Starboard Commercial Real Estate

Hans Hansson | March 12, 2012

San Francisco tenants in the market today are getting hit with a double whammy - higher rental rates and higher costs of improvements. Rents are up nearly fourty percent in some sectors of our market and tenant improvements costs are up fifteen percent. The reason for this is supply and demand; supply of office space and contractors are down and demand for these services are higher.

We recently moved our offices and even though I am in the business I was taken aback by the costs of things I took for granted, thinking they would not be a financial issue. For instance, installing an electrical outlet costs $861 while installing a flat screen television with support costs $1,439.

Today, tenants are competing with each other over the same available space. Landlords are now receiving multiple offers for each of their vacant spaces; this hasn't happened since the days of the dot-com boom of 1997-2001. As a result, landlords are not under pressure to pay for tenant improvements as they would have been in a down market, forcing tenants to either accept spaces as-is or take on the costs of tenant improvements themselves. Tenants without an understanding of today’s market still have large wish lists of items they would like to see in their new space. Unfortunately, they are in for a major let down as they learn that they will have to accept a lot less for a lot more.

Compromise is a must if tenants hope to make a deal. We were forced to do so when moving office. A new ceiling and lighting system were necessary in our new location but that cost would have to had to been picked up by us either in higher rent or by paying for it up front. We chose to keep the ceiling and replace ceiling tiles instead.

With the market hot, landlords want their rent sooner than later, meaning that the days of a tenant with six months left on their existing lease trying to do a deal are over. Businesses must now wait anywhere from 90 to 120 days prior to their lease expiring to move; putting a lot of pressure on tenants to drop their business in favor of looking for office space in a shorter time period.
Posted 7 years, 5 months ago on March 12, 2012
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Comments on this post:

Re: As Rental Rates Raise so do Tenant Improvements
OMG you were charged $861 for an electrical outlet! That is highway robbery. Sounds like your market is very hot and the landlords are in the drivers seat.

2012/03/22 by Carmen Brodeur wwwReply
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Re: As Rental Rates Raise so do Tenant Improvements
Its not so much the landlords but the trades. With construction picking up every electrician and contractor are working now thus prices are up.

2012/06/14 by Anonymous • • Reply
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Re: As Rental Rates Raise so do Tenant Improvements
Today's society is the most commercial one, and hence, no doubt for the huge prices. This is just a race, where the highest payer wins the space.

2012/06/14 by Investment Property wwwReply
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