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. 
 
Strategy is not about getting a deal done as quickly as possible. It’s about getting the right deal done at the right time. The right deal is the one that maximizes the desired outcome. The right strategy is a byproduct of having carefully considered the full spectrum of variables influencing outcome.  Take, for example, the concept of leverage. Leverage is multi-faceted. There is market leverage, which is the fundamental state of the occupier’s leverage in the market given the macro dynamic and assuming a good process. Today, occupier leverage is significantly higher than it has been in decades. Hence, tenants can expect to achieve more favorable outcomes. In soft markets, tenants can access a base level of leverage just by showing up. It doesn’t require strategy. But this base leverage only gets you so far, it leaves a lot of untapped value on the table. 
 
Accessing maximum value requires a much deeper knowledge. Things like the specific leverage dynamic within each asset. Each building is comprised of a capital stack (equity and debt), leasing risk based on current vacancy and upcoming expirations, and ownership motivations. Thus, notwithstanding the broader market dynamic, each building is uniquely positioned to compete for your tenancy. And that’s the right way to think about it…competition. Our strategic approach is about managing a multi-round bidding process in which landlords compete by offering ever more favorable terms to capture your tenancy. Given how significantly domestic office markets have shifted from tight to soft over the past 4 years, we often find capital stack distress. This is when, for example, the original equity has been wiped out and the value of the loan may or may not be on par with the asset’s market value. It’s no exaggeration that upwards of 40%+ of the assets in a market like San Francisco are experiencing some level of capital stack distress. Some of these buildings are in a state of limbo in which they’re not actionable because the only lease scenarios they can offer are significantly above the current market. A poorly designed strategy would be one which fails to recognize this fact, one in which valuable schedule is wasted on the inclusion of non-actionable negotiations. Furthermore, when we think about owner motivation profiles, we look to categorize the landlord into one of three basic categories, including, future value, cash flow, or REIT. Each type behaves differently, negotiates differently.  It’s critical to understand counterparty motivations.
 
The building stack or the status of the existing tenancy, is also a valuable datapoint.  A building that is currently showing as 90% leased may, in fact, have sizable lease rollover falling within the time frame of your negotiation, which translates to risk. Risk is one of the key components in leverage creation.  The more risk a landlord faces, the more value we can extract.
 
When we know the desired outcome, we can build custom strategies to get there. It’s a simple concept.  The complexity lies in building the strategy, in gathering and interpreting the right data to inform strategy.  As with all parts in this series, each is sequential. You can identify your purpose, establish budget and timeline, but absent the right strategy, you will still fall short of optimizing the outcome. Think of your advisory partner as a strategic consultant, not a “space finder”. Most brokers can find space options. Only the best possess the skills and experience to build the right strategy.