Office tenants, this is for you. And it’s personal. If you don’t have your act in order in this overheated, over-priced and treacherous office market, you’re going to jeopardize your business and future. As a 30-year veteran advising tenants in this territory, I also have a piece of advice to other tenant-rep brokers: Do your flipping job. Outside of the tech sector, which has entirely fueled the frenzied space-grabbing in the San Francisco area, non-venture-backed tenants have been compelled to sign leases north of $60/$70/$80 per square foot per year – absolutely unsustainable levels. Tenants, if you’re devoting more than 8-10% of your gross revenue to rent, you’re in trouble. Office leasing isn’t gambling. Your lease should be an *asset*. Odds are stacked heavily against you, at the moment, some of the reasons for which (see below) may surprise you. Dodging bullets – avoiding death by office lease — is possible. Critical thinking….and planning are required. CEOs have limited time for either.
- Market conditions ARE changing, slowly but surely – “taking” rental rates are easing in a few places….but primarily in the sublease market. Direct space rental rates – in particular view space – is always the last to decline in value. The weakest offerors of space are tenants, who’re leading the decline in rates. Brokers (especially the landlord-brokers mentioned below) will have you focus on the “vacancy” rate rather than the “availability” rate. The City has over 12 million square feet available, ~9.3%….and climbing. San Francisco’s (aka Camelot) leasing activity led the explosive absorption of space in surrounding suburban markets; it will lead the decline as well.
- We are undoubtedly in a bubble — meaning local conditions are clearly not sustainable for tenants. Even, if not especially, angel/venture-backed tech tenants….90% of whose Hail-Mary, non-sensical pledges to stratospheric rent will end badly. Whether the air leaks out slowly or quickly is a matter for tenants to decide. New-construction supplies of space haven’t caused any of our downturns since 16 million square feet came out of the ground in San Francisco in ’82. Tenants (read *demand*) are the key. No one — take your pick — JLL/CBRE/CW/Newmark/Colliers is any good at predicting demand. And neither is the landlord community or the press. So, drink the Kool-Aid you hear from listing brokers and landlords or not….with your eyes wide open.
Speaking of [JLL/CBRE/CW/Newmark/Colliers], the landlord-brokers who control 75% of the listings on the market; here’s the big question for those of you tenants who swear you’re getting great advice from them:
- When they have their weekly leasing meetings and compare asking rental rates and deals in all of their listings….does this serve your interests when they’re doing their best to pump up rates and drive down concessions for their landlord clients? Of course not. Are there implicit agreements to keep rental rates high? Is this a form of collusion or conscious parallelism?
- Isn’t doing business with and for the landlord a much better business than representing you, tenants? After all, they earn property and project management fees managing those buildings; they can earn fees appraising them, packaging and selling them; and the long-term listing assignments far outweigh what they can earn by representing you. These brokerage firms are sales organizations. Close your deal and move on to the next one.
- Tenants large and small try to make “safe” decisions when hiring a broker to represent their interests. You rely on your tenant-rep broker to advocate for you and advise you of market conditions and opportunities. What is “safe”, tenants, about the conflicted environments described above? If you’re wondering how and why market conditions are moving slowly to the downside, in spite of economic forces at play, look no further than the market prognostications and advice given to the landlord clients of [JLL/CBRE/CW/Newmark/Colliers]. In many respects, they are the Wall Street of the commercial real estate markets. Rarely will you hear bearish sentiments. And what happens behind closed doors between the brokers is none of your business. In the meantime, isn’t it a coincidence that [The Herd] voices the same advice to tenants: Markets will continue on track; demand is solid; rates may flatten but remain strong, perhaps stronger; tour activity and appetite for space at current rent levels persists.
Your Team should use the latest innovative tech to avoid making mistakes in the deal-making process: griddig. We’re using griddig’s live marketplace platform and (pre-populated) tools for all of our tenant-rep assignments. We collaborate – with transparency throughout the leasing process – with our client (and all necessary decision makers), architect, contractor, real estate lawyer….from calculating your space needs, through search, comparison of your total occupancy costs in buildings of your choice, and fully execute your Letter of Intent ONLINE. Listings of space are publicly viewable; we push landlords/listing brokers to upload details if they haven’t already. Using smart tech like griddig is the most expedient route to deal closure.
Tenants, please: Choose your brokers carefully and compel them to do their flipping job. Tenants need not suffer death-by-office-lease. Hire a team of advocates (ALL who specialize and are devoted to serving tenants: Broker, Architect, General Contractor, RE Counsel).
Think about our representing your interests in your next office leasing negotiation. Thanks.