In San Francisco, like any real estate market, it’s easy to focus on the big players—Twitter’s enormous Market Street office, or AirBnB’s remodel of 888 Brannan. These are the movers. These are the acquisitions that make headlines.
But underneath is an entire world of real estate transactions to which few people pay attention. Ignored by press, practically ignored by real estate brokers, it’s a hardscrabble, high-turnover market that’s more gritty than glamorous—it’s the realm of small space leasing.
“In traditional markets, they’re really focusing on the large vacancies, because that’s how the landlord pays the mortgage, pays their investors—that’s why they bought the building. Sometimes smaller spaces remain as a result,” says David Adams, managing director at real estate brokerage firm JLL and co-creator of HiRise. Since these smaller spaces are less lucrative for both brokers and landlords, there’s less attention paid to them.
For those tenants that need that space, though, the market is a frustrating and awkward labyrinth to navigate. “An 1,800 square foot tenant is looking for space—the broker may show them a 2,500 square foot space, but to an 1,800 foot tenant that’s a big difference. There’s a lot of friction in that end of the market,” says Adams.
Alan Bernier, founder of Rofo.com, agrees. “Each commercial real estate market is completely different in terms of economics, industry participants, supply and demand. Yet the inefficiencies in each market are the same,” says Bernier.
Both HiRise and Rofo use technology to push small space leasing options into the spotlight and (hopefully) eliminate these inefficiencies.
Rofo, which originated in 2008 in San Francisco but has since expanded to 3,000 cities, is the more traditional marketplace. “Rofo provides a platform where businesses can search and discover information on available properties and consult with local real estate agents,” says Bernier. “We also provide a reverse search where companies can input their business space requirements and make highly relevant connections.”
And business is booming. “Rofo has originated 530,000,000 square feet of property tours with an average size of 14,100 square feet, ” says Bernier. “The larger companies choosing to be headquartered in San Francisco is spawning further demand for smaller businesses serving those larger companies. Making sure there’s the right mix of inventory for smaller users will be the challenge provided demand remains strong.”
HiRise, which hasn’t officially launched yet states on its Web site (http://gohirise.com/) that it will be coming to Washington, DC in May 2014, sees the same issues with San Francisco. “If you look at downtown San Francisco proper, the vacancy rates are fairly low. I believe there’d be a significant demand from the tenant side, but we’re not sure of a significant demand from the landlord side,” says Adams.
But regardless, HiRise intends to go even further towards increasing transparency in the small space market.
“The average transaction size in the U.S. is about 4,100 square feet, which is much smaller than we anticipated when we started this project,” says Adams. “We’ve broken down the by-the-square-foot paradigm and created a by-the-seat paradigm. That’s how the spaces are priced, is by occupancy. Everyone understands how many employees they have.”
Landlords set the maximum occupancy per space, and then tenants can browse by the number of seats needed. Landlords may even list spaces for co-location, ensuring the entire space is filled even if it takes multiple companies to do so.
“The tenant basically goes in and says I need thirty spaces and this suite will allow me to co-locate, I’ll take these thirty spaces,” says Adams. “They put it in the cart, select a term, sign up for the payments process, execute the lease and submit it to approval by the landlord, and they are given an approval within seven days or they’re free to do another transaction.”
“It’s a speed of process and a transparency of process they’ve never had before,” he continues. “Going back to my example from earlier of the 1800 square foot tenant everyone keeps trying to put in a 2500 square foot space, they won’t be faced with that challenge.”
Combine the financial crash in 2008 with the growth of start-up culture, and small space leasing is only growing in importance. “We have certainly seen greater demand in leasing since 2009 and 2010. A lot of that is driven by the relative health of the local tech industry. More capital for startup growth and more business formations,” says Bernier.
And, says Adams, “We’re seeing two things happening: focusing on smaller spaces rather than these large mega-spaces on the corporate side and a focus on shorter lease terms. That trickles down throughout the whole marketplace.”
Whether its HiRise or Rofo, this is a segment of the market in need of a lot of attention nowadays. Perhaps these two companies will be the ones that drag it out from the shadows.