasing, market process is how you engage the market.  It ties to your strategy, with sensitivity to the objectives you seek to accomplish.  The market is where you implement your strategy, where you take it from theory to reality.
 

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part III: The Right Strategy

TenantSee Weekly: Modern Workplace Planning: Solving for Experience  Part III:  The Right Strategy

Once you’ve established the purpose of your physical workspace, and given careful thought to budget and schedule, it’s time to develop the right strategy. This is a vital step prior to market engagement. Good strategy is not always obvious.  At a minimum, any effective real estate strategy will include simultaneous assessment of multiple deal scenarios. Why would this matter? For starters, negotiation outcomes are not known.  At the beginning of the process, the favored outcome may be to stay in the existing space. However, as the process evolves over multiple rounds of negotiation, we often find that things change in ways that may cause the desired outcome to shift. For example, when the existing landlord offers terms that are materially less favorable than those achievable through relocation. 

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part II: Budget and Schedule

TenantSee Weekly: Modern Workplace Planning: Solving for Experience  Part II: Budget and Schedule

Last week we established the importance of defining “the purpose” behind your workplace, especially those elements of the workplace which are expressed through physical spaces.  This is the first (and vitally important) step companies must take before they begin a real estate process (e.g., the process of acquiring space).  Once established, the next step is to think carefully about budget and schedule.  These considerations, much like the discussion of purpose, are greatly aided by working closely with your real estate advisor.  Here, again, companies must shift how they think about the engagement of real estate advisory services.  Having the right real estate partner on board from the very beginning facilitates access to critical data and insights.  The process of properly defining the budget and schedule are both areas in which the advisor can play a key role. 

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part I: The Purpose

TenantSee Weekly: Modern Workplace Planning: Solving for Experience   Part I:  The Purpose

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: Where Does It Hurt?

TenantSee Weekly:  Where Does It Hurt?

Office lease negotiations typically cause pain for one party because leverage is rarely balanced such that the outcome is a true win/win.  Sure, the actual winner will suggest the other party also won (after all, they got the deal), but sometimes winning feels a lot like losing.  That’s OK.  Markets ebb and flow.  What matters is that you know how you’re hurting the other party.

TenantSee Weekly: This, or That?

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: The Office as Hotel

TenantSee Weekly: The Office as Hotel

I participate in a lot of “conversations” on LinkedIn in which people argue that office buildings should be as flexible as hotels.   I love to explore the possibilities, the idea the office can be something different, something better.  But sometimes these conversations are so detached from reality it makes my head hurt.

TenantSee Weekly: Successful Negotiating Strategies for Office Tenants

TenantSee Weekly: Successful Negotiating Strategies for Office Tenants

Many business executives know how to negotiate.  Indeed, it’s a vital skillset essential to advancement in nearly all careers.  But not all negotiations are equal.  Negotiating leases on behalf of office tenants, for example, is a specialized undertaking.  As with all negotiations, successful tenant lease negotiations are highly correlated with understanding the motivations of the counterparty.  This means knowing everything about the landlord, including the equity and debt positions, the investment thesis, the leasing dynamic at the building (vacancy, lease rollover, etc.), the value of any recently completed comparable lease transactions in the building and in the market, and the overall market dynamic.  These factors are fundamental to assessing leverage.  Yet even when these basic elements are in place, the act of exercising leverage also requires special skills. 

TenantSee Weekly: The Negative Deal

TenantSee Weekly:  The Negative Deal

Investors invest in office buildings to generate a positive return on their investment.  Return is created in 2 primary ways, one is through ongoing profits generated from the individual leasing transactions completed within the project, and the other is through financing activities (taking on debt which allows the investor to pull equity from the investment or selling the asset).  This TenantSee Weekly is focused on the first of these 2 scenarios, the one in which the landlord seeks to create positive cash flow through its leasing activities.

TenantSee Weekly: Conflict in Tenant Advisory

TenantSee Weekly: Conflict in Tenant Advisory

Years ago, I was a partner at The Staubach Company, one of the industry’s most prominent tenant-only advisory firms.  The Staubach Company was a highly ethical business, full of skilled tenant advisors.  One of the firm’s core value propositions was that its advisory services were free of conflict.  The conflict narrative is powerful in how it seemingly separates the conflict-free advisor from most other brokerage firms which serve both occupiers and landlords.  Tenant-only firms often differentiate themselves with statements like, “…when you hire us, you never have to be concerned that we’re beholden to a landlord who pays us millions of dollars each year in fees”;  or “…we fight harder for you because we’re not concerned about our relationship with the landlord”.  To the unknowing audience, these statements can make it seem that all so-called “full-service” firms (those with diverse practices) are incapable of providing ethical, conflict-free occupier advisory services.  When you consider the spectrum of tenant-only firms is very small, as a sales tactic, this is a brilliant approach in that it significantly narrows the competitive landscape, making it more probably the tenant-only firm will be hired. 

TenantSee Weekly: New Year, More Leverage

TenantSee Weekly: New Year, More Leverage

n March, we’ll hit the 4-year anniversary of the date when offices all over the city first shut down due to the pandemic, a time when just 5% of the city’s office inventory was available.  Today, despite having more office workers now than we had then, just under 30m sf of our total supply sits vacant, and even more than that is available.  Citywide average asking rental rates declined 17.5% during this period.  We expect this trend to continue, possibly to accelerate in 2024.  Sublease supply is pulling rates down as companies increasingly view any recovery as a net positive.  There’s little on the near-term horizon to suggest we’ve begun (or will even begin in 2024) the long march toward recovery.  The market dynamic is considerably worse than that which we experienced in the dot-com recession when it took 63 quarters to get from bottom to peak.  We’ve not yet reached the bottom. 

TenantSee Weekly: TenantSee Team San Francisco Market Predictions: 2024

TenantSee Weekly:  TenantSee Team San Francisco Market Predictions: 2024

Let us lend our TenantSee perspective to the coming year.  Despite green shoots from 2 large AI sector leases (Open AI and Anthropic), demand for San Francisco office space remained low throughout 2023, yielding 4 more quarters of negative net absorption.  We finished the year with vacancy at >35% - an historical record.  The market is under significant stress, creating sizable opportunities for occupiers.
 

TenantSee Weekly: Translating the Lease

TenantSee Weekly: Translating the Lease

Recently, we completed a lease for a client in a small San Francisco building.  The transaction was negotiated to provide our client with a tenant improvement allowance, and the right to manage their construction.  Because the client is a design firm, this approach suited them well.  They understand design and construction and can leverage relationships to mitigate cost.  The ownership of this building is not an institution, its management team lacks the sophistication you would otherwise see with professionals working for larger institutional owners.  The lease provided the landlord with the right to approve the plans prior to construction, but it notably lacked a specific mechanism for communicating such approval.  Our client provided detailed plans.  They received a few minor comments/questions to which they responded promptly.  Otherwise, the landlord agreed to the project schedule and let them commence their construction – implicit approval.  During the construction, the client invited the management team to attend weekly meetings, to walk the space and generally sought to keep them informed (under no obligation to do so).  Despite a few bumps along the way (the building had non-compliance in a few areas and a small amount of hazmat was discovered), the project was successfully completed.  However, after moving into the space, the landlord sent a letter stating numerous elements of the construction had been completed without its approval, and the space must be restored at the end of the lease term (an undertaking which would cost hundreds of thousands of dollars).  Naturally, our client was concerned.  Thankfully, they sent us the letter and asked for our guidance.

TenantSee Weekly: The Great Reset and Rent

TenantSee Weekly: The Great Reset and Rent

The so called “capital stack”, the money investors and lenders have put into an office building investment, has recently been the subject of much discussion in markets like San Francisco.  In many cases, the stack is broken, meaning the investor has lost all its equity and the value of the lender’s position is compromised, as well.  We’ve reached a point at which these financial partners have concluded there is no path forward for the investment, leaving only one option:  sell.  This is how the Great Reset begins.  It’s exemplified in the sale of buildings like 350 California Street, an asset that would have traded in the $800/sf+ range prior to the pandemic, but which traded in the $250/sf range this year. 

TenantSee Weekly: Wayne Gretzky and the Young Generation

TenantSee Weekly:  Wayne Gretzky and the Young Generation

Wayne Gretzky attributed his success, in part, to his ability to “…skate to where the puck is going, not where it’s been”. This was among the skills that made him a great hockey player.  This same skill can help companies and individuals be more successful in business.  Yet it’s not what comes natural to us.  Have you seen young children play hockey, soccer, or similar sports?  A child’s first instinct is to go where the puck or the ball is, resulting in a highly ineffective throng of players.  In business, it can also be hard to go where others are not.  It requires instinct, thorough analysis and understanding of a market; and, most importantly, confidence to stay the course. 

TenantSee Weekly: Reconnecting Work to Place

TenantSee Weekly:  Reconnecting Work to Place

Lately I’ve been contemplating Enrico Morreti’s 2012 book “The New Geography of Jobs”.  In it, Morreti makes the case that urban winners and losers are determined, in large part, based on the extent of geographic concentrations of high-tech employment.  San Francisco was perhaps the most prominent example of the thriving economic ecosystems that can emerge when tech employment is aggregated in one region.  I believe Morreti’s core thesis remains correct.  But his ecosystems are more fragile than we may have anticipated.  In fact, it seems they can unravel in much less time than they took to build. 

TenantSee Weekly: Social Facilitation

TenantSee Weekly: Social Facilitation

Here’s how ChatGPT defines social facilitation: “Social facilitation is a psychological phenomenon that refers to the influence of the presence of others on an individual's performance of a task. It describes how the mere presence of other people, whether they are spectators, colleagues, or competitors, can affect an individual's behavior and performance.”  In 1898, Indiana University’s Norman Triplett studied cyclists to determine differences in performance when racing other humans vs. the clock.  He found, “…bodily presence of another contestant participating simultaneously in the race serves to liberate latent energy not ordinarily available…”  I’ve experienced my own version of this in training for and running marathons.  Without fail, I was always able to run faster and farther when in the presence of others.  It turns out we have the capacity to do better, to do more, but reaching that next level is not easily accomplished alone.

TenantSee Weekly: Timing the Downturn

TenantSee Weekly: Timing the Downturn

Since the pandemic, the cost to lease San Francisco office space, but for the most premium segment of the market, has steadily declined.  The pace of decline is beginning to accelerate as more landlords capitulate to unprecedented vacancy and reduced demand, just as more companies are (finally) taking a longer-range approach to workplace. For occupiers, this provides a welcome respite from the relentless effects of a decades-long dynamic in which the office market was both too tight and too expensive.