Men's Fashion - A Random Commentary

In the 1990s, my pants fit more loosely.  They were often pleated.  Then, seemingly overnight, loose fitting, pleated pants were out of fashion.  To be fashionable required an entirely new product, a new look.  My now out of fashion, yet still perfectly serviceable, pleated trousers were initially (optimistically?) relegated to the back of the closet, ultimately to be unceremoniously delivered to Goodwill. 

The arrival of flat front, tighter fitting pants caused men to shift (pardon the pun – all men will get that) other elements of their wardrobe, as well.  The sport coat and suit jacket were no longer meant to drape, but rather to accentuate one’s athletic build, thus eliminating one of the great benefits of the suit, enjoyed by slightly fat men everywhere.   The necktie disappeared.  Eventually, the suit, itself, began its journey to the back of the closet.   Then came athleisure, a product that could provide both the important tighter fit, while facilitating a much-welcomed degree of comfort.

Recently, my sources (e.g., the internet) are showcasing yet another shift in men’s fashion.  What’s new?  Loose fitting pants with pleats. 

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. 

What Do You See?

When you look at an office building, what do you see?  Maybe you see the architecture.  Maybe it’s the neighborhood, the restaurants, and amenities.  Perhaps, you see the views from within the building.  This is what most people see.  They’re all important.  But it’s what you don’t see that matters most.

As tenant advisors, we see the same things as you, but more.  Much more.  We see cost basis, debt, ownership motivation profiles, capital improvements, operating strategy/history, vacancy, other tenants, etc.  It’s this “more” which is included in our view that helps us create value for our clients.

While the architecture is stunning and the location is perfect, if the landlord’s equity is gone and the value of the loan is greater than the building’s market value, the suitability of this asset may be limited.  The quality of your transaction is directly correlated to how much your brokers know, and how skilled they are at putting that information to work (for you).  It’s in seeing and acting upon that which is less apparent that separates a great broker from the pack.

How Investor Exit Options Affect the San Francisco Office Market

When it comes to understanding the office market dynamic in a region like the San Francisco Bay Area, there are factors at play which are less than obvious but nonetheless impactful.  One such factor is the drastic decrease in IPOs since 2021.  This decrease is caused by a host of variables, including interest rates/inflation and the overall poor performance of recent IPOs, especially SPACs.  The historical venture capital playbook called for portfolio companies to show substantial revenue growth with limited regard for profit as valuations were (mostly) a multiple of revenue.  The value impact of running the business for profit was largely left to post-IPO (e.g., public market) investors. 

Today, however, with the IPO exit largely unavailable, most startups have no choice but to remain private.  This has caused founders to become more cautious with investor capital, making it last longer.  They’re forced to run the business with more discipline, with an eye to profit.  This, in turn, results in a very different hiring dynamic. 

By extension, a market in which startups are running more like traditional businesses has the broader effect of reducing demand for office space.  This is no small difference, as past markets were heavily influenced by extreme growth mandates which led to excessive hiring.  This new reality has played out alongside more obvious implications from changes in approach to workplace (e.g., hybrid and remote work).

Do Cities Still Matter?

I grew up in a small town but I always dreamed about big cities.  I sensed they were special places where, given the right amount of drive, the right mindset, one simply could not fail.  Sure, there would be ups and downs, but cities provided access to a robust network of opportunity.  This was in stark contrast to the small New England towns of my childhood, many of which never fully recovered from the demise of the textile mills in the early 1900s. 

Those were single-industry towns but the cities of my dreams were places where many industries thrived at once.  Physical places where the failure of one was overshadowed by the success of many.  Here, people came to do things, to make things.  This is where entrepreneurs thrived. 

The first choice I faced upon graduating from college in the late 1980s was about place, not work.  Would I choose the small-town life in which I was raised, or go to the city?  I had no doubt about where I was going, even if I had no idea what I would do when I got there.

Does place still matter?  Do cities still matter?  These are the questions that trouble me today, as I continue to bear witness to the post-Covid detachment of work from a designated place or places.  When workers are free to work from anywhere, cities suffer.  This is because cities were built, in part, as places for work.  It is the consistent presence of workers in the city which supports and promotes its economy, an economy which fails in their absence. 

What comes next?  Perhaps that should be the question.  If we no longer attach work to place, what do we do with all the places we built for work?  What do we do with our great cities?

Middle Manager on the Shelf

Our young children, now 8 and 9, have formed a special bond with Lucy and Jack, two elves assigned by Santa to watch over them.  For the past several years, Lucy and Jack have demonstrated extraordinary commitment to our family.  They’ve traveled during the holidays, magically appearing at our vacation destinations.  They’ve even stayed on after Christmas, despite being needed at the North Pole.  Just the other day, I found one of our children covering them in cinnamon (apparently this helps them get their magic back after being touched by humans).  To be sure, their presence has sharpened our children’s focus, causing them to think twice about being naughty, providing a welcome assist on the parental front. 

While our 9-year old is beginning to ask pointed questions, she’s either keeping the dream alive for her younger sister, or not quite ready to abandon belief.  Sadly, I suspect the former.  What makes the elf so powerful is the combination of magic and a connection to the big guy.  Magic is awesome, because for some period of a child’s life, it defies explanation.  Which other questions can be simply and definitively dismissed with a one-word answer, “magic”? 

Yet the elf’s magic is dark.  Sure, both Lucy and Jack wear a constant smile.  But behind their cheery demeanor lies the power to destroy.  I hate to be cynical, but I suspect my children’s proclaimed love for Jack and Lucy is, at least partly, fear.  To be blunt (and decidedly out of season), Jack and Lucy exploit their omnipresence to scare our kids into thinking twice about being naughty (even when there’s no one around), because, well, those elves are always there.  Naturally, this got me thinking about the office.

I’m considering developing a new product called “middle manager on the shelf”.  Imagine how effective this could be now that so many workers are remote.  Part of the swag an employee receives when joining the company could be a middle manager on the shelf.  Employees would be asked to carry their middle manager with them everywhere they work.  Of course, most employees won’t buy the magic narrative, so our middle manager will be equipped with audio and visual capabilities.  This will, effectively, solidify the essential connection to the big boss.

Having the middle manager on your shelf seems a fair trade for the privilege of remote work.  Sure, you might forget your middle manager on the shelf is watching while you take that post-lunch nap, but trust is built on transparency.  What do you think?  I’m on to something big, right?  I’ve got a history of sharing some of my best ideas before I ever do anything about them.  Watch. I’ll forget about this and next year, suddenly, middle managers on the shelf will be everywhere.