Changing Law Firm Trends…

Changing Law Firm Trends…In the past, each law partner may have had his or her own administrative person. Now one admin might support four to five partners. In the past the partner’s private office may have had a high degree of finish work, expensive paneling and furniture, now the focus is on multiple-sized meeting and conference rooms near the reception area.

Demands for more efficiency, collaboration…

“Demands for more efficiency, collaboration, attracting Millennial talent and implementing new technology are just some of the issues that companies are dealing with. For continued success in the future, law firms will need to evolve, acknowledge these trends and behave more like a contemporary business.”

-Haworth Workplace Trends Influencing Law Firms 10.13

Benefits of Using a Tenant Rep

Using the experience of a tenant representative will level the playing field with the landlords. Most companies lease or purchase commercial real estate every five or ten years while Landlords make the “process” their business.

Executive Vice President

Jeff WeilTenant reps also help you achieve your business goals, not the landlord’s, to save you money on your lease or purchase. Discover how the Exclusive Rep Team at Colliers International can help you achieve your business goals.

● Exclusive Tenant Representation and Commercial Property Sales
● No landlord lease listings – No Conflicts of interest!
● Highly specialized to focus on the tenants’ side of the equation
● Typical savings to the tenant range from 10-20%
● In almost every case, no cost to Tenant/Buyer for these services

Landlords are usually experts at being landlords – Tenants have their own business to operate and do not have the resources (i.e.; lease comp, competitive concession in detail, in-depth knowledge of what is happening “behind the scenes”) to compete on a level playing field. Most Fortune 1000 corporations use exclusive tenant representatives on their lease renewals and relocation’s because it saves them money!

● 37 years of office leasing and sales experience to benefit you
● Millions of square feet of successfully complete office transactions
● Support of Colliers International, with over 15,000 salespeople and staff,
with offices in 51 countries.

Corporate Office Perspectives | Issue #201

One needs to keep the audience excited (or at least attentive) so I talk about the San Francisco tech phenomenon…

Recently I’ve been giving a number of speeches and presentations, including one on the Bay Area commercial real estate market. One needs to keep the audience excited (or at least attentive) so I talk about the San Francisco tech phenomenon, with kids in their 20s and 30s flocking to San Francisco from all over the country (and other parts of the world, for that matter), eager to get in on the Internet Gold Rush of our decade. Sitting at long desk-benches with headphones for virtual isolation from fellow co-workers, these techies (7 to 10 percent of who bike to work, the majority of the rest take Muni or Bart) are creating so many new ways the rest of us will work, shop, play and gracefully age. Companies provide bicycle storage rooms and showers, bring in free gourmet lunches and dinners, a number allow your dog to join you, your doctor comes to your office for a checkup — all to keep you happily employed. My talk also discusses all the new East Bay retail developments, with block after block of new Walnut Creek two-to four-story residential over retail. However, when it comes time to inject excitement about the East Bay office market, I get stuck. Few significant leases, no new construction, same old CPA, lawyer and insurance company offices, and other than Workday, there is little tech excitement… and no way will just about any office building owner allow you to bring your dog to work! For the most part, office vacancies hover around 15 percent (better than the national average of 17 percent) but unless you think an old-line environmental engineering office or real estate law firm operation is sexy or cool, we in the East Bay are just typical Main-Stream Americans… and there is nothing wrong with that!

“Like 70% of offices in the U.S. these days, Square’s new San Francisco Market Street headquarters is designed to be open and collaborative.” Designed to attract tech employees, the main floor is 100,000 square feet. The goal was to make the big office feel small by adding/including Main Street amenities like a full coffee shop with two full-time baristas, a library with real books and 27 cabanas enclosed on two sides for “private time.” The company venture and fitness center is located on another floor. “Off the boulevard are rows of tables that provide a “touchdown space” for the workers, who are organized into “neighborhoods” based on their jobs. Instead of individual cubicles or desks, these spaces are home bases for employees to place pictures of their kids, store personal items and recharge their computers, she said.” No one has an office with a window view. Instead, there are couches and chairs near the windows for everyone to enjoy. (The SF Gate 2013)

If you are looking for commercial real estate financing, the Colliers Mortgage group reports there is lots of money for decent financing or refinancing, non-recourse, assumable and at fixed-rates running about 2 percent over ten-year United States Treasury.

You think your office space is expensive? Office space costs almost $20/sf per month in Hong Kong, and $18/sf per month ($222/sf per year) in London’s West End. The rumors that they only hire tiny workers to fit behind skinny desks are not true (National Real Estate Investor 2013)

Work out while you work … “A growing number of Americans are standing, walking and even cycling their way through the workday at treadmill desks, standup desks or other moving work stations.” You can walk on a treadmill while you make phone calls and sort e-mail. I wonder if you turn in your budget on Excel while tread-milling, does this make your budget a moving target? (Contra Costa Times 2013)

How will the aging boomer population affect the design of office space as well as change the types of occupancy? “Today, 10,000 Baby Boomers reached 65. The same thing happened yesterday and the same thing will happen tomorrow. In fact every day, for the next 15 years 10,000 Baby Boomers will reach that age Milestone.” What does this mean for the many two-story smaller office buildings without elevators, both to the aging CPA’s, lawyers and insurance agents housed on second floor offices still unable to retire, as well as their aging clientele, an increasing number who may be arriving with a walker or wheelchair? What does this mean even for Class A buildings with inconvenient disabled parking or which are less accessible for aging customers using public transportation?

Silicon Valley companies have taken more than 700,000 square feet of office space in San Francisco during the past year, from tiny start-ups to big giants like Cisco and LinkedIn. The talent, which is pouring in from all over the United States to be part of this new Internet Gold Rush, is the reason for this. (San Francisco Business Times 2013)

According to the United States Green Building Council, San Francisco has the highest number of LEED Platinum and Gold-Certified Commercial projects in the nation, with 155 projects in comparison to second-place holder, Chicago, with 148 projects. On the other side of the report card, San Francisco earned an “F” as the least-affordable major United States city. (The median home price is now $706,400!) (San Francisco Business Times 2013)

“How big data centers can cut greenhouse gas emissions by 88%…” according to new Stanford research, simply by switching to efficient, off-the-shelf equipment and improving energy management, data centers could be significantly more sustainable. (Buildings 2013)

The FASB accounting rule changes that have been underway for the past four years, which would require corporations to capitalize their property leases on their balance sheets, is still stuck in the muck of negotiation. Congressman Brad Sherman predicts that the new rules would automatically add $2 trillion to the financial statements of U.S. companies, increasing debt ratios which might compel firms to cut spending to deleverage their books. “It could also raise the cost of capital and trigger loan covenant violations amongst the vast majority of businesses that use the generally accepted accounting principles (GAAP).” (CoStar GROUP 2013)

One of many reasons the San Francisco Bay Area is a booming tech center lies in the fact that Google has purchased more than 200 companies, since 2010 … The secondary impact of these purchases may have increased its Bay Area office presence… (San Jose Mercury News 2013)

The San Francisco Bay Area is expected to be a job magnet for the entire United States for years to come. By 2040, the Bay Area will claim nearly 2.55 percent of all United States jobs, with 75 percent of these jobs expected to come from business and professional services, the health and educational sectors, and leisure and hospitality. (The Registry SF 2013)

Solar installations grew 76 percent in 2012 and are now the fastest-growing energy source in the United States. Growth in the commercial market was only a small part of this, comprising 7,000 of the 90,000 solar installations. (Buildings 2013)

According to Rich Martini of the Colliers Multi-Family Investments Group, the Real Facts-Meyers Research Group tracks 28 multi-family metros across the country and ranks those metros according to 11 indicators, including: rent increases, occupancy, job growth, multi-family permit levels and estimated cap rates for stabilized properties. The top three metros (markets) are as follows: San Francisco at number 1, Oakland region at at number 2 and San Jose at at number 3.

Deals and Rumors: We will start in sizzling San Francisco, where Visa just leased 110,000 sf at One Market Plaza; Square took 155,000 sf at 1455 Market St.; Twitter is rumored to be looking at 300,000 sf at 499 Illinois St.; Zendesk took 73,000 sf at 1019 Market St.; American Eagle Outfitters leased 10,000 sf of office space at 49 Stevenson St.; Clinkle took 20,000 sf at 360 Third St.; Viz Media leased 20,000 sf at 1355 Market St.; Lyft is taking 16,000 sf at 185 Santa Clara St.; Intuit signed for 14,000 at 71 Stevenson St.; Yahoo leased 60,000 sf at 5th and Mission St.; The United States Departments of Housing signed for 50,000 sf at 1 Sansome St.; Minted inked an expansion to 18,000 sf at 747 Front St.; LinkedIn signed for 40,000 sf at 1 Montgomery St.; and FitBit leased 55,000 sf at 405 Howard St.; (whew). In South San Francisco Genentech leased 63,000 sf at 285 East Grand Ave and just broke ground for 225,000 sf on Grandview Drive. At Sierra Point Towers in Brisbane, eBay expanded to 41,000 sf and Hyperion leased 20,000 sf. In Redwood City, Corelogic leased 20,000 sf at 275 Shoreline Dr. Across the Bay in Oakland, Vigilent leased 22,000 sf at 2001 Broadway. Over the hills in Pleasanton, Specialty’s Restaurants and Catering took 14,000 sf at 5050 Hopyard Rd., relocating out of San Francisco.

The North I-680/East County industrial market has come back strong, coming back from a 15 percent vacancy rate in 2011 to an effective rate today of 8 percent. Similarly in Solano County, the 17 percent vacancy rate has dropped to an effective current vacancy rate of 5 percent.

Office collaboration through open design – The Big Ass Fan Company (BAF) designed its new 80,000 square foot headquarters with an almost total open floor plan. The design has only one executive office, a cantina, clinic and meeting rooms, and an acoustical deck that absorbs and dissolves sound. Six conference rooms and fifteen breakout rooms allow for a wide variety of meeting functions. (Buildings 2013)

A recent article published in the National Real Estate Investor, October 2013, predicts that tech office growth will eventually spread outside the current core areas of San Francisco, New York, Chicago to elsewhere that have lower labor costs and rents, and where there are more incentives to business. Whether this becomes reality remains to be seen, but there are a lot of suburban Landlords to whom this will be music to their ears.

Big block office space and big rents – there are reports out predicting Manhattan will record 60 or more 100,000 square foot office deals in 2013, with 46 of these more than $100 per square foot for annual rent. Major tenants may be downsizing the square foot per employee ratio (from 250 square feet per employee down to 150-175 square feet per employee) thereby enabling justification of signing at top market new building rents. (National Real Estate Investor 2013)

The largest net zero energy building in the world is the Phoenix regional office of DPR Construction. The LEED-NC Platinum facility features an 87-foot solar chimney that enables a passive cooling system, releasing hot air out of the building while drawing cooler air in; 90 operable windows working in tandem with the energy monitoring system to open and close based on indoor and outdoor temperatures.; solar optical tubular day lighting devices harnessing light from rooftop domes and bring it into the workspace; a “vampire” switch cuts off 90 percent of plug loads at night; and photovoltaic-covered canopies cover half of the parking lot, generating energy power to offset the buildings annual energy needs. This solar array moved the building from net-zero to its current grid-positive performance. (Buildings 2013)

Downtown Walnut Creek Main Street retail space is getting expensive, now that Broadway Plaza has given lease termination notices to about 40 tenants in the way of their new remodel. I have heard of downtown store rates of $5.00 per square foot triple net. Ouch! Of course, compared to Manhattan where prime retail rents can exceed $150/sf per month everything is relative…

Light industry/warehouse space – Concord/East County, our guys have leased more than 1 million square feet of space just during the past 18 months…

Big blocks of office space available in the San Francisco East Bay … Concord has several 200,000 square foot office availabilities, and if you want 1 million square feet all at the same office campus, both San Ramon and Pleasanton can accommodate.

CoStar reports that the nation’s equity REITS are selling large amounts of industrial property and in turn purchasing office properties, at a spread that “has almost doubled so far this year as compared to last year”… does this mean significant office rent increases are in the tea leaves? (CoStar GROUP 2013)

Increase in San Francisco tech jobs 2012 to present: 36 percent; number of tech companies in San Francisco: 1,892; San Francisco unemployment rate, August 2013 is 5.6 percent; rate for California 8.9 percent, according to the (San Francisco Business Times)

Jordan, who is a junior in high school, is fortunate to really enjoy school, and his Lacrosse pre-season practices are in full swing. We are now in college choice discussions, and all the parents who have gone through this know what this process entails. Madison, his 11-year old sister getting ready for the 2014 softball season and is a little less enthusiastic about elementary school, but loves the field trips and school activities. Their latest photos can be viewed here.

Always do the right thing, take the high road, do what you say you will do, give everything you do with 150% effort – the commercial real estate industry and life in general always has its up and downs, and it does not matter how many years or how many decades you have been involved in your profession and in life, curve-balls can come out of nowhere. Sometimes they smack you in the side of your head, and when you recover and the birds stop singing in your ears, you stand back up, shake it off and do your best to get back in the game. Occasionally a curve ball hits your bat just the right way and soars out over the fence for the home run. One thing is for sure – unless you keep getting back up to bat, you will never see what type of impact you will have … Enjoy the upcoming holidays, call me for all of your commercial real estate requirements and live life in gratitude!

Jeffrey S. Weil

Why Most Office Subleases Won’t Be Sublet

The office sublease market in a number of sub-regions across the United States has changed dramatically during just the past six months. There are a number of reasons why some industry experts believe that in many instances current and future sublease space may not be sublet or have its leasehold terminated prior to lease expiration.

Between 1998 and 2001 hundreds of millions of square feet of office space were leased across the U.S. by dotcom, e-commerce, high-tech, VC-funded start-ups, and yes, even by Fortune 1000 established corporations. During these frenzied years of rapid office absorption, companies purchased billions of dollars of new office workstations, private office furniture, file cabinets, new telephone systems, computers, chairs, and other office equipment required to house the workforce moving into this newly-leased office space. The bursting bubble collapsed not just the office leasing market but office furniture and equipment industries as well, causing a glut of almost-new office furnishings of every type, style and price range imaginable. As Corporate America went through phase after phase of significant down-sizing, tens of millions of square feet of office space became available for sublease.

Sublease rental rates were discounted initially 25-50% from the going market rental rates for comparable space, and when the substantial savings in leasing a “plug & play” were factored in many of these bargains were snatched up. Of particular value in a number of sub-markets were quality Class A office space, brand-new or almost new state-of-the-art furniture, workstations and equipment, a credit sub-landlord that presented no risk of defaulting on the master lease, significantly long-term sub-leasehold of 5-10 years, and below-market rental rates.

During 2002 and 2003 there was a strong feeling among many landlords that the market was going to return to health sooner rather than later, and thus many landlords did not aggressively market their space at low-enough rental rates to compete with these sublease bargains. To lock in low rates long-term would diminish the value of the building asset, make it more challenging to obtain future financing, and potentially lower the price should a future sale be contemplated. Most landlords were also unwilling to provide a “plug & play” scenario. During mid-to-late 2003 it began to become evident, at least in many U.S. subregions, that perhaps the office market was not poised to recover as quickly as had been hoped. Global off-shoring was sending hundreds of thousands of U.S. jobs to India, China and other low-cost areas. Call centers, back office engineering, insurance processing, accounting, and a host of other office functions vacated millions of square feet of U.S. office space to take advantage of employee costs 30-80% lower than that of the U.S. Technology, once touted as a great labor-saving potential, finally delivered on its promise. Software integrating accounting, human resources, payroll, and other functions efficiently reduced staffing in some departments by as much as 40 percent which created vast amounts of excess office space as a result.

Corporations enjoyed rising stock prices as a direct result from lowering expenses, and regional offices once housed in Class A quarters in some cases were moved to the back of a distribution or manufacturing facility. Per-employee office square-footage diminished further and workstations which may in the past have been 10’ x 10’ or 10’ x 12’ went down to 8’ x 10’ or 8’ x 8’. A significant number of workers were “virtual enabled” due to very recent technological advances in high-speed remote internet access, and some companies with telecommuter or mobile work-enabled employees were able to totally eliminate a number of offices and workstations as a result of this empowerment.

Many office subleases are down to 1-2 years remaining term, and thus with this short a remaining leasehold, these office facilities may be near-impossible to sublet without Landlord lease extension participation. As it costs $5-7/sf just to relocate, including moving expense, cabling and wiring, even if the sublease rate is deeply discounted it still may not make financial sense to move in and move out for such a short time-period.
Most of the “great office sublease deals” have already been taken. The Class A, terrific location, super views, state-of-art furniture and long remaining terms are becoming more scarce.
As terms expire, vacant space not sublet gets added to the landlords vacant space inventory and further increases pressure for the landlord to provide competitive rental rates and terms in direct office leasing.
Corporate America continues to downsize, giving up partial or total leaseholds at lease termination.
Landlords for the most part now realize the office market may not regain strength for a number of years, and have become more market aggressive to secure new tenancies. This has resulted in lower rental rates, increased tenant improvements, and more lease term flexibility.
The amount of medium and larger corporations seeking 20,000 square feet and greater has dramatically diminished during the past few years, while the demand by the 1,000 – 10,000 square foot office user has increased. In a number of instances landlords are beginning to subdivide these larger but unwanted blocks of office space to accommodate these smaller user groups.
Corporate America still has a huge amount of “shadow space” estimated at 10-20% of the total occupied office space inventory. This “shadow space” is vacant space within an existing corporate office facility. It can be in either leased or owned property. It may be an entire building or buildings that are not available for lease or sale, but is not occupied. It may be a portion of the floor, or in some cases one of every seven or eight cubicles empty throughout the entire facility. When Corporate America does begin rehiring, this is the first place new employees will be housed versus leasing new space.

What will increase the odds of sublease space being sublet?

  • Longer-term leasehold.
  • Sub-landlord (Tenant) ability to fund tenant improvements.
  • Ability to subdivide premises to meet market size.
  • Broker incentives, open houses, bonus fees (our experience is that this is effective 25-50% of the time, but one never knows which space will be in this category).
  • Consider paying your sublease listing broker a monthly retainer fee to be offset against commission fees.
  • For subleases less than 36 months, significantly higher brokerage commissions in order to be competitive to direct-space fees. Remember, your sublease rental rate may be deeply discounted and your sublease term may be a fraction of the normal 60-month term. Thus, without leveling the commission playing field, fees paid on a sublease may be 25-50% of what the broker can make elsewhere. Commissions are always negotiable, and should reflect the specific market and market conditions.
  • Make sure, within reason, that the available sublease space is as presentable as possible. Replace broken or stained ceiling tiles, burned-out lighting, and have miscellaneous equipment stored neatly or put into a back storage area.
  • Plug & Play moves the quickest, so if you can, leave all desks, workstations, chairs and file cabinets. Today’s used furniture market still discounts these items to 10-20 cents on the dollar, so leaving these items in place usually provides a greater value to the success of subleasing versus selling to outside vendors or 3rd-party buyers, or relocating the furniture and workstations to other offices.

Have your broker set up a meeting with you and the landlord right in the beginning so you know how cooperative the landlord will be if a replacement tenant requires a lease termination or a lease extension to create a 60-month term. There may be a firm requirement by the subtenant for a renewal option with the landlord. What happens if the subtenant tenant requires improvements that trigger ADA or life-safety upgrades that would normally be a landlord cost? Can you market your space at rates below what your landlord is quoting (some leases prohibit this)? If you sublet plug & play space, who may be liable for removing telecom wiring at the end of the sublease/direct lease, the sub-landlord, the sub-lessee or the landlord?

If you subdivide the premises, in order to sublease your space, will the landlord require this space to be restored at the end of your term? How long a process is landlord approval? Are there landlord forms that can be pre-reviewed? How many original contracts must be executed so that the landlord, subtenant, sub-lessee and brokers have sufficient copies? Find out early!

If your space is not plug & play, be prepared to make it so if this makes economic sense. In advance, line up a space planner, used furniture vendors, and get your pricing estimated so that if time is critical you do not lose a subtenant by unnecessary delay.

For any subleases over 1,000 square feet and with at least nine months remaining term, it is almost always still beneficial to market your sublease space versus letting it sit idle and out of sight of prospective tenants. There is usually little downside and there is always the possibility of salvaging even a few months rent through early lease termination if a replacement tenant is located.