It’s been a tough year for everyone for all kinds of reasons. My sympathies and condolences to all who’ve suffered, and many have. This note, though, is about office building owners — and what’s next for them, all things considered. As between landlords and tenants, there’s no question that between the two, the landlords are better capitalized, better informed about bricks and mortar; and more in control with respect to the lease documents they and their lawyers drafted for tenants to sign.
The question is, landlords, what are you going to do next — because the office markets have crashed all around you. I summarize some of the big picture numbers below with an understanding that each landlord’s circumstance may be different. But the point is that things are not rosy. Tip #1: If you think you can continue to hide under the blanket and pretend that rental rates are unchanged from the pre-Covid days, please do us all a favor — mothball your building and don’t waste our time trying to make deals with you. If you remain exuberantly bullish in the face of record-low demand and soaring vacancies, just take your space off the market and hope for recovery before 2025.
Tenants and tenant-brokers are sorely in need of Covid-safe, workable, flexible spatial solutions with motivated landlords. If you’re not motivated to accept the realities of today’s environment, you’ll be wasting our time. And yours, too, by the way. You’ll burn whatever relationships you left standing before you started pushing unrealistic terms our way. We’ll give you some time, maybe about an hour, to decide whether you’re in or out of the market. But understand that patience is thin in the tenant market. Paying for unwanted and unused empty space since March 2020 will do it for most tenants. And no CFOs are worth their title if they’re not evaluating how to eliminate expenses.
Tip #2: If landlords want even a remote shot at renewing a tenant — they better get off their hands and be super aggressive. And now that tenant- brokerage fees have popped to $3/square foot/year, you should make clear on your first call to the tenant’s broker…no sweat, got you covered.
Finally, tenants are really good at the smell test — the smell of you know what. Is your building a breeding ground for Covid-19 contagion? If not, then prove it. They will be up to date as much as you, or even more, about what technology can do to eliminate and limit viruses. Tip #3: Landlords and listing brokers are not people of science. They are purveyors of office product with an aim to extract as high an economic benefit as they can from tenants, and we understand that. However, not even the newest of Class A office buildings are armed with sufficiently protective HVAC systems to prevent the Covid contagion from spreading in their buildings. And their elevators aren’t air-conditioned. So, tenants know very well what’s up.
On top of that, landlords need to be aware of today’s market realities, and I’ve compiled a summary here:
- The overall market for all office buildings in San Francisco, ~2,300 buildings, shows that nearly 28 million square feet is available on the market today, way up from 10 million square foot figure pre-pandemic.
- ~22% of office space is now available
- Net absorption, which measures net demand (contrasts all leasing activity vs. all direct and sublease space coming online) is NEGATIVE 1.5 million square feet at present (Q2 of 2021 in progress), this is following Q1’s NEGATIVE 3.1 million square feet
- We’ve had 4 quarters in a row of the lowest demand in history
- Since the beginning of the pandemic, the San Francisco market has experienced NEGATIVE net absorption of 11 million square feet
Dan Mihalovich | Founder & CEO | THE SPACE PLACE | Getting the best lease deals – just for tenants.
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