Hans Hansson | November 30, 2016

Castro StreetDear San Francisco Mayor Ed Lee,

Several years ago, one of our citizens and small business owner, Juliet Pries, had an idea to open a "prohibition style" ice cream parlor and soda bar on Cole Street in San Francisco. She secured the location for her new store, only to spend nearly two years earning the necessary permits to legally open. Through the City's Planning Department, the process for her to open her doors for business took so long that she actually took measures with the City to create a streamlined process and help small businesses open their doors sooner.

As you may already be aware, the process to change a space requires a considerable amount of upfront costs, including architects, consultants, attorneys– not to mention the time and effort it takes to secure the necessary support of the local community in order to successfully open a new store. In addition to these typical obstacles, business owners are expected to pay landlords the respective rent before business is in full swing, further challenging owners financially with having to sign a lease and make rent payments without the guarantee that they will even get approved.

In the instance of The Ice Cream Bar on Cole, the commercial space was converted from non-food use to a food use place. Although this is considered a legal use for the property, it still required what is called a "variance" so that the impact of this switch is gauged through the application process and public support. Today, San Francisco is so backlogged with these types of applications that the process easily takes six months or longer to complete.

Luckily, The Ice Cream Bar was able to open its doors and has since experienced incredible support from the Cole Valley community.

I've had the pleasure to know Juliet and see her business' success. I can say without a doubt that she perfectly eligible to expand her business into other locations, although she is currently not thinking about expanding.

San Francisco's Castro district is quickly changing due to formula retail restrictions that have been set in place. Formula retailers are establishments with more than 11 locations worldwide and standardized features or a recognizable appearance. The restrictions have made it extremely difficult for businesses to open on Castro Street.

The public review process is very challenging for business owners. It comes at a tremendous cost and is more complicated than a simple variance. As a result, vacancies have heavily increased on Castro street.

In support of small businesses, particularly in the Castro, Supervisor Scott Weiner encouraged the opening of ice cream stores back on Castro, where ice cream stores had disappeared over the years. About a year ago, a local landlord had approached my friend Juliet with a Castro location in mind, which he knew would be well supported by both Supervisor Weiner and neighborhood groups.

At the time, Juliet was confident that with the city would provide a quick permit process for businesses like hers and she believed she would be able to move in hassle-free. Unfortunately, that did not happen.

I had happened to be in the neighborhood when I saw Juliet in front of her new store reviewing her plans. She told me she was expecting to be open by the fall in 2015. Months later, I saw the space was still vacant and no construction had taken place. I was disappointed to see that she had still not opened and inquired about the delay. She informed me that PG&E took over 11 months to upgrade the electrical service, which of course without it, she could not secure a final occupancy permit.

This story is one of many that I experience as a commercial real estate broker in San Francisco. It speaks to the overly regulated governmental environment that destroys business opportunities in favor of public interest.

There is no real reason why the City's Permit Department and Planning Departments take months to make concrete decisions. Consequently, vacancy rates are continuing to climb. On Union Street today, one of the most popular neighborhoods of retail blocks, there are a total of 18 commercial vacancies. On Geary Boulevard, there are over 30 vacancies. These vacancies have a direct effect on the surrounding businesses and cultivate a hub for homeless.

I ask you, Mayor Ed Lee, and the Board of Supervisors to please create a proactive program that will hire proficient people to streamline the process for all construction and occupancy permits. No permits of any kind should take more than 30 to 45 days to complete, including the public hearings. Our great city should not hinder growth, but assist it. Please step up to resolve this problem.

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Hans Hansson | November 17, 2016

Commercial BrokerageAs the year starts to wrap up, we start to look to the new year and beyond, imagining what lies ahead down the road.

During this year's CCIM conference in Atlanta, principals from various commercial real estate brokerage and service providers discussed the future of commercial real estate brokerage. All were in agreement that there are numerous challenges that will effect traditional brokerage firms and their brokers.

  1. Large firms will be forced to play in smaller markets: Firstly, because more money both nationally and internationally are seeking investments in second and third tier markets, larger firms are going to be forced to service smaller markets and compete directly with established local brokerage firms.
  2. Brokerage firms will behave more like consulting firms: Relationships are going to be key to success as technology addresses the needs of clients in research while brokers will become more involved in the company's strategic planning. As a result, brokerage companies could begin to act more as consulting firms rather than brokerage firms as they assemble the necessary talent to address companies in strategic execution.
  3. Technology can't replace a broker: A broker will become more important to address acquisition and disposition decisions as companies shed in-house real estate departments in favor of hiring third party brokerage firms to handle all of their real estate needs.
  4. Shifts in business models in order to attract new talent: Another important challenge discussed was hiring qualified talent. Real estate is losing young talent to tech as real estate falls into a legacy career category. In addition, today's graduating students are more inclined to seek employment in fields that promote a more collaborative environment instead of the one-on-one individual broker model, where a broker's success relies on his or her own individual efforts.
  5. Firms will begin to offer salaried positions: Although new talent entering the workforce are qualified with college degrees, most aren't interested in commissionable employment. They are seeking salaried careers. This means brokerage firms will need to change their business model from today's independent contractors to hiring agents as full time employees.

We are already seeing large corporate brokerage firms move toward a salary plus bonus model. Independent firms that represent high net worth individuals or smaller partnerships and syndications are less likely to have to worry about such changes. But it's clear we will see the landscape of commercial real estate continue to shift in the near future.

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Hans Hansson | November 11, 2016

Office DesignFor those of you way too young to remember the Bewitched television series from the 1960's and 70's, each week we watched scenes of Darrin Stevens working out of his advertising office in New York.

Darrin's office included two or three exterior windows, a very large desk, a large cabinet for storage, a decorative throw rug over wall-to-wall carpeting, and more importantly– a bar. When he would leave his office, he had a secretary and her desk directly outside of his door. His boss had an even larger office that included sofas, a large conference table, and of course– a bar. This was a typical professional office of the 1960's through the 70's.

With the introduction of personal computers in the 1980's, we saw office sizes shrink, drinking while working became frowned upon, the office bar was completely eliminated, and the private secretary became a secretary for everyone– serving multiple executives instead of one.

In the late 90's and early 2000's, the "open plan" office grew popular and we saw a decreased need for private offices, with the exception of top executives of course. In sales, the top producers were rewarded with private offices, while the rest of the team was pushed into open bullpens.

Today's office space is nothing like the past. Offices are more of a combination of home and sweat shops, rather than Darren Steven's 1960's advertising agency. Back in the 1960's, the average per square foot allocation per employee was over 225 square feet per person. Today, the average is 125 square feet down from 200 just three years ago.

Top office designers suggest that offices today have to compete with the flexibility offered to all employees at most businesses, and therefore offices need to simulate homes, rather than offices. Larger offices include full services for their employees including all day catering, personal training at their onsite gym, transportation to and from work, and even offers to have your car serviced while you work.

During a recent Gensler Architectural presentation, I learned that some offices need to include facilities for pet care, child daycare, and even senior adult daycare. It's become a benchmark to have businesses take care of all employees' personal obligations off the table in favor of having workers continue to work.

The other major shift that came into play is the use of the smartphone. With phone calls being replaced with texting and emails to conduct business, offices do not have to be as insulated for sound as they once did before.

In fact, the quietness of an office, particularly a sales office, is no longer a factor. With built-in music speakers in the walls, and television monitors mounted on walls throughout an office, there is also less need for private office space and an increased need for sofas and communal lounge areas.

Today, private executive offices are practically extinct, as executives are now taking seats in the open area with all other employees in order to create a more collaborative work environment and a utilitarian office.

It's way too early to tell how these new office environments will play out. With tech firms, this has been the norm going back to the Dot.com days of the late 1990's. However, for conventional businesses, this is a major shakeup and its long-term success will take time to measure.

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Hans Hansson | November 8, 2016

San Francisco office rentsOver the course of the last three years, there has been an explosion of office and retail property sales. Any commercial building put on the market has sold quickly– and with multiple offers. We've also experience unsolicited offers on buildings at never-before-seen prices also sold.

How We Got Here
The two principal reasons for this was because San Francisco office rents were skyrocketing toward a New York City price tag. Retail rents were considered undervalued to any major city in the world, both in terms of rent and value per square foot. Speculative buyers, particularly from New York, have come in and purchased several buildings that have not traded hands in generations.

This entire boom has occurred because of our quick growth in technology, which is now in its fifth year of its cycle (the boom-and-bust year of 2001 had lasted four years). But what happens if the tech boom softens, or worse, collapses due to high building rents?

Our Current State
Well today, the market is in fact cooling. As reported in the San Francisco Business Times this month, office leasing activity in the city fell to 875,000 square feet in the third quarter as big deals are scarce and tenants are more cautious.

This was the lowest third-quarter activity since 2001, and a dip from the 1.3 million square feet of leasing in the second quarter and 1.1 million square feet in the first quarter.

Let's step back and look at office rents before the current boom cycle. Average Class A rents were around $32.00/square foot. While today, rents are around $69.00/ square foot.

When you take the tech tenants out of the market equation, conventional businesses during this boom actually saw some growth, but on average there was no real growth beyond a single digit annual growth. Yet, San Francisco's high rents would require conventional firms to grow at a high double-digit rate in order for conventional businesses to afford to stay.

Retailers are faced with similar challenges, along with a looming industry conundrum as online sales continue to close all brick-and-mortar stores and purchase behaviors of the millennial generation continue to evolve.

San Francisco's largest tech players all face serious uncertain times– Yelp, Twitter, LinkedIn and Dropbox once hailed as industry disruptors have all been struggling to continue to grow, let alone survive in their markets. These are just a few of the struggling tech giants who lease the majority of the commercial space in our city. In addition, there is a large number of new office spaces being developed, which will add to potential weakness in office rents.

Will Rents Lower?
In the retail world, you already see major holes of vacant retail in the city, including areas surrounding Geary Street, Post Street, and Sutter Street with stores like Prada and Saks Fifth Avenue Men's Store closing. In other words, we are seeing major blocks of space coming back to market, yet rental prices are still holding firm– why is this?

Buying buildings today is not about cash flow. It's about building value and a landlord's ability to maintain and/or grow that value over time. Buildings that have been traded recently at high prices based upon today's rental rate have been purchased too soon to deal with any market reality changes.

These conventional tenants haven't seen enough growth to support paying current rents, so they will likely instead leave current spaces vacant until either the market grows again, or until building appraises start showing that the values have been lost, therefore releasing new appraisals that will bring down values enough to begin leasing at lower rates.

So, as tenants in the market today, you are a bit too early to enjoy rent reductions. Best thing for tenants in the market place today to do would be to look for buildings that have not traded in this cycle and can meet true market rents, because they can afford to do so.

If you are in a building that recently traded hands, you will fully need to inspect before moving, because your new landlord will have no liability to cut deals soon after buying.

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Hans Hansson | October 26, 2016

Real Estate Economic Committee UpdateThe Bureau of Economic Analysis “final” GDP estimate for the Second Quarter was released on September 29th, and showed overall economic growth at a 1.4 percent annual rate. This was the third consecutive sub-par quarter, and confirmed that the long expansion (now at 86 months in duration) is slowing its momentum. While the initial Third Quarter estimate will not be out until early November, preliminary data indicate continued sluggishness. Retail sales are up just 1.9 percent year over year. Housing starts, permits, and home prices slipped during the summer. Industrial production and capacity utilization are also in decline from 2015.

More positively, net real exports have risen for the last several months, and this should be strengthening GDP during the second half. The auto industry has also been trending upward. Incomes have started to rise, and for the first time in this cycle lower and middle-income households are benefiting materially, according to a Census Bureau study released in September. This is contributing to a small uptick in inflation, with core CPI now up 2.3 percent year over year.

Jobs. Employment growth has decelerated in 2016, averaging just 178,000 monthly through September. That’s a 1.7 percent annual growth rate, down from the 2.1 percent rate in 2015, but still enough to add 2,447,000 jobs to the economy for the 12 months ending September 2016. Business and professional services, healthcare, retail trade, and food services led the growth, indicating that job growth is positively spread across a variety of worker skill levels. The BLS “JOLTS” report (Job Openings and Labor Turnover Survey) shows twice as many workers quitting jobs compared with layoffs, indicating improving worker confidence. About 5.4 million job openings were reported in August (the most recent data published), and there were 5.2 million hirings that month. The unemployment rate stood at 5.0 percent, and has been relatively stable during the past year.

Read more: West_Q3_State_of_Market.pdf

Economist Hugh F. Kelly, PhD, CRE, who leads TCN's Real Estate Economic Committee, is a Clinical Professor at New York University’s Schack Institute of Real Estate where he has taught for 30 years. He is widely cited in the real estate industry and is well known for his research on 24-hour cities and commercial real estate investment performance.

Hans Hansson | October 13, 2016

The Evolving Landscape in Sales

SalespersonAs we enter a new age of automation, where technology and society are evolving faster than most organizations can, Darwin's words have never resonated more clearly.

New automated technologies have the ability to entirely transform businesses and takeover jobs where humans were once required. We've already seen this across industries, but sales is a role particularly at risk.

Prospects Are Harder to Reach Live
A tip we hear often from brokers who may be in "stall mode" is to just "pick up the phone and call someone." Unfortunately, in today's world it's becoming very rare to actually reach someone live on the phone.

In the past time, the office "gatekeeper" was once the receptionist, who has today been replaced with an automated voicemail directory system. If you are lucky enough to even find the right name you are trying to reach within the directory, you can also count on that person to transfer your call to their voicemail.

Next to no one seems to list phone numbers publically anymore. You go to a company's website, particularly tech firms, and there is no contact information listed other email addresses. It's as if businesses have decided that it's too expensive to have a human being field calls and that answering the phone from an unknown number is a waste of time.

Although this "new age gatekeeper" makes no sense to me, it's the reality that which we as salespeople have to learn to work around.

So what do we tell our salespeople to do? We tell them to do some research on professional platforms such as LinkedIn and Manta, attend networking events, and learn to attract new clients by engaging on social media. The ability to have meaningful conversations and interactions with clients will require a consistent presence across social, mobile and web channels. None of these methods are either easier nor faster than picking up the phone, but it's becoming the only viable options when it comes to engaging with clients.

Marketers Taking Over Sales
A job in sales used to be distinctly different from a job in marketing. In today's world, a salesperson also has to have the skills of a strong marketer. They have to be able to find new ways to be found and entice people organically reach out to them, instead of the other way around.

In a way, this is maybe what businesses are hoping we evolve into– more sales via collaboration and less via an individual. More collaboration will mean more team efforts in order to attract new sales opportunities. Quite the opposite from the "lone wolf approach" in which the sales career path has been built upon.

Here's the thing– yes, marketers can attract clients to their services, but there is still a bit of convincing that needs to be done in order to persuade a client to make the purchase. This task is not easily done and salespeople get paid well to perform such a job. Marketers on the other hand get paid much less, thereby costing companies less if they believe that they can turn a marketing call into a sales transaction.

Is our role dead?
Today's salespeople are no longer even recognized as salespeople. More likely, they hold titles such as as vice presidents, advisors, client specialists, principals– anything but a salesperson within their title. It's like sales is a bad word or is it simply a major shift to replace salespeople with marketing people because salespeople make too much money are not controllable will jump ship with any better offer will steal their clients and move them somewhere else and simply are not company people. Marketing people are mostly salary plus a bonus. Clients belong to the company if you leave you can't take anything with you. Therefore, the company can remain stable if good marketing people leave.

If the phone is not going to get answered and you can't stop to visit with clients because the security guard won't let you in the elevator, then perhaps the salesperson is a breed on the extinction list.

However, it's important to note that clients-no matter how big their business may be-are still people. And people like to do business with other people. Often times, the decision makers need real answers to unique questions that are not always anticipated in datasheets, brochures, and other automated technologies– with the level of specificity only a human-to-human interaction can provide.

To say in the game and keep the salesperson's role with valued, today's salespeople will need to play to the traits that make them uniquely human-being trustworthy and have the ability to relate to customers and prospects at a personal level. These are the things that simply cannot be replicated by machines.

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Hans Hansson | October 3, 2016

Interest RateWhen my wife and I bought our first home in San Francisco for $138,000 in 1978, we were required to put 25 percent down. We were so excited to get a 30-year amortized loan at 7.5 percent. For many years after, interest rates on home loans only varied slightly until the crash of interest rates, which hit following the economic crisis of 2007.

Since that time, we've had historical low rates which have led to higher real estate prices. As mortgages have become more affordable, this has allowed the government to finance their debt at lower costs and fuel the stock market boom as an alternative to fixed rate investments, which are also locked in at historically lower rates.

Lower interest rates have injured the elderly who are on fixed incomes. Baby boomers are securing riskier investments in order to achieve the necessary returns to fulfill their retirement needs. Social security payments haven't increased in years and it's starting to take a toll on the growing population of older Americans.

So, will interest rates eventually increase? Conventional belief is that it will. However, it would increase in such small increments that it would severely impact growth, but on the flip side it would at least offer some profitable gains to savers and investors.

American cities and states remain in crisis over the ever-growing pension fund shortfalls and the continued bloated government overspending citizen's tax dollars. San Francisco is one of the richest cities in the United States. The city also has increased its budget to over $9.6 billion in 2016, yet has still has around a $100 million shortfall. The state of California is in a serious financial crisis. In just a few years, the state will experience tremendous hardship with the slightest turn in the economy and paying off state debt with higher interest rates.

But let's take a look at an entirely different scenario. Let's say interest rates over the next couple of years take a dramatic increase, back to a five to seven percent range, which historically was considered the stable rate for decades. This scenario would cause increased costs in order to carry out real estate investments, which in turn would have a direct negative effect on values. Doubling interest rates would severely hurt all government entities – from local to federal.

It's clear that pushing interest rates to that level would be economic suicide. However, if they don't raise interest rates, a large portion of our population will not meet economic objectives. In turn, this would force many baby boomers to continue to work past the average retirement age and create more pressure on the overall employment front.

Whichever presidential candidate wins the election, the drastic changes that are about to take place within the next year will cause an upswing and accelerate increased interest rates. Either way, we are going to have another bumpy road.

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Hans Hansson | September 19, 2016

Commercial PropertiesI just attended the TCN Worldwide national convention, held in New Orleans, LA, where I was educated on interesting overall market activity. With agents speaking from around the world, one theme was consistently heard - there is nothing more to buy... anywhere.

With interest rates at historical all-time lows, people, institutions, and owners have all migrated to real estate. As a result, there are limited quantities of property available and virtually no deals to be made.

Today, in downtown Manhattan there are no more than five to six commercial properties available at any given time. In San Francisco, a major office building – One Front Street – sold this week for a high water price, even though the overall market is showing signs of slowing down and rental rates are starting to drop for the first time in years.

In Kansas City, developers are planning an additional seven million square feet of new construction for industrial products, all listed as "spec buildouts." With rental rates at 35 cents to 45 cents on average, the margins are thin even if they are successful in securing tenants quickly.

Costs to purchase land and build are running $50 to $60/square foot. With this cost and taking into consideration the current rental rates, you are looking at a six to seven cap rate. Yet, there are industrial properties in Kansas City trading as high at $75/square foot, making older-leased buildings sell far below these cap rates. Of course a two to three percent return is much better than most bank accounts, but any upturn in interest rates will eventually force these sale values down.

With more products available online, the likelihood of higher rental rates in the future do not seem realistic to allow owners to use future higher rental rates in order to secure higher building values.

Retail prices in major cities like New York are selling at over $1,200 to $1,500/ square foot, yet retailers that would pay the rent to support that purchase price are balking and no longer willing to pay such high rental rates. With changing consumer demographics and buying habits, long-term, higher-end goods particularly in brick-and-mortar locations are already struggling to compete with online sale alternatives.

In secondary rental markets such as Omaha – from single residential homes to apartment buildings – brokers suggest that the market for deals passed two years ago.

In England, even with plans to leave the EU, are still seeing significant buyers from Germany and the Middle East, flooding the market even as rent growth continues to slow.

So long as interest rates remain low throughout the world, I would expect little exchange in properties. However, if the U.S. raises interest rates, the potential negative effect on current prices could easily be offset with more overseas buyers making deals in the US. Only time will tell...

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Hans Hansson | September 12, 2016

SalespeopleIf you decide to enter a career in sales, it's important to know how you sell. Review your skill sets and determine how easily you can apply these skills to a particular sales position.

Are You a Hunter or A Farmer?
Asking yourself one critical question will help you determine the best sales position for you: Am I a hunter or a farmer?

In sales, there are two types of salespeople who are successful based off these basic skills: hunting and farming.

As a hunter, you will start selling from scratch and hunt for new opportunities, building your client base from the ground up.

Hunting is a skill set that requires the ability to be unafraid of the risks ahead. A hunter is the type of salesperson who would be willing to tackle any risk in favor of securing the end result– a closed deal. Hunters typically require a mindset that is calculating, while also able to multitask at a moment's notice in order to address whatever situation is in front of them in the pursuit of the sale.

If you're a hunter at heart, you probably won't like, or excel at, a sales job that requires the cultivating temperament of the farmer.

Farmers have the ability to service clients over an extended period of time. In sales, your ability to develop trust and confidence through your stellar service to clients is key to long-term success. A farmer type of salesperson enjoys working with existing accounts– growing existing relationships, cross-selling, and upselling their existing client base.

Successful Salespeople Are Both.
A truly successful salesperson has to have both hunting and farming skills in order to be successful. However, they don't necessarily have to have equal strengths in both areas. For instance, you can be more of a farmer than a hunter. If you enter into a sales career that requires more attention to a client over the long-term and that client rewards you with continuous sales, than you will likely succeed more by applying your farming skills.

If you have a short sales cycle and you are selling something one time that will not require another sale opportunity until much later down the road, then a strong hunter's skillset would work best for this type of sales career.

In my personal commercial real estate career, I choose to represent entrepreneurial type of clients who are similar to me. I have stronger hunting skills and better farming skills for a more immediate sale.

On the other hand, institutional investment brokers need more farming skillsets and less hunting skillsets. They need to be able to nurture their deals with more extensive understanding of the financial impact of a sale. The ability to provide accurate data to their clients so that they can make the proper investment decision will lead to better purchases by their clients and more loyalty for future purchases. The need to hunt is lessened, although they still have to find opportunities for their clients to invest in.

Hunters tend to be less organized and have a stronger ability to multitask. Farmers tend to be more cautious taking their time to layout their plans to service a particular client.

To be a successful salesperson, you need to have both hunting and farming skills. Regardless, you will fail as a salesperson if you don't take the time to learn where your own strengths lie.

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Hans Hansson | August 26, 2016

Office RentWhen you are in a hot market like we are experiencing in the San Francisco-Bay Area, affordable office space is hard to come by. According to Colliers International Research and Forecast Report for San Francisco in 2016, overall weighted office rent averaged about $80.42 per square ft. for class A space, a 9.5 percent increase from just last quarter.

Most clients I see today look for office space and rush the process. They want to secure a new space as quickly as possible, rather than taking the time to determine if the space is truly affordable for their business long-term.

I see this especially ring true with most tech tenants we work with. Often times, these firms are newly funded and in development mode. Therefore, rent is not the most important factor for them.

These tenants are focused on securing a space quickly so that they can hire the talent they need to launch their business and start making profits. Regardless of the reason, at the end of the day, rent needs to be paid. And if rent is too high, it will impact a business' revenue stream along with every other aspect of the business.

As a rule of thumb, I have always determined the amount of rent a business is able to pay is typically between six to eight percent of its gross sales. However, today's office layouts have changed so drastically to the point where there are more people situated in less space. In years past, the rule of thumb had been 200 square feet per person. That was based off an office space that was comprised of 60 percent private space and 40 percent of open space. It also includes a good share of conference rooms, kitchen area, and storage areas.

Today's office arrangement looks quite different. With less use of phones and more use of emails, instant messaging, and texting to conduct business, the need for private office space has reduced significantly. Also, companies today have a collaborative work culture. Instead of isolating cubicles, workstations have been replaced with long conference-style work tables, which are much more conducive to collaboration and conversation. As a result, businesses are squeezing more people into less square footage.

Today, it is not uncommon to see offices with less than 150 square feet per person or close to the minimum legal square footage of 100 square feet per person.

To address growth, I often hear clients tell me that they will just add more chairs to their existing workspaces, rather than moving to a larger space. Clearly, this is not a plan to make their businesses more efficient, but really it's just a sign of not wanting to deal with the moving process at all. Although conventional businesses are a different story, their approach to growth are similar. These businesses are more focused on remaining profitable and their increasing their bottom line. Squeezing in more talent while working in smaller spaces does ease the burden of higher rent rates in the Bay Area.

Five years ago, the average rent for Class A office space in San Francisco was only $32.00 per square foot; a much more affordable price tag than today's average of $82.00 a square foot.

Today, the average square footage office user in San Francisco is only 3,000 square feet, holding 15 people. Five years ago, the annual rent was only around $96,000 (or $6,400 per person). Fast forward to present day, assuming 150 square feet per person, a 3,000 square foot space holds 20 people, which puts today's annual rent at around $216,000 (or $10,800 per person).

Conventional businesses have not yet seen enough multi-digit growth over the last five years as a reason to absorb such an increase. Certainly, with real signs of the market softening, they cannot count on this level of growth to continue.

Tech companies, particularly startups, haven't cared about cost of rent in the recent past. Why? Although they were forced to sign longer-term leases, some with three to five years of commitment, their business model for success was not based upon profitability. It's been based upon the ability of the business to get acquired or go public. But as capital continues to dry up and firms are struggling to continue to exist, they will need to be more cautious about their rental costs.

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