Market Insight Editorial & Advice to Tenants: 1Q2000
In this Issue:
Mihalovich Partners has been busy representing several stellar tenants in San Francisco Bay Area markets:Wilson, Sonsini, Goodrich & Rosati. New San Francisco office, to open at One Market Plaza in July. See http://www.wsgr.com .
RiverSoft, Inc. New San Francisco office, opening at Embarcadero Center in July. Their U.S. headquarters for interventionless network management software, called OpenRiver. See http://www.riversoft.com
Revbox, Inc. New Emeryville office, opening in May. The warranty business will never be the same. See the new paradigm at http://www.revbox.com
Experts-Exchange.com. New San Mateo office, now open. Experts-Exchange has registered over 40,000 experts, ready to help you address any of your most complex questions. See http://www.Experts-Exchange.com
Addwater, Inc. New and expanded offices in San Francisco. Addwater keeps growing its business—web strategy; branding; environmental design; consumer behavior expertise. Watch them sizzle at http://www.addwater.com
The flow of venture capital into start-ups and other growing companies appears to be outpacing the rise in rental rates, by a significant margin. Tenant demand throughout the San Francisco Bay Area continues at rates never before witnessed. Landlords’ expectations, at least in this part of the country, are that next week’s deal must meet new and better criteria than deals done literally the week prior. Tenants, of course, fuel the fire by bidding up rates and terms well over “asking” terms—some offering warrants and huge letters of credit.
Wired.com (http://www.wired.com) picked up the stock topic. Check out Joanna Glasner’s article: “Put Up Stock to Set Down Stakes”, where Mihalovich Partners is quoted.
In the world of low single-digit vacancy, opportunists are everywhere. Dot coms pound the new availabilities on the very day the listings are posted. Yes, landlords are confused by all the attention. Demand appears many layers deep at their doorstep. When should they stop shopping for a new tenant? How far should they push rates? How much equity in your company can they extract in exchange for simply providing office space at “market rates”? We are going beyond leveraging tenants with expensive rent; paying for most of the interior improvements; and putting up exorbitant security deposits and letters of credit. Tenants are paying to make base building renovations for buildings they do not own, including long term capital improvements (updating building systems, restrooms, common areas, technology infrastructure, etc.) which heretofore were always improvements found on the landlords’ side of the ledger.
It is difficult to fathom a more strenuous market dynamic than at present. But then it is unworkable for us to bet against the inertia of an Internet driven economy and the dearth of venture and personal capital available to fund great new ideas and technology. We don’t see an unraveling of the office market as a result of failing B2C businesses, as intimated by a recent Barron’s article. In all due fairness, however, we didn’t envision the tidal wave of the last few years of tenant demand. Stay tuned. Nothing is more fascinating.
Taking into consideration all of the up-front costs to move, build new space, get wired, buy furniture, hire like crazy and provide bonuses to offset extraterrestrial home prices, tenants have the honor and privilege of handing landlords enormous deposits (cash/security deposits, letters of credit, or combinations thereof) to lock down space options. Competition for space is stacked deep in dot coms, meaning that traditional, non-VC-backed tenants such as law firms, accounting firms, ad agencies and other professional services companies are having a difficult time enticing landlords to select them in the space beauty contest. Sure, there are a handful of landlords who refuse to do business with dot coms at any price, but these landlords don’t make the market. What kind of money is involved?
During the past 12-18 months landlords’ expectations were that incoming dot coms would secure ALL of their out-of-pocket expenses, such as tenant improvement allowances, base building improvements (restrooms upgrades and other code-necessitated changes), broker fees plus some interest factor. As the markets tightened further, however, even where no landlord allowances have been given, tenants have been forced to commit huge sums to deposits. Now we see some landlords asking for 12-18 months of rent PLUS deposits to cover landlord costs. If rent is $60 per square foot per year, a tenant may have to post a $60-$90-$120 per square foot deposit! Once again, this is the market’s way of ensuring only the most platinum credit, cash-rich tenants survive—or perhaps the most desperate, risk-taking tenants.
Let’s be clear on at least one thing: Brokers are not having an easy time in this tight marketplace. Period. Positioning our clients so that an owner will immediately be well informed about the company, its financial wherewithal, clients and references, executive team, partners and backers is no small chore. Our clients need services from other team members, too, such as architects, contractors, telecom connections, furniture people, etc. Your broker should be able to introduce you to vendors (a) who are really and truly available, since business is booming and few who are worthwhile aren’t up to their eyeballs in work; and (b) who can take the ball and run with it, no matter what type of building or space you pursue. Once at the negotiating table, this team—led by your broker—has to show the ability to out-perform the competition. If you have better information and higher organization than other prospective tenants do, you’ll stand a far better chance of winning at negotiations...and leasing the space.
Please note: We provide Bay Area market data and analyses for the current year only. To request commercial real estate market data for previous quarters, please contact us.