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.
But just as landlords couldn’t perfectly time the top, it’s important for occupiers to realize they also cannot perfectly time the bottom. Leasing decisions are generally made better through predictive analytics which look to inform the benefits of acting at different times. For example, in the San Francisco market, tenants seeking non-premium view space will fare some order of magnitude better by addressing the lease in say 2025 than in 2024, as the market dynamic will have become even more tenant favorable. Our research and analysis allow us to confidently predict another 10% to 20% drop in rental economics over the next 24 months. Along with declining rental rates, landlords will find it increasingly necessary to bolster concessions. So, yes, the narrative for tenants will continue to improve. Does this mean tenants should delay negotiations? Not necessarily.
The bigger picture matters. One of the most important post-pandemic changes in how we think about workplace is a keener focus on how the space serves the organization. Corporations are now designing physical spaces which best promote outcomes not easily facilitated through technology. That’s the modern purpose of the office. This has resulted in a shift away from commodity type offices which are leased with strong emphasis on cost containment toward custom designed spaces which offer employees unique experiences designed to foster important behaviors (where the ROI of the space is a more relevant driver than its cost). Delaying the creation of such an office solution to capture more savings in a future market may thus be a flawed strategy in that the impact of the delay on ROI outweighs the benefit of the cost savings. To be sure, we’ve entered a “generational” market moment where the leasing dynamic is (already) materially better than it has been in decades. What’s more, a good advisor can capture some portion of the future market decline today, as the market’s downward trajectory is (also) not a mystery to the landlord. Today, risk avoidance is the landlords most important objective. The biggest risk is what happens if they don’t make the deal…what comes next.
Given current and near-term future market conditions and the new imperative of the office, this is not the time to let cost drive strategy. Yes, cost is a factor. But it should be given proportionate consideration along-side the achievement of key employee engagement and productivity goals (ROI). You may not be able to time the bottom perfectly, but the value of such an accomplishment is dubious, in any case.