AI is Changing Tenant Representation

Just as it stands to alter many industries, AI will significantly impact my business, the business of advising office tenants. Interestingly, the change has been slow to come from within. Perhaps this is always the case. But the commercial real estate sector has been notoriously slow to adopt new technology or embrace change. I believe this stems from the original business model, which was centered on the provision of information in opaque markets. Brokers had the information tenants needed to transact. It was that simple.

Over the years, the best brokers and brokerages evolved to provide more than just information. They became expert consultants, offering a strategic approach to analyzing markets and exercising leverage to maximize beneficial outcomes. The best advisors have always combined data with strategy. Negotiating has always required understanding the leverage landscape and knowing how and when to pull the right levers. A disproportionately large part of the industry still subsists on providing the most basic service offering, typically centered on showing space alternatives. These professionals often lack strategic insight because they do not have access to key information, do not understand how critical data impacts negotiations, or both. This subset of market participants will be among the first and largest wave of disintermediation.

Our approach to advising tenants has been developed over decades of experience. Despite its nuance, what we once regarded as a proprietary edge can increasingly be replicated by agentic AI. We can and should build an AI agent that automates large swaths of what we do. And we will not be the first or the only ones to do so. Because the industry has long suffered from an institutional aversion to change, those outside the industry may be the first to build models that fundamentally disrupt it. The theoretical moat that once protected the industry by limiting customer access to full data is shrinking. The largest data aggregator in the industry is Costar. Costar gathers data from landlords and brokerages, repackages it, and delivers it through an expensive subscription-based platform as a one-stop searchable database of availabilities and analytics. Its analytics have always been less robust than those of the best large brokerages, but they have steadily improved since its founding in the late 1980s.

For now, owners of office buildings mostly elect to list their space with Costar, but many also maintain their own websites where availability is posted. We have reached a point where site-specific data is largely accessible directly to customers who know how to prompt AI effectively. By scraping the full universe of available data, AI has also made large advancements in producing increasingly accurate market analysis.

This points to a marketplace in which the broker's value is insights. The broker becomes an expert at evaluating data to uncover critical insights that materially impact outcomes. Office leases are unlikely to trade on blockchain anytime soon. In a capitalist system, both landlords and tenants have an incentive to craft advantage from the inefficiency of opacity, which keeps them operating in a marketplace where not all information is revealed. But enough of the market will be knowable that finding the edge will require refined expertise, the kind only the most experienced and skilled professionals can offer. It will be the top ten percent of the industry who survive and thrive.

As the industry changes, customers are less certain why they need brokers at all. Early-stage tech companies, for example, have always struggled to find value in tenant advisory beyond site selection. Today the problem is even more pronounced. Executives at these companies are predisposed to a digital-first mindset. They move fast and are often surprised by the clunky inefficiencies of leasing space. They see brokers as an inefficient vehicle, even a hindrance, to getting what they want: information on available space and buildings. They equate broker value to the least valuable service a broker provides. In doing so, they fail to select an advisor who can engage with them at a true consultant level and thus end up transacting less productively.

When the Grid Can’t Keep Up

Did you know the U.S. is facing a significant shortage of electrical power? Demand from AI hyperscalers and data centers has surged, and the Department of Energy warns that if new generation doesn’t keep pace with plant retirements, blackout risk could rise dramatically - with some scenarios showing up to a 100-fold increase by 2030. AI and data-center loads currently account for roughly 4–5% of U.S. electricity use, and several forecasts project them rising toward 8–10% by 2030. In its current state, the U.S. power grid cannot fully meet present or future demand.

Government agencies and AI industry leaders are increasingly concerned that the U.S. may lose its competitive edge to China, which now has well over twice the U.S. generation capacity and is expanding it at a far faster pace. This widening gap could influence which countries are best positioned to support energy-intensive AI growth.

We’re already seeing the effects of an oversubscribed grid in commercial real estate. In some regions, utilities have reallocated or downgradedelectrical service to buildings that sat empty during the pandemic, prioritizing areas with active demand. As a result, historical power specs often do not match what the utility can deliver today, especially as AI demand accelerates faster than new generation can be built under current federal energy policy. This creates real risk for occupiers signing leases under outdated assumptions.

A good tenant advisor will confirm with the utility what capacity is actually supported today, rather than relying on outdated building specs. It’s not about inspecting transformers ourselves - it’s about making sure the power a lease promises still exists. This issue isn’t going away, and CRE decision-makers will need to adapt as these constraints tighten.

The Productivity Paradox

The advent of AI has sparked profound changes in how employers are thinking about work. Among its most basic promises, AI offers a pathway to complete routine aspects of work more efficiently and at significantly lower cost. Recent employment data suggests the early stages of a shift: employers are not only replacing some workers with AI, but increasingly viewing their workforce through a colder, more analytical lens with an eye toward reductions.

Human employment has long been…human. Involving people, as it does, it is inherently complex. People are unpredictable. They have good days and bad days. They get sick, distracted, inspired, or demoralized. And yet, economic systems like capitalism depend on people’s willingness to participate. They require belief. The social contract of work is built on the premise that individuals see value in engaging productively, that they believe they can lead more fulfilling lives by contributing their effort and talent in exchange for fair reward. The system runs on incentives and purpose.

Today, that belief is beginning to erode. As the perceived value of human employees declines, anxiety rises. Meanwhile, corporate leaders are pressured to stay competitive by accelerating toward a digital future.

The push begins with task analysis:

• Which functions can AI perform better, faster, or cheaper?

• What roles can be automated or replaced?

On a spreadsheet, the trade looks simple: replace “Jane” with AI. It’s a winning trade. Jane is expensive, imperfect, and may eventually quit. AI is tireless and precise. But when applied at scale, this trade has potentially destructive implications.

This is a pivotal moment. We must ask ourselves: what is the purpose of our economy? Is it merely to maximize profit for the few, or to serve some broader societal good? Viewed solely through the lens of efficiency, humans will always fall short compared to modern compute. Yet, as we race toward our digital future, I see very little discussion about the bigger picture. It’s at least possible AI fails to meet it full promise. But the pace of its current advancement would seem to indicate otherwise.

What AI Can’t Replace: You, in Person

Here, in the fall of 2025, employee demands for flexible work have been muted by a changing reality, one in which employment itself feels less certain. Distributed work was never destined to end well for employees, especially those in high-cost markets like the US. And now, with the rise of AI, the connection between work and specific human workers is eroding even further.

Separating worker from place was always an existential threat to the worker. The more disconnected the employee, the easier it is for the employer to optimize for task fulfillment. It becomes less about providing employment for Jennifer, who, in turn, is known to use the income to support her family. Instead, employers today are encouraged to optimize through technology.

Ironically, it was employees, in their quest for more flexibility, who championed the very use of technologies which accelerated their disconnection from the company. In pushing for remote work, many employees overestimated their value. Others imagined hybrid schedules as a sustainable compromise. But what seemingly all missed is how much not being together weakened the bond between themselves and their employer.

Enter AI. It is the ultimate expression of technology’s quest for efficiency and cost reduction, in some cases, bypassing the human worker entirely. The dream of flexible work giving way to a new equilibrium of freedom and productivity may have been an illusion. Our current moment reflects deep economic and cultural forces pushing us toward the efficiency motive, the full realization of which may be less human-centric.

Yet for most of human history, society has been organized around physical connection, around people being together. Technology increasingly stands between us, mediating, filtering, and, in some ways, replacing that connection. Unless the value you bring to your company is exceptional, irreplaceably tied to you, your best strategy for career preservation may be personal connection.

Algorithms Don’t Need an Office

Those who make their living in the office market, investors, lenders, and brokers, tend to be averse to change. Big shifts, such as the pandemic, trigger a collective head-in-the-sand moment. Here in San Francisco, despite being in the epicenter of AI, it’s difficult to find thoughtful real estate industry dialogue about how AI might reduce the labor force and lower demand for office. It’s a bit like contemplating one’s own demise.

To be sure, the surging demand for office space from AI companies makes for an awkward bedfellow. On one hand, market players welcome an expansionary sector — it’s exactly what we need to fill our empty buildings. On the other, we quietly worry demand for office may surge while AI is being built but rapidly decline as AI is deployed and begins replacing workers at scale.

For my part, I’ve tried to imagine how commercial office brokerage might change with AI. It’s easy to see the obvious stuff but difficult to look ahead 10 years. Recently, I asked a young professional who straddles tech and real estate what a firm like Cushman & Wakefield might look like in ten years. Without hesitation, he said, “It’ll be a branded AI agent,” which sounded to me like an app. He envisions large CRE firms evolving into AI-powered agents based on proprietary data and analytics. What’s more, these agents will interact (largely) with other AI agents. A set of desired outcomes will be provided to an agent which will navigate other agents to fulfill the objectives. Less humans. Is this a reasonable view of the future? I have no idea. But here’s what I do know: algorithms don’t need an office.

Given my challenges visualizing the future of my industry, I decided to tackle a less complex subject: food. My family’s food consumption has gone decidedly digital. Date night? OpenTable. Groceries? Instacart. Dinner at home? Often Doordash. These platforms are guided by AI which tracks our habits, prompting reorders, suggesting meals before I even think about them.

For now, people are still in the mix. My Instacart orders are fulfilled by human shoppers, my Doordash meals delivered by drivers. But how long will that last? Imagine Amazon introduces a smart refrigerator. Call it the hardware (like my Peloton bike). For an annual subscription, Amazon delivers me the fridge at no cost. It monitors our food levels, links to Amazon’s robotic warehouses (and my bank account), and automatically replenishes my inventory. It suggests new recipes and with a click the recipe and ingredients are at my fingertips. Delivery is fulfilled by a robot at the warehouse loading an autonomous vehicle or drone. No store. No people. Just AI, logistics, and robotics.

Once Amazon controls product acquisition and delivery, why not also control its production? Amazon could take over farming, employing advanced robotics and bio-engineered solutions. At this point, they control the entire vertical, from inception to delivery.

Some AI evangelists argue we’re heading to a great place in which we’ll be freed from many burdensome tasks. However, in many cases, these tasks are also known as “work.” Work for which people receive compensation. So, one important question: what do we do when the performance of our business no longer requires us?

Optimists also liken this moment to the Industrial Revolution, which shifted the economy from agrarian to manufacturing and ultimately raised living standards. Machines replaced some jobs but created others. Perhaps AI will do the same. But if new forms of work emerge, will it happen in offices?

If I were a major office investor or developer, I’d be talking regularly with AI leaders, computer scientists, and futurists to learn as much as possible. But I’m just one guy trying to see around the corner of my own small world. For now, I’m keeping an eye out for that Amazon refrigerator.

Defining the Landlord’s Bottom Line

Every deal has a breaking point, the line where the landlord’s motivation meets their limit. A great negotiation brings you right to that edge, to the point of indifference.  This is the point where they’ve given everything they can, and anything more would tip the balance toward walking away. But how do you know when you’ve reached this point?  

The best brokers don’t just “negotiate.” They engineer leverage. They understand how capital stacks, lender pressures, and portfolio dynamics shape behavior. They know which owners are over-leveraged, which funds are on the clock, and which assets can’t afford another quarter of vacancy. They read the market from the inside out and design strategy around that knowledge.

Maximum value is not measured in how well a deal matches the comps.  That’s average value. Maximum value is measured in how far you’ve pushed beyond the comps. To acquire such knowledge, you must be able to do the landlord’s math.  What does the deal look like from their side of the table? What are they protecting? What are they willing to trade? That’s the difference between a broker who reports on the market and one who reshapes it.

Most tenants never see this side of the equation. They’re shown numbers, not narratives, “market” ranges instead of strategic pathways. This gives the average broker a wide space in which to lazily achieve the average result, a defensible outcome. But your goal shouldn’t be to hit the average.  The goal should be to achieve an exceptional result, one that captures every ounce of value.

Office space isn’t just an expense; it’s a strategic instrument. It influences culture, productivity, and identity. The delta between average and great can mean millions in savings and a workplace that inspires performance.

So, when you interview advisors, don’t ask only about process. Ask how they define the landlord’s bottom line. Ask how they know when the deal is truly done.

The Economics Behind Hidden Opportunity

The economics of an office lease are inherently opportunistic. Value tends to flow from one party to the other, depending on timing, market dynamics, and circumstance. This push-and-pull plays out across both the macro and micro levels of the market.

At the macro level, when vacancies rise across the city, negotiating leverage shifts to tenants. Landlords, eager to fill space, become more flexible on rent and concessions. Yet each building tells its own micro story. A property that’s 90% leased in a weak market may still hold firm on pricing, betting that a small amount of vacancy is worth the risk if it means maintaining above-market economics. The same opportunism appears in reverse during tight market when demand outpaces supply, landlords move quickly to raise rents and pull back on concessions simply because they can.

Most tenants, however, aren’t in the real estate business. They don’t see the hidden forces shaping value, factors like the capital stack, which refers to the financial structure behind a property, including both equity and debt. Shifts in that structure can create windows of opportunity that have little to do with lease expiration.

Consider a building with a loan coming due just as multiple leases are rolling over in a softening market. That landlord may be under pressure to stabilize income before refinancing. In such a case, they might offer reduced rent in exchange for longer term, boosting WALT (weighted average lease term), a critical metric for lenders assessing loan risk and pricing.

For tenants, this means opportunity often hides in plain sight. By periodically assessing their landlord’s financial and leasing position against their own occupancy needs, tenants can uncover leverage points that others miss. These hidden opportunities, when the market, ownership circumstances, and tenant needs align, often yield the most favorable outcomes.

Transparency = Value

Most tenants don’t really understand how office tenant advisors work. Brokers are often hired for their personality, connections, or confidence, not because tenants clearly see the value of their services or how fees are structured.

While tenants understand brokers don’t work for free, they often pay less attention to compensation because the landlord pays the fee when the lease is signed. Yes, the landlord cuts the check, but it’s the tenant who ultimately pays the fee through rent.  This arrangement makes commissions easy to overlook and often opaque without clear disclosure.

Fee structures vary by market. In some cities, commissions are tied to rent - so the higher your rent, the higher the broker’s fee. That’s an obvious conflict. In San Francisco, the model is different: advisors earn about $3 per square foot per year of lease term, capped at $30. A 10,000 SF, 10-year lease = $300,000 fee. The conflict in San Francisco centers on the amount of space leased and the length of term.  When your broker is pushing you to lease more for longer term it’s a red flag.

What’s a tenant really getting for $300,000? The best advisors bring more than building tours and charm. They provide strategy, analysis, negotiation leverage, and end-to-end services that create measurable value. But many tenants never ask the question.

When brokers are paid also creates misalignment of interests.  Brokers only get paid if a lease closes, at the end of a months’ long process. They risk providing extensive services without compensation.  This can present conflicts when a broker chooses not to provided vital analysis because it might result in no deal.  The best advisors always put the client first, no shortcuts, no hidden agendas.

How can tenants break through this opacity to select the best advisor? The solution is simple: force transparency. Ask prospective brokers to explain:

• How they’re compensated

• How their services relate to that fee

• What value they’ll create for you

The best advisors will answer directly. The others won’t. And that’s the easiest way to tell them apart.

Create It First

For years, we’ve emphasized the importance of creating your ideal office solution before going to market. Why? Because searching without clarity is inefficient and ineffective. Touring buildings with multiple brokers often means being steered toward spaces that serve their commission, not your needs.  AI makes the create process easier than ever.

What does it mean to “create” your office?

It means defining why you need an office, what you want it to achieve. Common drivers include:

• Team collaboration

• Culture-building

• Client interactions

• Brand presence

• Recruitment

• Retention

If your company believes an office best supports these or similar goals, the next step in the create journey is answering some simple questions:

• How many people will the office serve, and over what timeframe?

• Where should it be located and why?

• What design will best support your objectives?

• What’s the capital budget for securing the office?

• What’s the ongoing rent budget?

This process works best with input from finance, people, and operations leaders, noting each will have different priorities. Yet these priorities are also relative, meaning they’re not all equal.  For example, finance may push for low cost, but a cheaper space that fails to attract talent could become wasted spend.

For young, growing companies that don’t have experience leasing office space, AI tools can help in drafting an initial brief which can be used to properly engage a real estate advisor. For example, here’s a simple prompt:

We’re a 30-person AI company, growing 10% annually. We need open, creative office space with natural light in San Francisco.

We prefer a 3-year lease, no tenant improvement spend, and need to budget for rent, furniture, IT, and AV.

Which submarkets should we consider to attract and retain engineers? How much should we budget for up-front spend and rent?

Size: 5,000–6,000 SF (assuming 150–180 SF per person, with modest growth built in).

Location: Focus on SoMa, Mission Bay, and South Financial District—close to transit and tech talent pools, while signaling credibility with investors and clients.

Layout: Primarily open space with flexible seating, 2–3 small meeting rooms, 1 boardroom, and collaborative lounges; maximize natural light.

Term: 3-year lease with expansion rights if possible.

Budget:

Rent: $40–$65/SF/year, translating to roughly $18,000–$32,500 per month depending on submarket and building class.

Furniture/IT/AV: $20–$30 per SF upfront, or about $120,000–$180,000 total for plug-and-play setup.

Special Considerations: Look for spaces already built out to avoid tenant improvement costs. Sublease opportunities may provide turnkey creative layouts at below-market rents.

Once you’ve created a clear brief like this, the smart move is to hire an experienced real estate advisor. Unlike landlords’ brokers, a true advisor represents your interests, helping you secure the right space at the best possible terms.

Create it first. Then go get it.

Balancing Bold Design and Human Risk

City skylines are shaped by buildings that blend politics, economics, zoning, design, and ambition. For developers, bold design often means greater financial reward.

From the pyramids in Egypt to the Great Wall of China, humanity has always built to project power and culture. Today’s skyscrapers are simply the modern extension of that impulse, equally audacious symbols of wealth and modernity.

The Citicorp Center, once hailed as an engineering marvel, came within inches of catastrophe. Completed in 1977, its bold design masked a fatal flaw, one uncovered by undergraduate Diane Hartley. With collapse looming, engineers reinforced the tower under cover of night, quietly saving one of New York’s boldest skyscrapers and preventing a disaster that might have redefined modern architecture.

We seem hardwired to build big and bold, with captivating results. Anyone unmoved by the sight of the Burj Khalifa soaring into the clouds might want to check their pulse. We feel powerful from such heights, yet often ignore the risks behind the audacity. True progress in building comes not just from daring designs, but from carefully weighing human risk as we reach higher.

Drawing Hard Lines

Over the years, we’ve seen every imaginable approach to workplace communication management. From “…we’ll let you know what we decided,” to “…let’s give employees the illusion of input with a carefully crafted survey,” to the rare “…let’s genuinely listen and design around employee needs.” Before the pandemic, the norm was simple: senior leaders dictated how and where people worked. Employees were expected to comply.

The pandemic disrupted that model. Fearing turnover, talent shortages, health concerns, and even litigation, many companies staged a more accommodating posture, inviting employee input into workplace policy. But the notion of employees wielding real influence over corporate decisions always ran counter to hierarchical corporate order. The dynamic remained fundamentally top-down.

Now, circumstances, layoffs, AI, politics, and other factors have eroded employee leverage. The conversation around work is shifting back toward historical norms: employers set the terms and employees accept or leave. And with fewer alternatives, many employees have little choice but to acquiesce. As the Wall Street Journal recently framed it in “The Boss Has Had It With All the Office Activists,” companies from Microsoft to JPMorgan are reasserting authority, pushing back against protests on everything from politics to return-to-office mandates. At TenantSee, we’ve always maintained that the fight over “the office” is just one front in a larger battle over the nature of work.

If corporate interests were truly best served by broad employee input on things like political engagement, workplace models, compensation, or any other matter once reserved for executives, wouldn’t the free market have already taken us there? It’s telling that even startups, often heralded as more progressive, increasingly favor in-office work as they scale. Remote policies in younger firms are often driven less by empowerment than by cost control.

Perhaps employees mistook the reactive, crisis-driven behaviors of 2020–2022 as a permanent shift in power. Today, however, the lines are being redrawn. Work is beginning to look less like 2022 and more like 2010. And despite all the hand-wringing about productivity and bad commutes, employers seem to, once again, favor the office.

Slo Mo No Mo

One of the oldest tricks in the landlord playbook is the “Slow Play”.  This is when your landlord (figuratively) puts his arm around your shoulder and says, “…don’t worry, we’re going to make you a great offer, it’s just a bit early”.  What he’s really saying is, “…we want to back you into a corner so that you have fewer options, so you’re more captive, less likely to relocate.  This way we can achieve more favorable terms”.  Well, when you put it that way…

The Slow Play benefits the landlord both when market leverage is in their favor, and when it’s not.  In the case of the former, forcing a tenant to wait brings the possibility of competitive demand for the space, possibly fueling a bidding war, pushing rents even higher.  In the case of the latter, peak tenant leverage is when the tenant has credible options, when the threat of vacancy is real.  Accessing such leverage requires well-timed market engagement, a credible market process that clearly shows the landlord it must compete or risk vacancy.  How do you avoid being slow played by your landlord?  Engage a qualified advisor and run a full market process beginning at least 18 months ahead of your lease expiration. 

The office lease is a complex financial transaction with many moving parts.  Rental economics are broadly reflective of the market, yes, but they’re also heavily influenced by the unique circumstances of each asset and its ownership.  Things like vacancy, cost basis, and debt.  The best broker advisors understand how to create tenant leverage through a competitive market process in which landlords are forced to compete.  Note the use of the word “forced”…it’s not by accident.  Landlords would rather not compete. They prefer a captive audience.  Captivity, in the context of office tenancy, is when a tenant fails to access its leverage.  The most common cause of captivity is the failure to use time wisely.  The longer a tenant waits to engage the market, the lower the probability it will relocate due to the time necessary to negotiate a new deal, and to design and construct new space.  Landlords are attuned to the actions a tenant takes in the months running up to its lease expiration.  They underwrite both the probability a tenant will extend its lease and the extent to which they need to offer aggressive economics.  They’re watching. 

You love your building?  Great.  Your landlord is the best?  Awesome.  You want to stay in the same space?  Let’s make that happen.  But let’s make sure you get the full benefit of the market leverage to which you are entitled.  Let’s not fall prey to the Slow Play.  Say it with me, “…slo mo no mo!”

Confessions of a (Former) Landlord

I wanted you to feel awkward about bringing in a broker, like you’d be betraying a friend. I wanted you confident you knew the market as well as I did. You didn’t.

When you focused on the “little stuff,” I happily gave ground, winning on the big stuff. When your neighbor used a broker and crushed me for my best terms, I locked their deal in an NDA so you’d never know.

I told you there was “plenty of time” because my leverage grew every day we crept closer to your expiration date. I dropped your rent a little, knowing you forgot to reset the base year. I threw in a small allowance but it was structured so the code compliance bill landed in your lap. I gave you expansion rights on space that was already vacant, worth exactly nothing.

Do I feel bad? A little…maybe. But hey, it was your choice to negotiate without a broker.   Sure, you’re paying 30% above market.  But you won’t learn about that until well after the documents are signed, sealed, and delivered.  If I had to guess, you’ll put this lease in a drawer, lock it, and throw away the key.   

I won’t be around much for a while.  But don’t worry, like clockwork, I’ll be back just as your new lease approaches expiration.  You know, the usual, golf, tickets to games, etc.

Looking for Morality in the Wrong Places

The debate over office vs. remote work has taken on a surprisingly moral tone. Leaders like Elon Musk have claimed it’s “morally wrong” to let some employees work from home while others cannot. Jamie Dimon, in a now infamous leaked recording, dismissed remote Fridays with: “...and don’t give me this shit that work from home Friday works.”

While economists like Stanford’s Nick Bloom have studied remote work for decades, their research remained niche until 2020. Before the pandemic, the notion that where you worked might carry moral weight was virtually nonexistent. Even though the technology for remote work existed, the opportunity to do so at scale did not.

Morality, what’s right or wrong has never been fully aligned with work. The corporate promise is employment, not ethical alignment. At our best, individuals strive to be good and do right, but to expect companies to reflect personal moral values, like whether commuting is "immoral," is naïve. Employers design work structures to attract and retain talent. That’s economics, not ethics.

During the pandemic, many companies embraced remote work not as a moral stand, but as a pragmatic one. It was about competing for talent in a crisis. And now, as employers seek a return to office norms, the friction stems from more than just location, it’s about who controls how work is defined.

Employees had a moment of power during the pandemic. But ultimately, it’s the corporation that provides the work and pays the salary. And in that economic exchange, the power still tilts toward the employer. Looking for fairness and morality in that dynamic may lead to disillusionment, as reflected across today’s social media feeds.  Of course, all individuals should remain true to their moral compass. But we must also recognize the limitations of imposing our moral views on large societal constructs like work.

How Will Landlords Respond to a Recovering Market?

San Francisco’s office market decline post-2021 unfolded slowly, as landlords entered the downturn with strong fundamentals, including record occupancy, high NOI, and long WALT. Holding firm made strategic sense while testing the durability of remote work. But as hybrid and remote workplace models took hold, rent values ultimately dropped by 25% or more from pre-pandemic highs, a correction that only fully materialized in the past year (excepting the premium building/premium view market, which has steadily appreciated above pre-pandemic highs).

Now, momentum is shifting. Q2 2025 saw 2.1M SF of new leasing, a level well above the 1.6M SF quarterly average since 2006. With AI driving demand and office culture regaining strength, San Francisco is on pace to surpass 2019’s record new leasing activity.

So, what’s next? Expect landlords to get bolder: raising asking rents, tightening concessions, and standing firmer in negotiations. Still, with 35% vacancy and ongoing distressed sales resulting in new, lower cost bases, tenants retain significant leverage.  The 35% vacancy is not spread evenly across the market.  Some have more pain than others, widening the gap between high and low lease values achieved in otherwise comparable buildings.  But make no mistake, landlords will push hard to raise rents, translating every positive datapoint as justification for their effort.  Remember: rents always rise faster than they fall.

Letters of Credit and Security Deposits – What Tenants Should Know

Ever wonder why some landlords ask for a security deposit while others insist on a letter of credit? It often feels arbitrary, but here are the fundamentals:

Key Principles

• Stronger credit = less security

• Larger deposits should have a burn-down tied to tenant performance or financial benchmarks

• Security should cover a portion of the landlord’s upfront capital or a few months’ rent—not the full lease obligation

• Landlords prefer letters of credit (LOCs) because they can access funds faster in a default. Cash deposits may get tied up in bankruptcy proceedings

Sample Scenario

• 10,000 SF lease

• Solid tenant: profitable, cash-rich, good financials

• Landlord invests $2.05M upfront

• Monthly rent: $60,000 | Term: 8 years

• Landlord proposes LOC = 8 months’ rent ($480K) → too high

• Fairer ask = 3 months’ rent ($180K) with burn-down to 1 month by year 4

For Startups

Riskier tenants are judged by burn rate:

If a company has $10M cash and burns $800K/month, it has ~12 months of runway.

High burn = high risk → expect larger LOC or even prepayment of rent.

One More Thing: Pass-Through Entities

Large companies often use shell entities to sign leases. These may hold no assets, which can concern landlords. Solutions:

• Parent guarantee (limited or full)

• Use an entity with tangible assets

Watch Out for Hidden Limits on People and Power

One often-overlooked section of your office lease is the part that sets limits on how many people you can have in the space—or how much electricity you can use. These “consumption limits” give the landlord the right to charge you extra if your usage exceeds what's considered standard (though that “standard” isn’t always clearly defined).

Sometimes the lease includes an explicit headcount cap—like no more than 45 people in 10,000 square feet. Other times, it sets limits on electrical use (in watts or voltage), which can be harder to interpret.

Issues can arise if your planned occupancy already exceeds the lease’s limits from day one. As a rule of thumb, office leases should allow at least one person per 150 square feet. That’s considered high-density, but it’s still a common layout.

Electrical thresholds are more technical. To know whether your setup is within limits, you’ll likely need input from your IT team or vendors, who can help assess your equipment’s power demands.

Bottom line: Don’t gloss over this section. Make sure you understand what’s allowed—and what could trigger extra charges.

Ask Questions

Most tenants aren’t experts in building operating costs—yet they’re obligated to pay them. While a well-negotiated lease can include protections, leases are often filed away and hard to decipher when revisited.

The first step? Ask questions—starting with the property manager. Good ones value tenant relationships and can provide clarity. Landlords often offer limited info on invoices, but usually have deeper data for those who push. Don’t hesitate to ask for details.

Operating costs should be consistent with similar buildings in the area. If something seems high, professionals will compare line items—flagging issues like inflated management fees (which shouldn’t exceed 3% of gross revenue), overbilled internal services, or misclassified capital expenses.

If things still don’t add up, use the lease’s audit clause. You can bring in a professional to review the charges—though remedies are often limited to reimbursement and audit costs.

Bottom line: Operating expenses are complex and not always transparent. Tenants must stay proactive—ask questions, scrutinize invoices, and bring in experts when needed.

I'd Rather See the Movie

Ever tried reading an office lease? They’re dense, legal mazes—100+ pages of fine print packed with “notwithstandings” and “provided howevers.” They’re not just hard to read—they’re designed that way. Landlord attorneys often insert confusing “gotcha” language that can lead to costly oversights if you’re not careful.

Why are they so one-sided? Because landlords (and their lenders) draft them to protect their interests—not yours. These documents aren’t carved in stone—they’re negotiable. But what you get often depends on market conditions and the skill of your negotiators, including the attorney and the broker.

Many brokers disappear after negotiating the business terms. But real value lies in guiding the lease through every clause, from LOI to execution. So before hiring a broker, ask how they handle lease negotiations. Do they read leases? Do they comment? If not—you’re on your own in the fine print.

The Hidden Ratio That Could Affect Your Lease

A debt coverage ratio (DCR) is calculated by dividing a building’s net operating income (NOI) by its debt service. In office buildings, NOI comes from rents minus expenses and taxes. Lenders typically require a DCR of 1.2–1.35. If it drops below that, the landlord is technically in default—even if they’re making payments. This gives lenders significant control: they can sweep cash, restrict leasing or capital spending, demand more reserves, or even foreclose.

In high-vacancy markets like San Francisco, many landlords have fallen below required DCRs despite low loan-to-value (LTV) ratios. For example, a building bought in 2016 at 50% LTV and fully leased at $60/SF NOI was way above the DCR.   However, today the building is only 50% occupied, with falling rents and rising costs—pushing its DCR below 1.0.  This landlord is in default.

What does this mean for tenants? Sometimes, operations remain unaffected. Other times, service and maintenance suffer. But for tenants with upcoming lease expirations, a landlord in default can create leverage—and opportunity.  But don’t expect your landlord to volunteer this information.  Only experienced advisors who know where to look will be able to tell you if your landlord is in distress.  If you’d like to learn more about the circumstances at your building, reach out to us.