No Free Lunch

The office product offering is shifting to provide an array of hospitality-inspired experiences that, in some cases, rival those of a 5-Star hotel.  San Francisco landlords have lagged other markets in providing such high-end amenities because in the 2 decades prior to the pandemic the supply/demand dynamic favored landlords, making it easier to lease space  (e.g., they didn’t have to).  For the past several years, however, San Francisco landlords have begun to spend millions on targeted amenities.  The typical playbook calls for some combination of health/fitness, conferencing/events, club/lounge/bar, and specialty spaces, like golf simulator and podcasting rooms.
 
While some owners endeavor to “check the box”, providing the bare minimum, others have embraced a luxury model in which the spaces reflect high design and expensive finishes.  Further, in some cases the amenities are managed” with specific service offerings like gourmet chef catering/food services, personal fitness trainers, and concierge services.  They may also include flexible, coworking spaces.  Collectively, these amenities can reduce a landlord’s leasable area by 10% - 15%+. 
 
Amenity spaces cost millions to build, can be expensive to operate, and take otherwise leasable office space off the market at a direct cost to the landlord.  So how can landlords afford all of this?  By passing the cost on to the tenants.  Hyper-amenitized assets charge more rent.  For some tenants, the extra cost is worth it.  But it can be difficult to understand how those costs may impact a lease over time.  For starters, landlords are known to keep the cost artificially low while they’re leasing the building to remain competitive with the market.  Consider that many of the same buildings in which the amenity spend is highest are also buildings having the greatest vacancy (either new or renovated assets).  Once the building is fully leased, or near-fully leased, tenants will begin to experience substantial increases in operating expenses as the landlord passes on the full cost.  Absent caps on annual increases, tenants can thus be subjected to significant annual costs.
 
It can also be a problem when tenants realize they’re paying for bespoke services they may not use.  Things like the “free” personal training offered in the fitness spa.   Everyone whose ever bought a gym membership only to realize they’re paying a monthly fee for something they rarely use knows that fitness offerings are used by a disproportionately small segment of the total population (e.g., those most fit).  This means most are paying for a high-end service that benefits a select few.  Same for the beautiful bar/lounge space.  Undoubtedly, some smaller percentage of the total building population will use this excessively, while most won’t. 
 
There’s no free lunch.  When choosing a top of the market experience hub, it’s important to fully understand the landlord’s capital spending and the true current and projected operating cost of the amenity spaces.