Is Your Window Open?

Among the more routine elements of our business advising tenants is the art and science of analyzing opportunity, or what we call “looking for open windows.” When markets shift, as they did post-pandemic, we think it is important for occupiers to take stock of their lease, the market, and the specific dynamic in the building in which they lease space.

Somewhat surprisingly, this analysis is not intuitive to many of the companies we speak with. Instead, they believe they are stuck with their lease until the end of term. Sometimes that ends up being true.

But when it is not, when the so-called window is open, tenants can derive significant benefit from a lease restructure.

But just as windows open, they close.

The circumstances that lead to opportunity typically involve a distressed capital stack. The equity may be wiped out, a loan may be maturing, or both, all against the backdrop of steep declines in the market value of the asset. When this type of distress is present, a tenant who is willing to commit to extended term may find a landlord who is ready to reduce the existing rent immediately and contribute concessions in exchange for that term.

We have written about this strategy in the past. We even have a name for it: “End and Extend,” meaning end the high in-place rent now and extend the term.

What causes the window to close?

It is usually a reset of the capital stack, which may come in the form of an asset sale, an infusion of fresh equity, and/or a new loan. A reset takes the pressure off and allows the landlord to lease at market. After a reset, if the building has vacancy, it is common to see a flurry of new leasing activity.
When all of this is happening, the landlord loses its motivation for disrupting the tenant’s in-place cash flow.

In other words, there is no longer a reason to reduce the existing rent, irrespective of an extension offering.

While the San Francisco office market is in the early stages of a recovery, there remains plenty of distress and, potentially, open windows. We refer to the process of analyzing specific situations as part art and part science. It is art in that one must aggregate a great deal of data, historical, current, and projected, to paint the right picture and craft the negotiation strategy.

The science is in running the models that inform the opportunity.