Market Insight Editorial & Advice to Tenants: 1Q2009

Editorial from Dan Mihalovich, Principal of Mihalovich Partners and Founder of The Space Place®

If you’re a commercial tenant in the San Francisco area, you’ve come to the right place, The Space Place®. If you are a first-timer at our site, know that we are totally and unequivocally committed to serving and representing the tenant community—and that my Editorials are not only meant to be instructive; they are a written record of our market analyses and recommendations; and, from my perspective, an easy way for you to differentiate the quality of our thinking and strategy with those of our competitors.

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Mihalovich Partners earned 40 letters of recommendation from Tenant-clients. We proudly post them here for your review and consideration.

100 Words of Advice to Tenants

When the California Real Estate Journal/Daily Journal (the Statewide legal rag) called me for a condensed piece of market advice, this was our sound-bite:

“Know that we specialize in representing tenants, only. Tenants shouldn’t be concerned about picking ‘the bottom’ of the economic meltdown. Our mantra for tenants during the past 27 years is to lock in affordable rent for each and every year of your lease; commit 8% or less of your gross revenue to rent. San Francisco’s office market, like every other major city on the planet, is upside down…presenting terrific opportunities for tenants to achieve wonders through meticulously planned and heavily negotiated deal-making. Rents are already cheaper than in 1982, the year we started in the business. While Rome is burning, protective yourself on the downside but lock in long-term rental rates.”

Obviously we have a lot more to say on the topic. If you would like to schedule a meeting with me and our team, please contact us. Tenant representation is our sole focus.

In The Press Room, The Registry Commercial Market Report

Reporter John McCloud’s coverage on the commercial real estate situation brought him to interview our principal, Dan Mihalovich. Excerpt from “Office Tenants Shun Tenants’ Market”.

Some landlords resist taking steps to entice business to commit to space:

Dan Mihalovich, a tenant rep and principal of San Francisco-based Mihalovich Partners, believes landlords will ultimately be forced to adapt to tenant demands, though he concedes they may have to be dragged to that point. “It’s the consumer and commercial tenants who will dictate the plight of the commercial real estate markets, not building owners, no matter how much landlords paid for their buildings,” he says. “The market fundamentals will always prevail over time.”

In Mihalovich’s opinion, tenants have significantly more clout than they realize, not just now but most of the time. He considers brokers partly at fault for this, because they do not press landlords for more on behalf of the tenants. “In the 27 years I’ve been in the real estate business in San Francisco, probably 22 years have been a tenants’ market,” he says. “The exceptions were the dot-com boom and ’06 and ’07. Tenants can definitely get more than they’ve been led to believe.”

“We’re obviously going to be in a tenants’ market for the next three to five years and potentially longer. Property owners are going to have to bend at some point.”

Predicting The Economy, Right Here.

Commercial real estate markets, San Francisco Bay Area. Values are heading south, and fast. This spells huge opportunities for our clients—all tenants. Every county posted absorption levels in the RED, unsurprisingly. San Francisco’s availabilities soared above 18 million square feet… and will likely top 20 million shortly. Bay Area-wide, over 60 million square feet of space is on the market. Fundamentals are bearish for office space values, especially in combination: job layoffs; frozen credit markets; overbought and overextended building ownership; negative savings; low confidence levels. In residential sectors, economists worry about 9-month supplies of inventory. Consider that San Francisco inventories represent greater than a 10-YEAR supply of office space. Historically speaking, a “healthy” year of growth in San Francisco would be represented by one million square feet of positive absorption; Q1, 2009 net absorption was NEGATIVE one million square feet.

Office markets will not wait for 2010. Markets do not sit idle with economic fundamentals as weak as they are currently; markets work. Since tenant demand from 2009 lease expirations has been extremely poor, the markets will price in tenants with leases expiring in 2010—even late 2010 and into 2011—NOW. Expect to see extensive use of free rent, not only to entice tenants to move early, but to capitalize tenant improvements. Landlords low on cash or credit will offer free rent in lieu of improvements and other tenant concessions (moving expenses, design fees, FF&E), but let the buyer beware: Tenants must scrutinize landlords’ creditworthiness these days and protect themselves with SNDA agreements. Lease assumptions will return. Bear in mind that the market will feed on itself; much of 2010 demand will have already been satisfied in 2009. What demand will remain when we arrive in 2010? Nowhere near most projections.

Ruthless pragmatism at the consumer level. Consumers, who’ve been driving 2/3 of this economy, have come down with a massive case. Retail, as we know it, is dead. Wall Street, at least temporarily, has caught the same bug although it won’t be long before Wall Street reinvents itself and delivers another set of complex financial plays few of us understand yet make the trés riche, well, trés riche. They always do. In the meantime, the paradigm for spending is in a state of overhaul and will likely continue to drag on the economy until Americans’ short-term memory fades. On that you can rely. If the media didn’t keep reminding us of the Great Depression and the series of Recessions subsequent and every metric to compare to our current state; we’d likely be in recovery-spending-mode by year-end 2009.

Credit Default Swap Markets. Perhaps this item should be listed first, since this unregulated and ill-defined $60 TRILLION market may continue to be the root of all evil in our economy. Wildly leveraged, completely irresponsible gambling is rooted in these markets—markets intended for conservative hedging. If you don’t start seeing this story floating to the front page, and pronto, we can expect the further demise of what’s left of AIG; and more bastions like Lehman and Bear, Stearns to hit the skids. If you’re able to wax poetic and counter this concern, please let us know and we’ll publish your explanation. This is a mammoth story.

Interest rates. Hand in hand with Fed bailouts and other conciliatory programs, interest rates must remain low and continue lower to fuel a recovery of our economy….future inflation be damned. As we’ve discussed here before (about exporting our unemployment), foreign economies are not strong enough to demand higher rates of return from the United States. Mortgage and business lending rates should continue lower. Unfortunately, while the Fed floods the country with liquidity, lenders are seized up, taking more time than ever and scrutinizing applicants with maximum intensity. Slowly, slowly, the credit markets will loosen up.

Prepare for inflation. During this period of recession (or depression, arguably, in some parts of the country), economic forces are working to create some spectacular opportunities for consumers, entrepreneurs, young and seasoned companies, investors…pricing in cheaper raw materials, cheaper labor, cheaper housing, cheaper infrastructure. That is what our markets must do to reinvigorate our economy. During the next 12-24 months, we’re likely to see greater economic opportunity to acquire and expand—relatively speaking—than we’ve seen in decades. But in the new business paradigm, we’ll be buying a lot less and will use less credit and leverage. Consumers and businesses, in the meantime, remain in defensive mode. Soaring national debt will eventually bring higher interest rates and meaningful inflation—of little concern at the moment.

Real unemployment: How about 15%? How does one predict a “recovery” of the U.S. economy when job growth is negative? We can’t detect a pattern of any positive nature, so how do economists and other pundits predict a turnaround in 2010 or any other year? Simple. Fabricate a future based on highly sophisticated accounts of days gone by. Newspaper articles and position papers from Wall Street are full of such metrics, chronicling every recovery since the Great Depression. Believing is seeing. Shall we believe the same Wall Street Lobby which brought us the economic catastrophe in the first place? Millions will. But inside the Board room, a CEO should be fired for predicting future corporate performance based on the past. Our entire economic paradigm has changed and demands new thinking.

We’ve visited this topic many times…how the U.S. Gov (Bureau of Labor Stats, “BLS”) serves up a 30-page employment report every quarter…and grossly understates the (un)employment situation (just as they under-report inflation).

According to BLS, March weighed in at (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent. Since the recession began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last five months. In March, job losses were large and widespread across the major industry sectors. Unemployed persons increased by 694,000 to 13.2 million.

Is this accurate and, if so, by what margin of error?

What about people who are not in the “workforce,” as BLS defines the term? Ah yes, “Persons Not in the Labor Force.” 81 million people, up 339,000 in the month of March.

Margin of Error (from BLS):
The confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000). These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the “true” over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that employment had, in fact, increased. If, however, the reported employment rise was half a million, then all of the values within the 90-percent confidence interval would be greater than zero.

States with Current Unemployment ~10% or Greater:

State Rate %
United States (1) 8.5
California 11.2
District of Columbia 9.8
Florida 9.7
Indiana 10.0
Kentucky 9.8
Michigan 12.6
Nevada 10.4
North Carolina 10.8
Ohio 9.7
Oregon 12.1
Rhode Island 10.5
South Carolina 11.4
Tennessee 9.6

“Stress Test” For Tenants

Unlike the politicized version taking place in the banking community, our version isn’t sugar-coated and there are no magic accounting spins to color the possible results. The livelihood of your business may depend on your passing grade:

  1. Engage, ExComm. Your company’s occupancy expenses are probably running second just behind human resources overhead. Assuming that this is approximately true, senior management’s focus on this line item is crucial, whether your firm’s lease is due to expire or not. In this environment, leadership must look to all expense areas for controls. If you haven’t pulled out your lease in the past few years because the lease doesn’t expire for some time… you’ve likely neglected some opportunities. Read on.

  2. All Hands on Deck. This isn’t a secret mission. We’re looking for problem areas and opportunities. Pull together your executive financial team, whether CEO, CFO, COO, Executive Director, Managing Partner, Controller, etc. Round up your outside sources, such as your office leasing broker, architect, general contractor, since these individuals should assist you in completing this Stress Test.

    Everyone should review your lease, any amendments and your building’s history of operating and tax expense pass-through statements.

  3. Does Your Space Still Work for its Intended Purposes? Assuming that your space was designed for you and your work patterns and technologies of some years ago, it’s time to do some “blue sky” thinking—especially if the product of your research identifies excess space. How can you do more with less….and still be prepared for an upturn in the economy? All of your key people and outside team need to contribute to this thought-process. Where is the found-money in your space and lease? Let’s find it.

    Utilization of space and other occupancy costs must be juxtaposed with your lease rights, flexibilities to sublease excess space and….revenues. Forget the assumptions you made before signing the lease; that economic matrix is of days gone by. Focus instead on best-guess projections for the next 2-3 years, or longer if possible. Were you to start the process today, what kind of office space could you afford if you committed 8% (or less) of gross revenues to rent (total occupancy costs)? There’s your target.

    Did you properly anticipate tax and operating cost pass-throughs from your landlord? Has the landlord billed you appropriately? How do you know? Does your lease allow you to audit the landlord’s books, as you question those expenses? If you haven’t exercised that right, why not? Perhaps you’ll find that your landlord has (innocently or not) overcharged for expenses and owes you a significant refund. Check your lease provisions; if the landlord has overcharged you, you may find that the landlord must also pay your expenses for the audit!

  4. Unamortized Improvements; Your Loan Agreement. When you originally built out your space, did you take out a loan toward tenant improvements and other premises-related expenses? Pull out the loan documents. How is this loan affecting your total occupancy costs? Remember the 8%-of-gross-revenue-cap. Are the payments still affordable and can the terms be re-negotiated? This may be the opportune time to leverage your relationship with your banker. They need your business as much as you may need a break.

  5. Parking Costs vs. Public Transportation. If monthly parking spaces represent a perk for your staff, at least consider the savings relative to your lease costs. Everything should be on the table during this Stress Test. If, for example, your tenancy is 20,000 square feet (around 100 people), perhaps you have 20 people driving to work. At $400/month/car (average cost, still, in the Central Business District), the parking bill equates to $4.80 per square foot per year additional occupancy cost. If your staff can gravitate toward public transportation, then why not take the opportunity to go green….OR revisit your landlord’s garage operator to leverage a negotiation for lower rates. If your firm is paying $35/sf/year in rent, that additional parking bill represents a 15% up charge in overhead.

  6. After-Hours Use of Air Conditioning. Like the parking tab, most tenants forget what rate the landlord charges…or that there is an additional charge. Worse, most landlords (we know from experience) assign a completely arbitrary hourly cost to this line item. Check your invoices from the landlord, relative to your lease language. Most buildings downtown do NOT offer standard operating hours on Saturdays; even if they do, it’s usually for a partial day. If, for example, your people tend to work during the 6-8 p.m. range during the weekdays and a half-day on Saturday, you may rack up a huge bill every month. At $100/hour (rates range, wildly, from $10/hour to circulate unchilled outside air…to $300/hour for chilled air), if your firm clocks 16 hours per week, you’ll spend nearly $77,000 per year for after-hours air. Using the example of our 20,000 square foot tenant, above, that air is costing an additional $3.80 per square foot per year in occupancy costs.

    Does your firm need the additional air conditioning? Did you budget for it? Can your staff open windows instead? Would it make more sense to encourage staff to work offsite during non-building-standard hours? Or, is it time to revisit your lease terms with your landlord to renegotiate the cost of air?

  7. Bay Views. We’ve written on this specific topic before. The San Francisco Bay Area is a very view-oriented office market. A tenant can devote upwards of $25/sf/year to be in the SAME building with Bay views. So, is it worth the premium to your business and strategy to house your firm in such premises? One would think that upper-end space is most desirable in the City, but we have the details on all of those availabilities. There are few takers, especially in this economy. In theory it should be easier to sublease excess space of the Bay-view variety. Plan accordingly.

  8. Saving Green. What aspects of being “green” can improve your firm’s bottom line…quickly? We’ve hosted articles on this website which address green design and sustainability, but which ideas might save some serious capital in the short-term? Ned Fennie, AIA, and principal of Fennie + Mehl Architects, has this to say (for the entire article, see Do the Right Thing!…But Beware of Greenwashing):

    1. Reduce your electrical energy consumption by upgrading old HVAC and lighting systems.
      Electrical power is at the top of the list for carbon dioxide sources and we need to cut back drastically in this area. Tenants are not typically in direct control of the HVAC systems in a building, but they can put pressure on landlords to modernize Base Building heating and equipment and controls to conserve energy. And while this is important, the lighting systems within the tenant’s space are typically considered part of your Tenant Improvements and can be upgraded by the tenant.

      You can make major reductions in electrical consumption when you install energy efficient lights and controls. Incandescents lamps are notoriously energy inefficient; compact fluorescents lamps can replace incandescent downlight lamps and the main lighting should employ high-output T5 linear fluorescent with electronic ballasts. Start with the majority of your lights, if they utilize the old T12 fluorescents, retrofit them to take T5 lamps with electronic ballasts. Install the latest dimming and controls systems that employ occupancy sensors and photocells to reduce light when appropriate. Select indirect/direct linear fluorescent fixtures that utilize the ceiling to diffuse and reflect the light from the fixtures. They will give your space a more even glare-less light, while consuming significantly less energy that the common 2x4 T12 parabolic or prismatic downlights. It’s best to work with an architect on these systems to make sure you get adequate lighting while keeping energy consumption to a minimum.

      Work with your architect to find for opportunities to capture more daylight such as adding skylights if your space is near the building roof, or adding windows to exterior walls.

      If you are metered and pay your own utilities, buy your electrical power from a green energy provider, one that specializes in wind or hydro-generated power.

    2. Get out of our cars.
      Let me repeat this one, get out of our cars. Transportation is right behind electricity production on the list of greenhouse gas sources and although hybrids are a good alternative to gasoline burning cars, they still only represent roughly a 20-30% reduction in greenhouse gases over gas powered cars . Considering that we produce five times the average amount of greenhouse gases our goal should be to reduce much further. So encourage everyone at your firm to use alternative transportation methods, with bicycles being one of the best ways to commute to work (zero greenhouse gases!). Or alternatively we should use alternative transportation methods such as carpools (especially using hybrids), mass-transit, etc. One way is to give your employees cash incentives or subsidies to those who use alternative transportation methods to commute.

      Consider buying company vehicles to be shared by employees for work related travel, thereby reducing the need for them to commute in their own cars. If you do make sure that they are hybrids that can burn ethanol, as it was shown in a recent study by GM that these ethanol fueled hybrids are best for the reduction of greenhouse gases.

    3. Don’t build new offices
      Have your broker renegotiate your lease and stay in place. Not only does this keep from consuming more materials, but will probably also save you money by keeping your relocation expenses at zero. Just make sure you negotiate for some Tenant Improvement dollars from the landlord to retrofit your lighting systems.

      Consider installing more hoteling spaces (shared cubicles) for employees who are highly mobile and utilize the latest mobile technologies to support them. Or better yet, transition to an interior workspace model which eliminates permanent individually assigned workplaces and replaces the office environment with a variety of unassigned spaces, where each employee (with their IP enabled laptop and VOIP phone) chooses their place each day. This is what Cisco Corporation has deployed worldwide with significant reductions in square footage per person, which translates directly into savings in real estate expenses and of course, reductions in their environmental footprint.

    If you have to move the office

    On the other hand, if it is imperative that the firm move its offices, the relocation team should at a minimum make the following their priorities:

    1. Locate the office close to your people
      Move your office location to a building that is closest to the homes of a majority of your employees (current as well as future hires). Use your Human Resources department to develop a list of employees and their addresses and then plot the locations on a map. You’ll quickly see where the best office location should be to reduce everyone’s commute distance. This will translate into shorter commutes and increase the viability of carpooling and public transit options.

    2. Keep your density up
      This means keeping your office area square footage per person to a minimum. Plan for fewer people in private offices, standardize on smaller cubicle sizes, utilize more shared cubicles (hoteling) for those staff who are frequently out of the office, and build fewer and smaller file rooms (deploy electronic records systems instead).

    3. Look for opportunities for re-use
      Work with your broker and architect to find second generation building spaces with existing in-place Tenant Improvements similar to your needs. Sometimes it may be possible to find spaces that are offered with the furniture systems, which can be reconfigured to suit your particular needs.

    4. Install ultra-efficient lighting fixtures and controls
      As noted earlier, this can provide a huge improvement in your energy consumption. Also, work with your architect to organize the space to maximize the available daylight, so that when coupled with daylight sensing controls, artificial sources can be dimmed or switched off automatically when there is sufficient available daylight

    5. Acquire systems furniture that you will keep
      If you have to buy systems furniture consider buying refabricated used product. If that is not a viable option, then select a system that is not only “green” based on the materials employed and the green manufacturing process utilized, but select a system that is ultra-flexible and rugged, so it can be moved and redeployed often as you grow or move to new locations. Make sure you choose colors and finishes that will look attractive over a long life.

    When changing or relocating your office, it is easy to get caught up in all the green hype that is sweeping the construction industry. It can be a real challenge to not be swayed to purchase new green products. Indeed on the surface this sounds like the very thing you should do when completing your build-out, but one should be cautious. If you demolish existing in-place improvements (that may be quite serviceable) and replace them with new green products your net environmental impact may well be much higher than if you reused those improvements! Remember the focus should be on making real reductions not consuming more (even if they are green products).

    Don’t be distracted by all the “green” noise out there. There is a lot of greenwashing going on in the construction industry and many of the products and systems are very good. But don’t be deceived; the biggest gains in the battle against global warming can be had by cutting our use of fossil fuels. This means quite simply cut consumption of electricity and automobile fuels. If your company is successful in significantly cutting these two areas, we will all benefit. So keep your focus on reducing your dependence on cars, cut the amount of power you use, and don’t sweat the small stuff. And, as Al Gore says, “Plant trees…lots of trees.”

Zero-Sum Game: Pay The Landlord Or Pay Yourself

At our firm, our world revolves around advocating and protecting the interests of our clients, tenants—never landlords—in leasing negotiations. Sometimes, a prospective client will ask, “What will the landlord think or say about us if we hire you to represent us?,” versus a competitor whose firm represents landlords.

On its face, the question seems straightforward enough. “Will our existing (renewal) or new (relocation) landlord think ill of us if we hire an aggressive representative?” Put less diplomatically, “Will we alienate ourselves if we push the negotiations too hard?”

Adding to the confusion are all the brokers who predominantly represent building owners and/or whose firms are among (the majority) those who control more office space listings than you’d imagine. These “landlord brokers” will profess to better understand the inner-financial workings of landlords and, therefore, that they are better equipped to advise you (the tenant) of what will be acceptable to the landlord. Their implication: That they are either privy to insider information; or that an overt conflict of interest will actually benefit you (the tenant)!

Let’s try to answer the broad question asked at the top…and dispel any rumors on this important topic:

  1. Purpose. To tenants: When you hire a broker to represent your interests, you must be clear about the broker’s job description. Tenants hire brokers for different reasons—although at our firm we know precisely the functions we prefer to fulfill. Nevertheless, you are the client and must knowingly and willingly enter into an agreement to be served appropriately. The real point, in this discussion, is that tenant-representation brokers and landlord-representation brokers fulfill COMPLETELY DIFFERENT functions for their clients. Our job description, as a tenant broker and advisor, is radically different from the functions provided by a landlord’s broker. Tenants: Understand what you’re getting into before you dare hire a landlord-broker to represent you.

  2. The Office Space Listing: The Landlord’s Broker’s Duties. Tenants, to help you understand how landlord-brokers and tenant-brokers perform completely different jobs, envision for a moment that Boston Properties (whose in-house brokers presently handle all of the leasing for Embarcadero Center) put out an RFP for a broker to take the listing for their 3 million square foot project.

    Beside the fact that virtually EVERY landlord-brokerage firm in the City would eagerly pitch this business, what duties (fiduciary and otherwise) would the brokers perform, once in the saddle to represent Boston Properties (“BP”)? How would they spend their days and how are those duties and interests different from those of a tenant-representation broker?

    • First, consider the magnitude of the commission revenue possible, since that is what the landlord-brokers will do. Fees on the listing side (BP would pay this in addition to fees owing on the tenant side) will range from around $3.75-$5.00 per square foot, so in a project like Embarcadero Center where 280,000 square feet are currently available, the “winning” landlord-broker could have a shot at nearly $1.4 million in commissions.

      Next, envision that in every landlord-brokerage firm, many of the brokers will purport to have the expertise to handle such an assignment. In-house competition ensues, probably on a scale uglier than you would care to imagine, until a “listing team” is brought forth to pitch BP. Will it be the best team? Possibly. But the best team may likely be working already on a competing listing, or several competing listings.

    • Before pitching BP’s business, each competing landlord-broker will be best served by doing a conflict-check with their other landlord clients. Is it OK for the landlord-broker to pitch BP? [It’s important to note, at this juncture, that oftentimes when we call on prospective-building sites for our tenant-client’s consideration, we find the very same individual/landlord-broker on multiple buildings. What must they say to each of their clients? How can they possibly serve in a fiduciary capacity—simultaneously—for multiple landlord-clients?]

    • Strange bedfellows arise to compete for BP’s listing. As each brokerage firm selects a team for the competition, it’s always a story of politics and probably some bloodshed as to how the team came to be. In-house competition could rise to produce a combination of brokers brought together simply to stop the in-fighting, possibly brokers who don’t even care much for one another. But to pitch the revenue, they “team” together. Finally, all for one and one for all, to avoid internal arbitration and go after the business.

    • BP’s new broker would be responsible for marketing/selling all space available, that is, every space large and small. To begin to accomplish this task, however, the new brokers would devote a tremendous amount of time to the following:

    • Tour the buildings and spaces, top to bottom. Study the building’s systems to make sure that you can sell the attributes and amenities of the project to every prospective tenant. Understand the operating expense history of the project and how to defend the increases which have occurred over time. Understand the new space measurement of the complex, since BP remeasured the buildings upon acquisition and dramatically increased the size of the spaces to suit their REIT shareholders.

    • Meet with the project’s favored space planner and contractor to figure out how to most effectively and inexpensively market each and every space available. The concept is simple; get the most with the least financial contribution to tenants and limit the landlord’s exposure to the market. Of course the tenant’s objectives are equally simple—although generally contrary to the landlord’s. The space must fit the tenant’s custom design and layout; irrespective of the landlord’s financial aspirations.

    • Help to create a marketing campaign to sell all of the space, whether a brochure design; web-related promotion; email campaign; or special broker-promotional functions. This takes a great deal of time, every day. Since 18 million square feet are available in San Francisco, the listing brokers have their work cut out: To make BP’s space the first thought in a tenant-broker’s mind, as potential space for our clients. BP’s brokers will have signed onto a fiduciary duty to promote and protect BP’s interests, including heavy marketing efforts to call on every live prospective tenant for their spaces available—whether the tenants fit or not—whether the tenants are represented by brokers or not.

      The listing brokers would likely take their story to each of the brokerage houses in San Francisco, to promote their project.

    • The listing brokers must be available at all times to take tenants and their representative brokers through the project. Landlord brokers, in an active market, will spend a great deal of time giving tours, daily; then following up with letters and calls to EVERY prospective tenant of the project, hoping to discover those tenants who want a second look or, better yet, a lease proposal. For all prospective tenants of the project, the landlord broker spends countless hours trying to lure the prospects into lease negotiations, space planning, and more negotiations—simultaneously juggling two or more tenants, as many as possible, to vie for the same space. After all, there is no guarantee to the landlord broker that any of you will lease any of the spaces they have to lease!

    • BP’s brokers would regularly provide marketing reports with updates on every candidate for every space. The brokers must gather whatever intelligence they can from the tenant-rep brokers or other members of the brokerage or tenant community who might know something about your needs and preferences! Landlord brokers are on the hook, right alongside the landlord, to get the space leased as quickly as possible. BP wants to know when the space will be leased; and their brokers better have an answer. The landlord’s broker must also be available for strategy and budget sessions. If the marketing campaign isn’t working, the listing broker has to make it work.

    • The landlord’s broker must also make a lot of cold calls to tenants. Perhaps, tenants, you’ve been on the other end of one of those calls….calls which start out with one agenda, to sell you on the caller’s space listing, then quickly change tune to pitch you instead on representing your company as a tenant-broker would. But the tenant-broker’s duties and alliances are so completely different from the caller’s.

    • The landlord’s broker must also spend a great deal of time studying BP’s master lease provisions. Once a tenant has signed onto a Letter of Intent and moves on to lease documentation, the landlord’s broker will sit alongside BP’s legal counsel, first to assist in crafting the business terms into the first lease draft in a way most compelling for the landlord; and then to continue pushing for those provisions throughout the lease document negotiations.

    • Imagine, now, that the landlord-broker has committed him/herself to multiple listings. Would this be OK with you, if you were the landlord and—if so—why? To make matters worse, the same landlord-brokers now go off and pitch tenant-representation business! While spending most of their days figuring out how to sell their space and extract every pound of flesh from tenants…all on behalf of their landlord-clients, they quickly change hats; quickly altering their economic arguments so that they are diametrically opposed to that of landlords; and quickly adapt to the tenant-representation process, one completely different from representing space, as above.

      Well, here they are, the most popular landlord-brokers in San Francisco, ranked by the amount of square footage of space available they each control. You can find this data in our quarterly market reports… updated regularly:

  3. % Market Share Square Feet # of Landlords/ Buildings
    1 *Jones Lang LaSalle 12.5% 2,832,687 28
    2 *The CAC Group 11.3% 2,559,677 61
    3 *CB Richard Ellis 7.4% 1,666,604 31
    4 *Cornish & Carey Commercial 6.7% 1,521,238 24
    5 *Cushman & Wakefield of California 6.6% 1,499,883 59
    6 *Grubb & Ellis 6.1% 1,382,804 50
    7 *Colliers International 5.1% 1,153,878 77
    8 *GVA Kidder Mathews 4.6% 1,030,666 33
  4. Forcing Landlords to Compete. As in the example above, each landlord brings onto its team a group of professionals who will align with its interests and advance their financial and other agenda. Landlords and their team are to fight for higher rates; lower tenant improvement allowances; fewer options or flexibilities for tenants; more stringent lease rights for the building owner, etc. This is the zero-sum negotiation to which we referred at the top of this article: More for the landlord WILL mean less for the tenant. It is our objective, as a tenant-broker, to simultaneously compel several landlords (including your current landlord, if renewal is possible and desirable) to compete for your business. As your advocate, it is our job to drive economic concessions from each and every building owner you’ve selected for consideration.

  5. Tenant’s Right to Representation. So, when a prospective tenant asks us, “What will the landlord think or say about us if we hire you to represent us?” or “Will we alienate ourselves if we push the negotiations too hard?” We believe the answers are obvious. Each party in the negotiation has the right to representation—and tenants must trust that EVERY landlord is appropriately aligned to do just that. In fact it is in the landlord’s economic interest if tenants do NOT have proper representation. In any event, a well seasoned and well advised landlord will respect the tenant’s selection of broker, architect, general contractor and other tenant-advisors. It is commonplace for tenants to align themselves in such a manner.

  6. Tenant: “Why is my broker kissing up to the landlord?” Tenants should recognize a landlord-broker and their motivation when they see it, even though most brokers do NOT disclose all of their allegiances NOR do tenants often demand this important information prior to selecting a broker. In a zero-sum negotiation, a tenant being represented by a landlord-broker cannot possibly be as aggressively represented as by a tenant-broker. For the landlord-broker and all firms so associated, the landlords with whom they negotiate today are all prospects for new business tomorrow. A broker cannot negotiate against a landlord effectively if in the next breath the same broker, or their firm, hopes to secure that landlord’s listing work. This is not only human nature, in our opinion; it is the law of ethics and moral commitment.

  7. Are you a bear or a possum in negotiations? Getting back to our original comment about PURPOSE: Tenants, if your purpose in hiring a broker is to employ the skills of a seasoned negotiator; a well-thought out and highly organized planner and strategist; and a quarterback to oversee the entire transaction and team from inception of the project through move-in… then you should expect to see major concessions from the landlord community and a seamless transaction going forward. Your choice, of course, is to tread lightly for fear of taking too much off the landlord’s plate. But we don’t believe the negotiations are about the landlord’s feelings or their pocketbook; in our book, it’s all above protecting and advancing our tenant-client’s objectives, budget, schedule and performance. You’ll only sign one lease with one landlord. The competition amongst several landlords will make it clear which is most desirous of accommodating your every need.

Shall we discuss your needs?

Your Landlord’s Portfolio Analysis: Where Do They Stand?

Before you commence any lease negotiations for a renewal, renegotiation or relocation within your current landlord’s domain, it’s critical to gain an understanding of your landlord’s supply/demand situation. After all, in the zero-sum game of negotiating business terms, leverage is paramount and knowledge is golden. If you’d like a copy of such a report about your building, please call or email us.

The Value Of Short-Term Memory Loss; The Resilient Shopper; And $500 Baseball Tickets

American consumers are a resilient bunch, generally optimistic and ready to pounce on a great, discounted deal at the mall. It’s certainly defensible that the economic downturn could change buying and savings patterns forever…but it is difficult to bet against our collective short-term memory loss; materialistic consumerism; the U.S. Government bailout; and the uber-rich Wall Street lobby. We can take a month when unemployment soared by “only” 500,000 people as a positive sign—since the rate of decline in economic factors is “improving”—yet in the tank we remain. We can rise up against policy makers in Washington, alongside stealth banking lobbyists and overturn accounting regulations so that banks, REITs and other investors can avoid “marking-to-market” all those toxic assets and radioactive properties. What an amazing reversal of fortune for so many companies, turning their books on a dime with the new accounting rules. But count on this: We won’t remember that we were fooled.

Every uptick in the stock market becomes a Twitter moment. Isn’t that the bet, Messr./Madame CEO? Where are market fundamentals? Will confidence soon return and is it safe to spend on infrastructure? Wasn’t it the almighty shopper who led us out of recessions gone by? But if we can’t sell the best baseball seats in the house for $500 per, can we just get a rain-check, or do we really have to deal with the pain? Our sense is that this downturn will produce the mother of all hangovers…at least for those of us under the age of 80. Keep in mind, as you’re barraged by Wall Street’s commercials, that Wall Street hasn’t forecasted a recession in modern history and rarely have they recommended selling a stock.

Office Leasing Train Wrecks: 1,484 CEOs Fired In 2008. Any Connection?

According to Challenger, Gray & Christmas, 1,484 CEO heads rolled in 2008. Intelligent people, in all likelihood, making poor choices. Some were caught in scandals. Some cooked the books. But most simply didn’t perform (and reaped platinum parachutes anyway). In the world of commercial real estate deals, the responsibility for overseeing office leasing transactions oftentimes is delegated to HR, Finance, Operations or non-equity partners—to people with little or no prior experience at the helm of such critical projects. The point is not to be condescending, but rather to support the notion that organizations should surround themselves with the appropriate real estate experts—not a simple task when the Client has little experience with real estate projects and real estate brokers. The CEO, in similar fashion, must manage risk. It is absolutely a risky and potentially devastating proposition to mismanage one’s commercial real estate.

Tenants should take our “Stress Test” to determine if your organization is primed for success in your current office leasing situation….or if you’ll need to re-think your fundamentals prior to your next lease negotiation. There’s no need for heads to roll. And we’re available to discuss your situation.

San Francisco Market Overview

Vacancy Rates: Are Your Options Soaring?

Tenants should watch carefully to detect how and to what extent your field of options changes. Which size blocks of space are getting leased? Discussing vacancy and absorption rates can be confusing to some. What language makes sense to tenants? Tenants ask, “Tell me about my specific options. How many choices do I have?” Are your options growing, as a result of leasing inactivity? Review the chart, below, and let’s discuss.

Here’s an intriguing statistic for you. BET YOU’LL BE BAFFLED: In Q2 of 2001, Bay Area Counties had a supply of 42 million square feet available for lease on the market. Today the Bay Area markets have 61 million square feet on the market. Tenants in San Francisco have a MUCH LARGER number of parcels to choose from in today’s market than in Q2 of 2001—the period just before our markets crashed. Today the trend for absorption has turned “down”… and the stats should give you reason to wonder—what kind of Kool-Aid has the landlord community been drinking? [In Q2, 2001, there were only 202 parcels of spaces available in San Francisco in the 5-10,000 sf range; 173 parcels in the 10-20,000 sf range; and only 67 parcels in the 20-40,000 sf range.]

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.

You can request a free space survey, containing all direct and sublease space meeting your specific requirements. We can also provide building photographs, floor plans, leasing histories and more. You’ll receive your survey within one business day. To discuss your space needs in person, call 415-434-2820 or email [email protected].

Tenants: Get It Straight

Mihalovich Partners represents tenants, only. Our core business is driven toward educating and objectively and aggressively representing TENANTS, only. If you are looking for biased market information serving the LANDLORD community, please see one of The CAC Group; Cushman & Wakefield; CB Richard Ellis; Grubb & Ellis; Colliers; Cornish & Carey; GVA; or Jones Lang LaSalle—whom collectively represent over 65% of the 20 million square feet of space currently on the market. Those eight firms have pledged their allegiance to over 370 local landlords.

Strange as it may seem, bearing in mind their conflicts of interest, we compete with them every day for YOUR business—for the opportunity to represent you, the tenant, in leasing negotiations. CAC, C&W, CB, G&E, Colliers and JLL control more space than any landlord in San Francisco. Mihalovich Partners’ business and approach is diametrically opposed to that of brokers who represent landlords. Are you, the tenant, looking for advice and counsel? You can count on straight talk from us. Advice for tenants, pure and simple. Serving the tenant community in San Francisco for 26 years.

Dan Mihalovich ([email protected])
Principal of Mihalovich Partners and Founder of The Space Place®

Take Me Straight to the Numbers: San Francisco Bay Area Rental Rates. Supply/Demand.

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.

Who Has the Most Space in San Francisco? Surprise…

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation, and who controls the most space in San Francisco? And, most importantly, why would you feel comfortable having them represent YOU?

Below we’ve surveyed the entire 110 million square foot inventory of San Francisco, and illustrated the companies with the most control of space on the market, the Top 25. You know from our other stats that 18.47 million square feet is now on the market in San Francisco. Of the top 8 companies, ALL are office leasing brokerage firms, controlling 65% of the City’s vacancy! These brokerage firms are beholden to more than 360 local landlords. Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant’s interests—objectively and aggressively? The top brokerage companies on the list control more of the City’s vacancy than Hines (#9); Tishman Speyer (#10); RREEF (#11); and more than Beacon Capital Partners (#13). Surprised, are you not? In the case of Studley, our friendly tenant-representation competitor, they represent over 195,000 square feet of space available in 11 different buildings. How can they objectively represent YOU, the tenant, if you choose to pursue any of their sublease space?!

% Market Share Square Feet # of Landlords/ Buildings

% Refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease. We have also noted the number of landlords/buildings represented by each entity.

* Denotes listing brokers. All other companies listed are landlordselopers.

1 *Jones Lang LaSalle 12.5% 2,832,687 28
2 *The CAC Group 11.3% 2,559,677 61
3 *CB Richard Ellis 7.4% 1,666,604 31
4 *Cornish & Carey Commercial 6.7% 1,521,238 24
5 *Cushman & Wakefield of California 6.6% 1,499,883 59
6 *Grubb & Ellis 6.1% 1,382,804 50
7 *Colliers International 5.1% 1,153,878 77
8 *GVA Kidder Mathews 4.6% 1,030,666 33
9 Hines
3.6% 809,272 10
10 Tishman Speyer 1.8% 403,821 3
11 RREEF America LLC 1.8% 400,000 1
12 *Newmark Knight Frank 1.7% 393,816 9
13 Beacon Capital Partners 1.4% 307,000 1
14 Boston Properties 1.2% 278,285 4
15 McCarthy Cook & Co 1.1% 252,275 3
16 SKS Investments 1.1% 250,000 1
17 Retail West 1.1% 242,000 1
18 *NAI BT Commercial 1.0% 233,517 24
19 *TRI Commercial / CORFAC Intl 1.0% 229,509 40
20 *Studley 0.9% 195,385 11
21 The Presidio Trust 0.7% 164,914 37
22 *Colton Commercial & Partners 0.7% 157,207 20
23 *Starboard TCN Worldwide Real Estate 0.7% 147,574 70
24 JRT Realty Group, Inc. 0.6% 144,927 1
25 *Johnson Hoke 0.6% 131,215 6
  All Others 3.3% 752,532 362
  Total   22,590,107  

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