Modern Workplace Planning: Solving for Experience Part IV: Implementing an Effective Market Process
You’ve identified the purpose behind your physical space needs, you’ve created a thorough project budget and schedule, and you’ve developed the right strategy. It’s now time to implement a market process.
What is “…a market process”? In the context of office leasing, market process is how you engage the market. It ties to your strategy, with sensitivity to the objectives you seek to accomplish. The market is where you implement your strategy, where you take it from theory to reality.
The first step of our market process is to create external messaging that aligns with your objectives. These are the talking points we will communicate to the market. One thing about urban commercial real estate markets, they have “big ears”. You can count on your market activities being tracked carefully by all the real estate service firms. This is a good thing. Why? Because we want our external market message to be absorbed, indeed repeated throughout the market.
When an occupier is considering staying at an existing site, for example, they must also carefully consider alternative sites, even if their first objective is to stay. By the way, it’s important for occupiers to be cautious not to reveal too much about their objectives as they interview prospective advisors, because you only hire one firm, and if you interview four, that means three firms you didn't hire now understand your objectives. This information will quickly be communicated in the weekly market meetings all major service firms hold. Firms track active market demand, and all the major firms have investor-side (landlord) practice groups. It’s quite possible one of these firms also advises your landlord. Hence, the individuals not hired are likely to report details about the occupier’s objectives (to the extent known) to the group. This can harm leverage, for example, when the occupier shares that its primary goal is to extend the existing lease and that information gets to the landlord. In this instance, the landlord will behave differently during the negotiations, making fewer concessions because they do not perceive as much threat of losing the tenant. The most basic element of a good external market message is that it makes it more difficult for any one counter party to easily assess your objectives. The goal is to put everyone on a level playing field in which they must compete fully for the tenancy.
Once the external messaging has been established, site selection begins. Here, we identify alternative sites and set about conducting physical inspections of these sites. This is a vital step in the process. This activity also reverberates around the market, making the external messaging more credible. The credible threat of losing the deal is the single most effective lever we have in accessing value. The goal of the site selection process is to identify a short list of sites, all of which could potentially fulfill the objectives. Importantly, this list must include more than just unique buildings. It must also be comprised of the right owner motivation profiles and asset dynamics, those that will help drive value. It’s important to understand the three distinct landlord motivations profiles, cash flow, future value, and REIT, in addition to being fully aware of the capital stack dynamics of each asset, as these variables will materially influence value creation. By way of example, in today’s San Francisco office market, there are many assets that simply cannot transact at market due to debt and equity constraints. Negotiating with these buildings will not yield a positive market outcome.
Once the short list has been established, the negotiations can begin. This is where we manage a bid process in which landlords bid for the tenancy. We initiate this process with a request for proposal (“RFP”) in which we detail our client’s objectives and ask the landlords to provide specific responses to all the items included in our comprehensive RFP. In today’s market, beginning with the RFP is a critical step because the market is so fractured, we can’t be certain how any landlord will respond. Some may choose to begin the negotiations at levels we would not have otherwise anticipated. This is a multi-phase, offer/counter-offer process designed to extract increasing levels of value as the process evolves.
The best market process is one that communicates relative indifference, one that keeps the counter parties on unsure footing. It’s not about dishonesty, or subterfuge, it’s about providing a platform to access the full range of value each landlord is willing to provide. The market process must be thoughtful, intentional, and properly managed. These are the hallmarks of an effective market process.