Someone Is Always Applying Pressure

Negotiating an office lease is not like most financial transactions. Outcomes aren’t dictated by a single metric—they’re shaped by a complex blend of variables: building class, age, views, landlord cost basis, loan structure, amenities, motivation profile, vacancy, and market dynamics. While experts can project a fair market value using comps from recent arms-length deals, real leverage—and real savings—only emerge through a thoughtful, iterative negotiation process that forces landlords to compete.

Some companies hesitate to engage an advisor, telling us, “We have a great relationship with our landlord—we don’t want to upset them.” That relationship often includes lunches, box seats, hosted events—all straight from the standard landlord playbook. There’s nothing inherently wrong with it. It’s smart business for landlords to cultivate goodwill with tenants.

What is wrong, however, is when that goodwill clouds judgment. Just because your landlord is friendly doesn’t mean you should skip a full market assessment or give up the leverage you’ve earned. Even worse are the instances when landlords tell tenants they’ll “get a better deal if they don’t use a broker.” We’ve addressed this myth in depth before

It’s always baffling to us when companies:

1. Enter a multi-million-dollar negotiation without professional representation, and

2. Take at face value that a landlord—whose job is to maximize profit—will simply hand over a sweetheart deal.

Landlords don’t give tenants better terms out of kindness. They apply pressure—subtly or aggressively—to get the best outcome for themselves. That’s the game. And tenants who aren’t applying equal or greater pressure in return are losing value.

Negotiation is about tension. At some point, each party becomes indifferent enough to walk. Maximum value is found just shy of that point. That’s where the most seasoned advisors operate.

In San Francisco and other major markets, the balance of power shifts with the tides. For years, landlords held the upper hand. Now, tenants—when properly advised—have real options. Pressure is part of the process. But it's also the tool that unlocks your best possible outcome. 

Short-Term Loan Extensions Don't Equal Stability

We’ve often emphasized the importance of understanding the capital stack—equity and debt—when leasing office space. Today, one of the most critical considerations is: Who is really in control when the capital stack breaks down? The answer is often more complex than it appears.

Frequently, the party identified as the “landlord” or borrower continues to manage and lease the property, even after losing its equity stake. In these situations, true decision-making authority may rest with the lender. This makes it essential for tenants to understand who the lender is and what drives their decisions.

The Illusion of Stability

Short-term loan extensions can obscure the reality of a distressed capital stack. While these extensions may appear to signal stability, they often do not. In most cases, they represent a lender’s effort to buy time—not a reflection of financial health. Even if the borrower makes a payment as part of the extension, it doesn't necessarily mean the underlying issues have been resolved.
To understand why, it helps to consider how office loans are structured. Typically:

• The loan is secured solely by the asset, with no recourse to the borrower beyond their equity.

• Loans are often interest-only with a balloon payment at maturity.

• Terms range from 5 to 10 years, with a 30-year amortization schedule.

• Repayment strategies rely on either selling the asset or refinancing at the end of the term.

In today’s post-pandemic market, many office assets have lost value, wiping out borrower equity. If a property is underwater, refinancing requires fresh capital—something not easily secured for distressed assets. In many cases, the borrower’s only viable option is to return the property to the lender.

Why Tenants Should Be Wary

Tenants considering leases in buildings operating under short-term loan extensions should proceed with caution. These properties often remain burdened by unsustainable capital structures. Financial partners may look to cut costs wherever possible, potentially impacting building operations and tenant experience.

Moreover, any lease signed before a building is recapitalized at current market value is likely to come at a premium. In other words, tenants may end up paying materially more than market rates—only to see rents reset downward once a new owner acquires and recapitalizes the asset.

Bottom Line: Short-term loan extensions are not a sign of long-term stability. For tenants, understanding the full financial picture behind a property is essential to avoid risk and ensure long-term value.

Hidden Traps in Landlord-Funded Tenant Improvement Allowances

Office lease negotiations are complex, and tenants who lack strong representation are often at a serious disadvantage as they don’t know what they don’t know. One area where this becomes painfully clear is the tenant improvement allowance (TIA).

Landlords often prefer providing a TIA because it works to their advantage. While it may appear generous, it frequently comes with hidden costs tenants don’t anticipate. Things like path-of-travel compliance, demolition, and landlord-supervision fees, to name a few.

Depending on the building’s compliance status, path-of-travel expenses can be substantial. Missing demolition costs alone can reduce the effective TIA by as much as $10 per square foot. And supervision fees? Don’t get us started.

Typically pegged at 3% of the total project cost, supervision fees can turn into a sneaky profit center for the landlord. On a $300/sf buildout for 15,000 sf, that’s $135,000 siphoned directly from the allowance, far more than the actual cost of oversight.

A savvy tenant advisor will:

• Negotiate the TI allowance net of demolition and path-of-travel costs.

• Cap supervision fees at the lesser of a fixed amount or actual cost.

Another common mistake: not knowing what it will cost to build the space.

Before finalizing lease terms, tenants must:

• Develop a preliminary design plan.

• Obtain ROM (rough order of magnitude) pricing from multiple contractors.

• Use this data to inform negotiations.

Without due diligence, tenants risk costly surprises and budget overruns.

In TI negotiations, traps are hidden everywhere.

When the Landlord Isn't

When the financial structure underpinning ownership of an office building is distressed, the party purporting to be the landlord may lack decision-making authority. In such cases, it may be a lender or other financial partner calling the shots.

Tenants can spend months negotiating terms that the landlord may represent as acceptable only to have a lender balk. When this happens, the best-case is when a lender tweaks the deal in ways that, while annoying, are nonetheless acceptable, and the deal can proceed. In the worst case, the lender is unwilling to proceed, and/or the terms they demand are unacceptable. This can put the unsuspecting tenant in a bind, having squandered months of its project schedule only to return to square one.

There are two ways to avoid this risk. First, smart occupiers retain skilled advisors who have demonstrated knowledge of capital market dynamics and can readily identify potential issues of authority before they become problems.

Second, the best advisors will always advocate a process that keeps their clients’ options open. Having a nearly fully negotiated plan B is invaluable when something goes wrong with the top choice.

It won’t always be obvious when the landlord isn’t, but with the right strategy and process, it won’t matter.

Subleasing Office Space - What Tenants Need to Know

Subleasing is often misunderstood—both by tenants trying to offload space and those looking to lease it. Here are key considerations from both sides:

For Tenants Subleasing Their Space:
Start by reviewing the sublease and assignment clause in your master lease. This section outlines critical rules—such as landlord consent requirements, recapture rights, prohibited subtenants, and documentation needed (often including financials and a fully executed sublease). Subleasing without understanding these terms can waste time and limit your options.

For Prospective Subtenants:
Subleases come with risk. Without a landlord recognition agreement (rare), your sublease could be void if the master tenant defaults—leaving you displaced or forced into a costly direct lease. Evaluate the sublandlord’s financials, and expect limitations on renewal rights, space modifications, and lease term flexibility. Also, ensure the sublease complies with the master lease and secure landlord consent, which can take 30+ days from full submission.

While subleases can offer short-term savings for subtenants, and cost mitigation for tenants, they demand careful planning and expert guidance.

A Long Shadow

When companies select a real estate advisor, one crucial yet often overlooked factor is the advisor’s credibility with landlords. It’s understandable why this isn’t top of mind. Credibility, after all, is difficult to measure. To be clear, this doesn’t mean you want the broker that all the landlords like. You want the one they respect.

But what does this kind of credibility look like in practice? It is about experience. Years of active engagement in a market. This kind of prolonged market presence does more than sharpen a broker’s skills; it casts a “shadow” within the landlord community, the owners and brokers who sit on the opposite side of the negotiating table.

There are good shadows and bad shadows. A good shadow is built on integrity, honesty, and reliability. It’s the reputation of a broker who consistently represents client interests to the fullest while running a disciplined, trustworthy process. This reputation fosters trust with landlord counterparts, a trust that translates directly to greater leverage and better deal outcomes for the tenant client.

From the moment you step into a building to tour space, the landlord’s broker is sizing up not only your company but also your advisor. Sure, you may have stellar credit and be a highly sought-after tenant. But landlords know they must ultimately negotiate with your broker. If the broker has a track record of unreliable or self-serving behavior, or if they are simply unknown, you will receive less favorable terms.

As you interview brokers, ask them how their experience impacts the value they create. Ask them to tell you about their shadow.

The Exclusive Right to Represent

At TenantSee, we only advise clients under a formal working agreement that clearly outlines our role as the exclusive representative, the scope of services, and how we are compensated. It’s a short, straightforward document—but a vital one. It establishes our fiduciary duty and marks the official beginning of our advisory relationship.

Occasionally, we encounter resistance to signing this agreement—often due to misconceptions about how brokers work or how value is delivered. These conversations are valuable. They allow us to clarify our role early and avoid potential misunderstandings down the road. In rare cases, we uncover fundamental misalignment and choose not to proceed. If a prospective client can’t commit to a clear, accountable working relationship, we’re not the right fit.

Sometimes, companies refuse to engage any broker on an exclusive basis. For us, that’s a red flag. It usually signals a limited understanding of how commercial real estate works. Some believe multiple brokers will expose them to more of the market, or that exclusivity leads to complacency. This thinking is rooted in residential real estate, where access to inventory is more fragmented. But in commercial leasing, the real value is not in finding space—it’s in how the negotiation is run. Driving a strategic, multi-building process over many months requires discipline, precision, and trust. You can’t do that with multiple brokers. Companies that skip exclusivity almost always leave significant value on the table.

So why would a broker work without an agreement? There are two reasons: inexperience or a volume-based model. Newer brokers may be willing to take big risks because they don’t yet value their time. More seasoned brokers may play the odds, engaging in high volumes of activity in the hope that something sticks. In either case, the client loses focus, consistency, and negotiating leverage.

Is ChatGPT Better Than You (Me)?

If you’re a business professional—accountant, lawyer, engineer, or even (gulp) an office broker—you’ve probably wondered: Can AI do my job better than me?
 
As a broker who advises office tenants, I tested ChatGPT in a domain I know well. I asked it for average Class A office rents in downtown San Francisco over the last 30 years, including supply and demand dynamics. In less than a minute, it delivered a surprisingly accurate answer.
 
That’s the power of large language models (LLMs). When trained on enough data—and prompted well—they generate insights quickly. Much of the market data I use comes from private sources, but a lot of it ends up in public research reports. That means LLMs are catching up fast.
 
But raw insight is only part of the equation.
 
I then gave ChatGPT a real-world scenario: a high-credit tenant, recent anchor vacancies, a distressed landlord with a maturing loan. I asked for a negotiation strategy—and it offered a basic playbook that aligned with the one I’d pursue. That was eye-opening.
 
LLMs are closing the gap on the data and insight side of brokerage. Where they still fall short is in execution. Strategy isn’t just about having data—it’s knowing how to use it to apply pressure, to read the room, to manage nuance. That’s the art of negotiation. And for now, it’s still human.

What Tenants See Impacts Tenancy

Most of what tenants need to see in order to make smart leasing decisions is not immediately visible. It must be uncovered through strategic discovery and analysis. That’s the mission of TenantSee: to provide the process and resources that bring hidden factors to light. We don’t make decisions for our clients—we make their decisions better.

Recently, we were hired by a company that had worked with another broker for years. To our surprise, they hired us on the spot during our first meeting. We didn’t do anything flashy. The meeting was simply arranged so we could share our perspective on their lease using a proprietary tool we call the Market Diagnostic.

The Market Diagnostic evaluates ownership structure—cost basis, equity, and debt—to identify landlord motivations, risks, and opportunities. We review existing leases and vacancies to assess leverage, analyze the tenant’s in-place cost, and model the market value of a lease extension against the cost of relocation to alternative sites (low-, mid-, and high-cost scenarios). From this, we establish a strategic set of priorities.

About 30 minutes in, the CFO said, “I’ve learned more about leasing office space from you in 30 minutes than I did from my broker in 10 years.” That’s exactly what we aim for.

We often lead first meetings with the Market Diagnostic because it delivers real insights while showing how we think and what we prioritize. It's our way of helping prospective clients see the unseen—the critical details that shape leasing outcomes. We don’t hold back or worry about “giving away” value. We share freely.

Could your company benefit from a Market Diagnostic? Maybe we can help you see your situation from a different angle. If you're curious, reach out. There’s no obligation, and we promise not to give you a sales pitch. We get hired because people appreciate how we think—not how we sell.

What Really Matters

In the business of advising office tenants on leasing space, services are provided by a wide range of firms—from solo practitioners to global public companies with thousands of employees. As in any competitive industry, each firm tries to differentiate itself by highlighting its strengths while casting doubt on the competition.

A solo advisor may tout the benefit of personal, senior-level attention. These individuals often come from larger firms and claim they started their own shop after seeing firsthand how poorly those firms served clients. They may suggest that larger firms don’t give smaller clients the attention they deserve.

Other firms promote their "conflict-free" status, emphasizing that they only advise tenants. This pitch plays on the fear that so-called “full-service” firms—those that serve landlords, tenants, and others—may have divided loyalties, resulting in weaker advocacy. Some small firms also carve out niches in sectors like legal or nonprofit, positioning their services as uniquely tailored to those industries. To an untrained ear, these claims can sound compelling.

Here’s the truth: most of these marketing messages offer little real value to the client. They're often crafted to distract or instill fear—suggesting risks to avoid while promoting themselves as the solution. This is true for both the "conflict-free" narrative and the "we specialize in sector X" pitch.

So, what really matters when hiring a tenant advisor?

Four things: information, analysis, strategy, and experience/credibility.

Let’s start with information. Office markets are notoriously opaque. The more active and broadly engaged a firm is, the more it knows. For example, a small firm with a few tenant-only brokers will have far less visibility into market dynamics than a larger firm with teams engaged across tenant representation, landlord agency, capital markets, and asset services. Advisors at larger firms often understand the financial posture of buildings—details like cost basis, debt levels, and landlord motivations. This knowledge enables them to create negotiating leverage based on real-time situations like lease rollovers or looming loan maturities. Robust firms also track all lease transactions, not just asking rents, giving their clients a clearer picture of real market conditions. In soft markets especially, the spread between asking and actual deal terms can be wide.

Analysis is equally critical. Having data is one thing—knowing what to do with it is another. The best advisors work with research teams that extract meaningful insights to inform strategy. Firms like Cushman & Wakefield, for instance, have global research departments dedicated to this task.
Strategy emerges from experience, collaboration, and innovation. Leading firms foster a culture of shared best practices and continuous improvement. They attract top talent and serve some of the world’s most sophisticated corporate clients—raising the bar on strategy development. But sound strategy depends on a strong foundation of accurate data and analysis.

Experience and credibility go hand in hand. You want the most experienced broker at the most capable firm. Why? Because landlords and their agents know how to "underwrite" the broker across the table. When they see a less seasoned broker from a smaller firm, they assume (usually correctly) that this broker lacks market insight and negotiation savvy. As a result, they offer weaker terms. An experienced broker, on the other hand, knows when a landlord has recently made more favorable deals—and can push for the same.

With so many claims being made, it can be difficult to know whom to trust. But if you evaluate potential advisors based on their access to market information, capacity to analyze it, ability to craft strategy, and overall credibility, you’ll consistently make better decisions.

What Will We Do?

What if we didn’t have to work? How would we spend our time?  For most of us, this is not a question that has warranted contemplation given financial realities.  But as a society, now would seem to be the right time to begin planning for the possibility of a future in which human labor is automated.
 
The societal implications would be significant.  Many of us spend 25% or more of our waking hours working.  Our identities are often defined by our work.  Yet if you’re following advancements in robotics and generative AI, it’s possible to imagine a time when manual labor is done by robots and “cognitive labor” is done by generative AI. This doesn’t mean there won’t be some new, different form of work.  Humans are a creative species, and our societies need structure to survive.  Indeed, as a societal construct, work originated to enhance human survival.  It has its roots in the betterment of human civilization.
 
Sam Altman, as far back as 2016, conducted the most comprehensive study of Universal Basic Income or “UBI” in US history.  Why would he be so interested in this topic?  Altman has been vocal about the need for UBI as technology advances to replace much of human labor.  Few would seemingly be in a better position to see this future than Altman. 
 
It’s important to remember, our economic systems are of our own invention.  For most of us, it’s difficult to step outside the demands of our daily work life and realize…we did this to ourselves.  You hear echoes of this in the current discourse about return to office and work-life balance.  I’ve long argued this discussion is more about people wanting to work less than it is about office space.  To be sure, the present tension around work can be traced directly to technology.  After all, it’s technology that enabled some who formerly worked in offices to now work from anywhere.  Indeed, this is a precursor to the bigger conversation that lies ahead, the one in which not just the office, but the job itself, is no longer necessary.  What will we do?

What's Missing

Negotiating office leases is like any other complex financial decision in that more information leads to better decisions.  Yet companies face challenges acquiring the right information at the right time. Why? Because the services typically offered by real estate brokerages are centered on transacting based on site selection and the negotiation of basic rental economics.  This is not enough.  Sometimes, these services (at least) include a level of multi-building negotiation, exercising a degree of leverage, but too often they lack the proper structure to gather and assess critical data, data that will have a big impact on outcome. 
 
The best way to think about this is to contrast the 2 parties in an office lease negotiation, landlord and tenant.  Let’s start with the landlord.  They’ve acquired or developed the property.  They have a known financial structure within which they seek leases that are accretive to the capital partners.  Their investment in the asset is based on rigorous analysis of the competitive market landscape.  They constantly monitor the leasing values being achieved in comparable spaces at comparable assets.  They have architects and contractors to assist them in understanding how much it costs to build new spaces in the building.  They know everything about the stuff you can’t see, like the building’s mechanical systems and the extent to which the path of travel is code compliant.  They have lawyers that drafted their lease document to protect their interests.  They evaluate every proposal based on how well it fits with their financial objectives and the extent to which it compares with the market dynamic for comparable space.  In other words, they bring full-scope resources to the table to ensure they’re making the best decision for their investment. 
 
In contrast, tenants typically show up to the negotiation with…a broker.  Often, they begin with a  “search” process, armed with little more than a basic knowledge of how many people they seek to accommodate and geographic boundaries.  What’s missing?  An architectural program which details how the ideal space should be designed to accommodate key groups of employees and the important adjacencies between such groups.  The program will also reveal which floor plate is best suited to the need, in terms of size and type (e.g., side core vs. center core).  Also missing is a project schedule that organizes the project by key milestones to inform project cadence and ensure the project is completed on time, avoiding costly mistakes.  Of course, the project budget is another vital element in a well-structured approach. The budget is sensitive to leadership’s financial objectives, which can be nuanced.  For example, some companies are focused on EBITDA.  Others may be hyper-focused on capital preservation.  Maybe the company is a partnership poised to sell in the near-term - - - here, a long-term lease obligation may erode partner value.  Most importantly, structuring the team to access all the necessary data means more than hiring a broker.  You need to hire a broker that has a team and/or a process designed to assemble a team at the onset. 
 
When tenants get it right, it’s always a byproduct of coming to the table having solved the knowledge gaps that result in poor decisions.  The final lease decision is made at the point of total occupancy cost knowledge.  From there, the final phases of the project, design, construction, and move, cab be executed without surprise, on time and within budget.

AirOffice

For many companies, office space is among a variety of resources they make available to employees to help facilitate work.  Other primary resources include technology.  In fact, today, technology arguably contributes more to how work is done than the physical office.  The diminished role of the office in facilitating work has resulted in changes in how companies look to use office space.  One manifestation of this change is in flexible offices, or coworking spaces.  This product segment, having grown considerably over the past decade, is tangible proof of shifting consumer sentiment.
 
As a product offering, office space is hard to create.  It’s expensive to build, and, once built, it’s difficult to keep up with changes in demand.  Developers must design the office product to best meet demand, such as it is, while simultaneously working within physical site constraints which limit scale and shape of the floor plate, among other things.  Of course, cost is also a factor.  The typical structure of the financial investment for office involves debt and equity and is not designed to support short-term leasing.  These challenges have created the opportunity for coworking to flourish.  But even the coworking market is shifting to place increased risk on the landlord.  Whereas the historical model called for the operator to lease space from the landlord on a long-term lease at market rents, today’s softer markets have permitted operators to negotiate revenue sharing arrangements that avoid committing to a market rent.  In some cases, there is a minimum rent, in others the operator is permitted to recoup its operating costs first, before sharing revenue.  Deal structures are highly situational. 
 
At some point soon, pioneering investors will look to advance a different product offering using different financial assumptions.  Instead of attempting to work around changes in how the consumer consumes their product, they’ll embrace them.  They’ll provide highly flexible leasing solutions directly to the consumer, eliminating the middleman (the coworking operator).  Already, we’re seeing some large, institutional landlords dabble in this market (e.g., Tishman with its Studios brand).  But what other novel solutions might we see?
 
One solution that has strong potential is for landlords to offer tenants the ability to relet their space on demand.  In other words, offering existing tenants who are not coworking operators the option to satisfy high flex demand and offset their own rental obligations.  If you look at a market like San Francisco, for example, plagued as it was by a massive wave of sublease space beginning in late 2020, the ability to offer highly flexible space solutions, on demand, would have activated large swaths of unused space, solving 2 problems, 1) vacant space that is not generating income for the sublandlord and 2) flexible space solutions that allow occupiers to use space as needed.  How would this work in practice?  Airbnb.  Imagine the same principals applied to office space.  You have an app-based platform on which companies can market unused or under-used space, consisting of all or a portion of their leased space.  Users can elect to use the space for short term occupancies, ranging from a few days to months or years.  The logistical challenges center around how the building is managed.  Currently, most institutional office buildings require a complicated process and approvals before a tenant can sublease space.  This process stands in the path of efficiently addressing on demand leasing requirements.  Coworking providers, in contrast, are permitted to address the on-demand market via licensing agreements.  Why not permit the tenant to do the same?  If this contractual element were modified to provide the long-term, prime tenant with such flexibility, it could make the space solution significantly more valuable by giving the occupier a new way of solving for the realities of changing use cases over a long period.  “Airoffice”.  Maybe this is among the ways the office product will continue to evolve.

Buy Services, Not Fear

Fear sells.  But that doesn’t mean you should buy it.  So called “tenant only” firms sell the idea that they, alone, offer tenants conflict-free advisory.  To be clear, the potential for conflict does exist in commercial real estate advisory (more on that later).  Yes, as a consumer of such services, it’s important to be aware of how conflict can manifest.  However, the conflict narrative being peddled by the tenant only firms is more myth than reality.  It’s a clever sleight of hand, designed to distract the consumer from realizing the big gaps in knowledge that limit the tenant only firm’s ability to properly advise, while simultaneously suggesting great risk in hiring a full-service competitor.

Allow me to unpack this.  Their version of conflict would have occupiers believe brokers who practice tenant advisory and work at full-service firms stop short of accessing full value for the tenant client because they’re beholden to the firm’s landlord clients.  This is utter nonsense.  I’ve been a commercial real estate advisor for over 30 years.  I’ve worked inside large institutional landlord organizations, I’ve advised landlords as a 3rd party broker, and for the past 15+ years I’ve focused primarily on advising tenants.  I’ve held management positions and worked at a variety of firms, including at the best tenant only firm, The Staubach Company, and at global full-service firms like JLL and Cushman & Wakefield.  Why have most of the best tenant only firms disappeared over the last 2 decades?  Simple.  The practitioners and owners at these firms realized they could no longer compete effectively lacking vital data.  They were fully aware the conflict narrative they sold was smoke and mirrors, not real.  At the same time, their lack of critical knowledge was real, something that limited their practice.  Over my entire career, I’ve never seen a single instance in which a tenant advisor at a full-service firm (of which I was a part) compromised her fiduciary obligation to the tenant client in favor a landlord.  In contrast, we regularly see the effects of the tenant only firms’ limited capabilities in the transactions they negotiate, which are often considerably less valuable than comparable transactions negotiated by advisors working at full-service firms.  This is directly attributable to a lack of basic yet important knowledge.

The biggest potential conflict in commercial the commercial real estate services market (domestic) lies in the fact tenant advisors are paid by the landlord counterparty.  This creates opacity and tends to cause the tenant client to draw a less direct line between compensation and services.  At its worst, an unsophisticated tenant believes the fee is being paid by the landlord.  Yes, the landlord cuts the check, but the fee is baked into the lease, paid by the tenant through rent.  When engaging a tenant advisor, consider brokers based on the services they provide in the context of the fee they stand to earn.  This will level the playing field, enabling a true comparison based on the issues that matter; namely, the efficacy of the services.  Which firm offers the most services?  How do they understand the market?  What knowledge and resources do they draw from in advising tenants?  Don’t buy fear, buy great services to ensure an optimal solution.

How a Building Sale Affects Lease Negotiations

The pace of investment sale activity in San Francisco is accelerating.  This is the “Great Reset” about which we’ve written.  It’s driven by capital partners (equity/lenders) deciding there is no viable pathway to own their way to an exit and choosing to sell (usually at a steep discount to what they paid and/or the value of the debt).  Ultimately, these capital stack resets are healthy as they activate the asset, enabling new capital partners to transact at market.

But negotiating a lease during a sale process can be challenging.  The process of selling an office building is about telling a story.  The story is part current reality, and part aspirational outcomes.  Sell-side brokers create the story.  They produce a beautiful book, full of data and images called an Offering Memorandum, or “OM”.  The OM is distributed to prospective buyers.  OMs include detailed data about in-place cash flow, rents, and operating costs.  They highlight the building’s features and make a case as to how the building fits into the market and submarket in which it is located.  The best marketing campaigns are augmented by credible leasing brokers who provide additional first-hand market details that support the value thesis.  Of course, buyers must develop their opinion of value and they often bring in their own leasing experts to provide detailed analysis.  When the building first comes to market, existing capital partners will not be inclined to do leasing transactions unless such transaction(s) readily support the narrative being promoted in the OM.  Imagine how detrimental it would be to the value to execute a lease that creates a worse outcome than is being represented in the OM.  When buyers can choose between the glossy pages of the OM or actual leasing activity, they know where to look.

When a buyer has been identified and the sale is “in contract” but not yet closed, the buyer will take a seat at the negotiating table and drive decisions.  After all, they will soon own the building and the lease will impact their value.  At this point, a leasing transaction should proceed at a normal pace.   

It’s important to understand when a building is trading, to know where the process stands and to properly underwrite potential outcomes.  This can be especially challenging for tenants when looking to renew a lease in a trading building.  All of this accentuates the need for broker advisors to be fully aware of the capital market dynamic, in addition to understanding the leasing market.  These days, you can’t understand one without the other.

Leverage

The concept is simple.  It’s the thing you use to make the deal better.  But in real estate negotiations, the extent of a tenant’s leverage and how best to exercise it, is less than obvious.

To be sure, in soft markets like that of current day San Francisco, tenants enjoy basic leverage just for showing up.  But basic leverage won’t yield extraordinary.  Extraordinary requires accessing the maximum leverage a market will afford, an impossible undertaking without specific knowledge and strategy. 

How do we access total leverage?  We start by assembling a curated list of sites, each of which could work for our client, all of which encompass the compliment of landlord motivations necessary to drive leverage.  The most essential motivators for leverage creation include vacancy, pending lease rollover, cost basis, debt, and hold period or investment thesis.  When the combination of these variables is too severe (e.g., a broken capital stack) a productive negotiation is impossible.  The sweet spot is the place in which there is sufficient distress to compel aggressive action by the landlord but the landlord remains capable of transacting.  Once our site list is assembled, we compel landlords to compete for our client’s occupancy through multiple rounds of negotiation.  With each successive round, we exercise leverage to enhance value. 

What’s the difference between basic market leverage and maximum leverage?  At least 25%, often more.  The best part, maximum leverage costs no more to attain.  It simply requires selection of the right advisors, those who truly understand how to navigate the market to access total leverage.

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).