Hans Hansson | July 9, 2014
It's no surprise that San Francisco's marketplace is currently the "hottest" office market in the country. Tech is the name of the game and office vacancy rates have dropped to mid-single digits, in which rental rates have gone up forty percent and higher since 2010.
If you are a 'conventional' tenant (a law firm, accounting, architectural, or a non-profit) and your firm has been around for a number of years in San Francisco, and you have a lease coming up within the next six to nine months, then get ready to be "truly shocked." Your current building will be looking for a renewal. If you would like to stay, you are going to be faced with limited options. You may either pay a very high, increased rent or you may decide to relocate outside the city.
Gone are the days when you signed your last lease five years ago, and when you started your search or renewal with your landlord six months to one year ahead of your expiration date. Back then, you had time to plan a new build out and the landlord was more than willing to offer you free rent and a relocation allowance.
Today, the tech tenants whom these conventional firms are competing against are seeking to move in to spaces within 60 days or less. They want an open plan office space as soon as they can sign the lease and are willing to pay the landlord's new rental prices.
So how do conventional tenants compete and protect themselves if their lease is expiring soon?
1) Use a Professional:
First, you truly need to hire an experienced commercial real estate broker who understands the "lay of the land". Today, you have young brokers working tech deals that have no idea what a conventional tenant is going through and what steps they need to take to survive this current upswing cycle. The landlord employs the brokers. Therefore, at no extra cost to you, these brokers can either to help you in securing a new space or aid in the process of your lease renewal.
2) Know the Landlords:
Next, you need to understand that unless you are 10,000 square feet or larger a building owner is not interested in leasing you space nine months from now at a locked in rent. Furthermore, landlords are not interested in building out new conventional space. It is more costly on their end to do so and most don't have the patience to put time and money into a space redesign, just to meet the desires of potential tenants.
3) Know Where You & Your Competition Stand:
Conventional tenants are going to have to seek spaces that are already built out, requiring minimum tenant improvements. Today, paint and carpet in a Union building could cost as high as $20.00 a foot. Today's landlord for conventional tenants may offer $20.00-$30.00 for a new five-year lease, if you're lucky.
If you cannot afford the expected rents, then you will need to seek solutions that may hurt. You may need to relocate to outer areas of the city such as Jackson Square, the North Waterfront, or Van Ness Avenue, all of which prices have also jumped, but not as high. Some companies will have to consider a major downsize and/or a different office design in order to accommodate a more mobile office environment with a more open plan. Others will have to look at outlining markets such as Oakland, the South San Francisco market or Marin/San Rafael area to survive.
Here are a couple things you need to compete.
1) You are OK with longer leases:
Firstly, you are probably OK with a new five to ten year term. Most tech firms struggle with lease terms over three years. However, there is a gamble here. If this is a fluctuating cycle, you could be caught with rental rates far higher than the market place in the next three to five years. An experienced broker will tell you that this can be mitigated later by subleasing your space and allowing you to move potentially into larger and better space in the future by blending rental rates together. You will still be higher than the tenants seeking space, but still lower than you would be paying now under a brand new lease.
2) You have a good track record:
Your credit is based on profit (hopefully) with a track record. Most tech firms have no track record, are not profitable, and are not bankable without large security deposits.
The best thing for any conventional business owner is to educate yourself before you make any offers. Understand that this market is a lot like residential and you will need to make offers quickly, while having your finances buttoned up and ready to present with your offer. You will also need to understand your new office may or may not have everything you are looking for, but grab it while you can. This market is booming!
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