Tricky Markets

The trajectory of rental economics varies dramatically by market. In St. Louis, for example, historical rents show relatively little movement over time. The market is largely flat. In San Francisco, the opposite is true. Rental values have swung by 50% or more in both directions across cycles.

San Francisco is a boom-and-bust market. Tethered to the tech sector, it responds quickly and often violently to the cycles of the innovation economy. For owners, this demands a forward-looking mindset. Values that fall sharply have a tendency to rebound just as quickly. Locking into long-term economics at the bottom of a cycle can prove costly.

We are in that kind of moment now. Landlords are weighing whether to transact today at current market levels with a stable, long-term occupier or hold out for improved pricing in a recovery. Among higher-quality assets, there are early signs of hesitation, even regret, around deals struck at today’s terms.

This is when markets become difficult. The best landlords stay disciplined and honor their commitments. Others don’t. We are already seeing instances of owners attempting to re-trade previously agreed terms. Every landlord has the right to set pricing. But once a tenant commits at that level, the terms should hold. Moving the goal posts undermines trust and introduces unnecessary risk into the process.