What’s Going On – San Francisco, Portland, and Seattle
Besides being a big hit for the late Marvin Gaye, “what’s going on?” is a question we are asked often by our corporate clients, as it relates to real estate markets and various trends and conditions that we are seeing. Fortunately our firm has been recently doing a lot of work and a lot of diverse assignments throughout the West Coast. Here are some of our successful assignments:
* TMC served as an advisor to a longtime San Francisco business in lowering the rent on their lease by $2M.
* As tenant representatives we completed leases of 65,000rsf of Class A office space in Portland, a corporate relocation for our clients in the Puget Sound, and the completion of a sale leaseback of a $7.5M industrial property.
* In the San Francisco Bay Area where clients are just getting hammered with rental increases we found a sublease for a client that was 8% lower rent than the market averages, and a direct lease for another tenant that we serve in the SF CBD that was 6% lower than the market averages.
* We are regularly reducing our clients operating expenses by auditing landlord’s tax and OE pass throughs.
So because of our geographic coverage and the diverse types of assignments we are getting, we’re gaining a ton of anecdotal evidence of what’s going on.
There are two very impactful conditions that we have recently experienced with our clients:
* Rent Increases in San Francisco. Nothing new or surprising about this trend. But where it is really having a negative impact on businesses is for longtime SF companies that have steady business and are renewing or relocating after a 5-year lease. 5 years ago they leased space at $30/rsf/yr. with full services included. Today the same space when renewed is seeking a market based $60/rsf/yr. rate. Plus or minus. If your business 5 years ago is roughly making similar revenue as you do now, a 100% cost increase for real estate and facilities is a huge problem for your business. And that is what’s going on for them.
What do you do? The best counteraction to this trend is to find spaces that require no tenant improvements. This means each of the transactions we work on are taking longer because we are pulling as many as 200 or 300 alternatives for clients and then whittling that down to 3 or 4 that need the least renovation. As that renovation is costing our clients a lot. Because in the SF market landlords increase their rent when they pay for TI’s.
Second we are looking at temporary and more creative solutions, like finding sublease spaces. Subleases in some markets are 20% less than direct spaces. In San Francisco the rent discounts we achieve aren’t as big. But they are discounts. Finally we are bringing in space planners to our clients so they can get more efficient in their space layout. The equation for total rent cost is rent x square footage = total rent. Reducing either or both lowers our client’s costs.
* Tenants Aren’t Searching and Negotiating as Much as They Should in Seattle and Portland. Bay Area tech companies expanding or opening offices in the Pacific Northwest especially in Portland are really getting gouged on rents. If you are in San Francisco and looking at $80/sf/yr. rents in SOMA, $35/sf/yr. in Portland sounds great. Problem is we are doing many deals at $25/sf/yr. in Portland in the same class and quality of property that tech forms are paying $35/sf/yr. for.
Why? We think that Bay Area companies are so happy to see lower rents in the Pacific Northwest, that they simply don’t search or negotiate as well as they could. We also notice that without any solely dedicated tenant rep firms like ours is in Oregon, that old dual agency conflict harms corporate tenants. We see a significant amount of tenants landing in buildings where the same brokerage has the landlord leasing assignment. And it’s not because the tenants are getting a good deal. Simply put we are seeing Bay Area tech tenants paying $25 in Class C buildings while we are getting clients $25 rates in Class B buildings.
Check the numbers if you are a tech based tenant leasing space in the Pacific Northwest and you’ll see what we mean. In Seattle the rents are higher than Portland and the Seattle CBD does have a big absorption factor that is driving rents. But even there a tenant should be hiring a tenant rep firm that diligently digs for all alternatives and has no conflict of interest as they negotiate for better lease deals.
TMC is a corporate real estate advisory business that has been in operation since 1986. We provide diverse services like tenant representation, lease renegotiation, operating expense reductions, and project management of tenant improvement buildouts. With offices in the San Francisco Bay Area and Pacific Northwest we are uniquely located to serve clients throughout the West Coast.