Strategic?

What does good strategy look like in tenant advisory?? Will you know it when you see it? How can you determine which broker offers the best strategic solutions?? This week, we take a closer look at what it means to be strategic when advising tenant clients.

Every good tenant strategy begins with a keen understanding of the client’s target objectives and the market.? Being strategic requires an inquisitive mindset, a thirst for knowledge.? No good strategy ever evolved from being uncurious.? The right questions must be asked.? The best strategies also require data and analysis.? Transactions happen at a moment in time, but the decisions you make in that moment must be informed by both the historical trend and projected market outcomes, both of which require deep and long-standing market experience.? For example, if the market forecast calls for steep declines in rental economics beginning 2 years out from the time when a client must otherwise transact, a good strategy would center on creating a meaningful comparison of the cost/benefit of a short-term gap solution against a longer-term outcome.

Excellent office leasing strategies always have 4 basic parts.? ?First is defining the objectives and the market.? Second is site selection and preliminary analysis.? Third is identification of a short-list of sites, and negotiation with each over multiple rounds to exercise market leverage, resulting in a fully negotiated letter of intent.? Fourth is negotiation of the lease document and final design and construction planning.?

Each part is nuanced. ?For example, even when getting the first part right, many advisors fail to properly construct the site selection phase (the second phase) of the project.? The single biggest mistake here is a byproduct of low market IQ, resulting in a target list of prospective landlords that is too similar, lacking options that will enhance leverage.? Remember, office markets are unique in that landlord motivations differ significantly, even if the product does not.? You want to have a short list that avails you of those most willing to reach for your tenancy, to be aggressive in their approach, even if these options may not be the most favored choice(s).? In other words, some number of the prospective sites included on the short list are there not because they qualify as the best options, but rather, because they generally fit the product category (e.g., being reasonably comparable to the first choice options) and they have landlords who will heavily compete for the tenancy.?

Recently, we were hired by a client who shared frustration with the outcome of their last effort to lease space in San Francisco.? They understood the office market was soft, that it should afford them ample opportunity to achieve a great leasing outcome.? But after spending months analyzing options and negotiating with landlords, they felt the outcomes were inconsistent with the market.? Upon reviewing their prior strategy, it was immediately clear to us why the results were so disappointing.? They negotiated with a set of landlords who shared the same circumstances and motivations.? There was no leverage, no way for them to successfully compel any of the landlords to compete more heavily.

It doesn’t matter if the target lease is 100,000 sf, 10,000 sf, or 5,000 sf.? A good strategy will yield significantly better results.? Be sure to ask prospective advisors about their specific strategic approach to leveraging the market and creating value.? While at first glance, many of us sound the same, if you dig a little deeper, you will find meaningful differences, especially in how we think about strategy.? ?

?Ask TenantSee Weekly

How much does it cost to build new office space in San Francisco?? The cost to build space will vary, of course, by design, building, and whether the contractor is union or not.? Nearly all larger buildings in the financial district require union labor.? A typical office space, consisting of 40% built rooms (offices, conference rooms, etc.) and 60% open space, will cost about $250/sf from shell in the current market.? Many are surprised to learn that construction costs have not declined during the downturn.? In fact, construction costs are greatly impacted by the hourly wages of union subcontractors, wages that continue to increase, irrespective of market conditions.? It’s important to understand the concept of “shell space”.? A proper shell space is one in which all the prior tenant’s improvements have been demolished, the main lines for HVAC and fire sprinklers are distributed, core walls are finished, ceiling and lighting is demolished with all the prior tenant’s distributed electrical removed, floor is leveled and free of previous tenant’s floor coverings, restrooms are fully compliant (possibly with new finishes, depending upon age of the floor), and common areas are finished to latest standards and compliant with all codes and regulations.? The $250/sf cost is net of the costs related to these other items.? It’s also net of the tenant’s FF&E, IT, AV, and Security expenses.? These costs typically add an additional $50/sf to $70/sf to the project cost. ?