Market Insight Editorial & Advice to Tenants: 1Q2010

On Office Leasing: Why Write About the Bank of Goldman Sachs?

Let’s connect the dots, shall we? Goldman Sachs is to its clients as ______________ is to its clients in the commercial real estate brokerage world (fill in the blank with CB Richard Ellis; Cushman & Wakefield; Jones Lang LaSalle; The CAC Group; Colliers; Cornish & Carey; Grubb & Ellis, etc.). They are all dominant market forces which represent both buyers and sellers (landlords and tenants, to make our point, whose interests generally conflict with one another); they constantly manage privileged information, information which is packaged and sold alongside market advice to both sets of clients; and straddle the ethical line on payday between (a) ‘heads I win, tails I win’, since every transaction makes money for the company, even if the client’s transaction sucks wind; and (b) ‘doing the right thing’ for the client. The issue for you, tenants, is whether or not this dynamic is a recipe for disaster. Are you a client, or a willing victim?

Shall we define “disaster”?

One trillion dollars of taxpayers’ money later, the disaster brought upon us by Wall Street firms is painfully obvious. But in addition to those losses (still mounting), how many hundreds of billions have been lost in the commercial real estate sector—and under whose watch were those transactions underwritten and pushed to market? Will the commercial real estate brokers who packaged and sold these deals please stand up? They are the biggest brokerage names in real estate, whose loyalty to the landlord community is indisputable. And like Goldman Sachs, they became rich while the markets were hot by pumping rental rates up and selling highrise buildings to frothy buyers. The purchases of these buildings and portfolio properties, of course, made as much economic sense as the “AAA” rated subprime junk being sold on Wall Street.

Office tenants should wonder about these brokerage giants: “Will one of these giant brokerage firms be a fiduciary and protect and advance my interests? How is that possible?” Goldman Sachs has an answer:

“Trust me.”

And that trust has finally made front page news everywhere. Business ethics. Rethinking loyalties. Rethinking the judicial prowess of rating agencies (Moody’s; Standard & Poor’s; Fitch), who were paid massive fees by Wall Street firms in exchange for sterling ratings on garbage products—which were then sold to Wall Street clients.

In the commercial real estate sector—on the tenant-rep leasing side—you might liken the rating agencies to the broker-interviewing committees of law firms and other commercial tenants. These committees form to evaluate real estate brokers vying for the job of representing the tenant in its leasing endeavors. Just like Moody’s, these committees are typically swayed not so much by quality, but rather gravitate toward brokerage firms who bring them business. And what’s wrong with that?

Well, everything, perhaps.

Should a hiring committee (like a rating agency) accept payment from CBRE or JLL or C&W or any other commercial real estate brokerage firm to secure business with the tenant? What constitutes “payment” for a favorable rating?

  • Commission “kick-backs” or fee-sharing with the tenant.
  • The promise of the revenue derived from bringing the brokerage firm’s business to the tenant; or commitment to drive business to the tenant, if selected to represent the tenant.
  • A pre-commitment of portions of the commission derived from the transaction fee to the tenant’s favored non-profit organization.

One can become cynical observing the Senate hearings and investigations into the collapse of the economy brought on by Wall Street and the banking community. One would think that the public outcry alone would crush the value of the stocks of “those companies”. Yet here are their Q1 earnings, folks:

Goldman Sachs: $3.5 Billion
Citigroup earnings: $4.4 Billion
Bank of America: $3.2 Billion
JPMorgan: $3.3 Billion

Perhaps, office tenants, there is another lesson to learn here. History repeats itself over and over again. Buyer beware? Are you more aware, now? Shouldn’t every commercial real estate brokerage firm be held to higher ethical standards, so that you’re crystal clear about their conflicts, potential conflicts and understand exactly where their bread is buttered? If you hire a brokerage giant whose loyalties are proven to align with the landlord community, will the hiring committee be held responsible?

Office tenants: If you choose one of the brokerage firms, below, to represent you—each firm is beholden to at least 1 million square feet of landlords to whom they’ve already promised to take as much of your money as possible. Is that clear? Now watch them dance.

% Market Share Square Feet # of Landlords/ Buildings

The % in the chart below refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease. We have also noted the number of landlords / buildings represented by each entity.

* Denotes listing brokers. All other companies listed are landlords/developers.

1 *The CAC Group 12.4% 2,905,404 58
2 *Jones Lang LaSalle 11.8% 2,750,125 28
3 *Cornish & Carey Commercial—ONCOR 8.7% 2,031,385 25
4 *Cushman & Wakefield of California 7.6% 1,788,494 58
5 *CB Richard Ellis 7.2% 1,690,870 28
6 *Colliers International 7.0% 1,637,358 80
7 *Grubb & Ellis 5.9% 1,389,116 56
8 *GVA Kidder Mathews 4.7% 1,107,020 35

Hire a “Local” Tenant Representation Broker

Our main competitors love to tout their “local” roots and expertise. We concur. So, next time you’re in the market to hire an office leasing broker to represent your interests, hire a true “local”:

Company Headquarters
Mihalovich Partners San Francisco
CB Richard Ellis Los Angeles
Colliers Boston
Cornish & Carey Santa Clara
CresaPartners Boston
Cushman & Wakefield New York City
Grubb & Ellis Santa Ana, CA
Jones Lang LaSalle Chicago
Studley New York City

A Trillion Here, A Trillion There

Perhaps throwing $1 Trillion at our national bankruptcy will lead to a true “recovery”. With $3 Trillion of toxic assets, one might reason that we have nowhere to go but “up”. Has there been a fundamental change since last quarter’s “Why I’m Still Bearish” position paper? Yes. Fourteen million people out of work remain out of work. 400,000 new jobs went to Census workers. Mass layoffs are still running 150,000 – 200,000 per month (after trending down to 150,000 at year-end 2009). Seven million homeowners (and growing) are under water. Our trading partners—sovereignties—like Japan, Greece, Italy, Spain, Portugal and perhaps dozens of other countries are seeking massive financial support or teetering on bankruptcy. Better watch the treasury sales and rates one is offered as inducement to support these governments.

And who loaned $2.6 Trillion to Greece, Spain and Portugal? No one seems to know.

Should we audit the Federal Reserve? Bernanke reasoned that the public’s access to inside information could interfere with the Fed’s independence and might otherwise stimulate unnecessary speculation in the markets. We probably can’t handle the truth anyway.

According to the National Employment Law Project, 33 states have run out of money to pay jobless benefit claims. So, these 33 states borrowed $39 Billion from the Fed. Who borrowed the most? California, at more than $8.4 Billion.

In California and locally, in San Francisco, massive deficits will continue to impede business and personal financial growth. This economic phenomenon, of course, bodes well for commercial office tenants and retailers seeking opportunities for historically cheap rental rates in high quality buildings…provided that one protects against failing landlords and lenders.

The BP catastrophe will soon be measured for its impact on job and revenue losses—and it will be uglier than we expect. We’re not used to staying down for long. But there are no advisors among us who know the way out of our financial conundrum from true experience. The stock market, with the wealthy Wall Street lobby at the bow, may float upward—but the foundation of our economy has been severely damaged and will take many years to repair. Likewise the impact on our economy—and the lives of thousands of business owners and millions of consumers—of BP’s contamination will weigh heavily, potentially for our entire lifetimes.

For those still reading this and wondering, ‘What about China?’, the quintessential buyer of our Treasuries and insatiable consumer of all the world’s goods….we give you this reality-check from Vitaliy Katsenelson, CFA, in his analytical report on the Chinese economy: “China: The Mother of All Black Swans. This Time is No Different – The Over-Investment Bubble” [Katsenelson is Director of Research / Portfolio Manager at Investment Management Associates, Inc, a value investment firm based in Denver, Colorado. He’s written articles for Financial Times, Barron’s, BusinessWeek, New York Post, and]

Perhaps we’d better print another trillion.

No BOMA for Tenants. Why Not?

In our article published in the California Real Estate Journal, Office Tenants Pay for More Phantom Space, we documented the aging trend underwritten by BOMA of increasing tenants’ occupancy costs by continuing to free landlords of building measurement restrictions. BOMA has orchestrated a free for all for the landlord community and you, tenants, are paying for it.

Commercial office tenants need a national Tenants Association; not a trade association as much as a pro-commercial-tenant-lobby.

According to their website, “Collectively, BOMA members own or manage more than nine billion square feet of office space, which represents more than 80 percent of the prime office space in North America.” BOMA, therefore, is among the strongest of landlord-lobbies in the nation, whose interests focus on deriving maximum yield (profitability) and performance for its member landlords.

BOMA’s services include:

  • Measurement standards
  • Legislative Action Center
  • Advocacy Staff
  • Advocacy Publications
  • Educational events / Experience exchange

Their online store sells copies of lease language guides, to help landlords leverage lease documents to the landlord’s favor. “Insider’s Best Lease Clauses” offers up plenty of punishment for tenants. And their “Escalation Handbook” should instruct any landlord as to the variety of ways to pass the maximum of expenses to tenants.

So, why is there no Tenants Association to address and rebuke the positions and policy recommendations of BOMA?

Gather round, tenants. Leasing is a game of leverage. This is the perfect time to begin a crusade.

Dog Days for Landlords = Prime Opps for Tenants

You’ll be hearing this theme for quite some time to come. Years, in fact. The global, U.S. and local economic fundamentals clearly favor office tenants—and will continue so under the weight of record vacancies. As we’ve been reporting (for the past few years), vacancies in the San Francisco Bay Area have surpassed that of the Dot Bomb period—by major magnitude. Today’s 64 million square feet of availabilities dwarfs the 42 million on the market in the early 2000s. However, this does not portend that the markets are dead. Far from it. Two million square feet of space was leased in San Francisco, for example, during Q1. The net of all activity in ‘direct’ (landlord vs. sublease) space, though, remains negative six quarters running. Gross absorption of space was recorded at its lowest level in thirteen years.

Asking rates for direct and sublease space declined in every market in the San Francisco Bay Area.

The gestation period for space on the market (time on the market until leased) continues to climb, now averaging ~24 months in the SF Bay Area. Digest that stat for a moment.

In several counties, an historically impressive number of transactions closed during the quarter. But judging from the low absorption figures, the implication is that overall transaction size is down…hardly a signal for good things to come for landlords.

Aside from the other economic developments cited in this column, building owners continue to face seized up funding sources and few ways out from under-water positions. During the next 3-5 years, we should expect to see billions of dollars of highrise and other commercial property returned to apprehensive (and potentially insolvent) lenders. Already this year there are scores of banks delinquent on their TARP repayments. The wide-scale re-pricing of office buildings, while frustrating to negotiate with during these tumultuous times, spell opportunity to patient and well represented tenants.

Predicting Tenant-Demand: An Impossible Task with Questionable Validity

Go no further than the CEO of any company to try to predict company headcount for the next few years. Predicting hiring, retention and layoffs is a difficult task for every company—but the notion that we, the commercial real estate industry, can accurately amass that confidential data and forecast demand has proved imperfect at best. Yet most of the commercial real estate brokerage giants take stabs anyway and unsurprisingly their predictions are rarely bearish. You wouldn’t expect a Wall Street firm to issue bearish forecasts, would you? In spite of the questionable validity of its forecasting, brokerage giants—beholden to the landlords they represent—typically issue bullish sentiment. And tenants/consumers want to hear good news.

Office market supply/demand statistics exist in a highly imperfect economic world. One cannot—repeat, cannot—accurately measure the supply of tenants, as we can the supply of space. Any such analysis of demand is based on conjecture, unlike our ability to forecast other types of commodity consumption, such as feed grains like corn and wheat. Grain markets are fluid, with nearly perfect market information. The market for office tenancies operates in closed environments, where transaction information is guarded and leases are unrecorded for public consumption.

We know that 64 million square feet of office space is available for lease in the San Francisco Bay Area; 19 million of which is on the market in San Francisco. We know, on average, that 64 million square feet has been on the market for….24 months. We also know that the markets have sustained NEGATIVE growth (less than zero, taking into account all leasing activity) for nearly two years—and just now are showing some signs of life. And this makes sense, as the market function is to price in demand in whatever ways possible (combining cheaper rent; free rent; lease assumptions; more tenant concessions, etc.).

We can also look back retrospectively to the Dot Bomb period when ‘only’ 42 million square feet was on the market in the SF Bay Area, at a time most industry experts thought the economy bottomed—and know that The Great Recession dwarfs the spiral of that downturn. Just the supply side proves that. But a view of history is not helpful in trying to predict and time a true “recovery” in the office markets. The markets will continue to “work”, and that bodes well for tenants shopping for space (or planning to renew) during the next several years…at least.

So, when you read a bullish prediction from one of the brokerage giants which includes targeted absorption rates, question their demand research (which they won’t be able to prove) and motivation (trying to pump up rental rates for the landlords they serve). Use your nose and the skill set of your favorite tenant-representation broker to evaluate the market and your opportunities going forward.

Vacancy Rates: Are Your Options Growing?

Tenants should watch carefully to detect how and to what extent your field of options changes. Which size blocks of space are getting leased? Discussing vacancy and absorption rates can be confusing to some. What language makes sense to tenants? Tenants ask, “Tell me about my specific options. How many choices do I have?” Are your options growing, as a result of leasing inactivity? Review the chart, below, and let’s discuss.

Here’s an intriguing statistic for you. BET YOU’LL BE BAFFLED: In Q2 of 2001, Bay Area Counties had a supply of 42 million square feet available for lease on the market—the period just before our markets crashed. Today the Bay Area markets have 64 million square feet on the market. Tenants in San Francisco have a MUCH LARGER number of parcels to choose from in today’s market than in Q2 of 2001. Today the trend for absorption has turned “down”…and the stats should give you reason to wonder—what kind of Kool-Aid has the landlord community been drinking? [In Q2, 2001, there were only 202 parcels of spaces available in San Francisco in the 5-10,000 sf range; 173 parcels in the 10-20,000 sf range; and only 67 parcels in the 20-40,000 sf range.]

Please note: We provide Bay Area market data and analyses for the current year only. To request commercial real estate market data for previous quarters, please contact us.

You can request a free space survey, containing all direct and sublease space meeting your specific requirements. We can also provide building photographs, floor plans, leasing histories and more. You’ll receive your survey within one business day. To discuss your space needs in person, call 415-434-2820 or email

Who Has the Most Incentive to Drive Up Rental Rates In San Francisco?

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation? Who’s marketing the most space in San Francisco?

Below we’ve surveyed the entire 113 million square foot inventory of San Francisco, and illustrated the Top 25 companies listing the most space on the market. Of the top 8 companies, ALL are office leasing brokerage firms, controlling 65% of the City’s vacancy!

These brokerage firms are beholden to more than 350 local landlords, paid to drive up rental rates and drive down concessions for tenants.

Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant’s interests—objectively and aggressively?

The top brokerage companies on the list control more of the City’s vacancy than Boston Properties (#9); Shorenstein (#10); RREEF (#11); Hines (#13); and more than Tishman Speyer (#15). Surprised, are you not?

% Market Share Square Feet # of Landlords/ Buildings

The % in the chart below refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease. We have also noted the number of landlords / buildings represented by each entity.

* Denotes listing brokers. All other companies listed are landlords/developers.

1 *The CAC Group 12.4% 2,905,404 58
2 *Jones Lang LaSalle 11.8% 2,750,125 28
3 *Cornish & Carey Commercial—ONCOR 8.7% 2,031,385 25
4 *Cushman & Wakefield of California 7.6% 1,788,494 58
5 *CB Richard Ellis 7.2% 1,690,870 28
6 *Colliers International 7.0% 1,637,358 80
7 *Grubb & Ellis 5.9% 1,389,116 56
8 *GVA Kidder Mathews 4.7% 1,107,020 35
9 Boston Properties Limited Partnership 2.0% 465,722 4
10 Shorenstein Company, LLC 1.8% 419,198 7
11 RREEF America LLC 1.7% 400,000 2
12 Newmark Knight Frank 1.7% 386,561 14
13 Hines 1.4% 338,145 9
14 Beacon Capital Partners, Inc. 1.3% 307,000 1
15 Tishman Speyer 1.2% 282,124 3
16 Retail West 1.0% 241,068 1
17 McCarthy Cook & Co. 1.0% 228,946 3
18 Cassidy Turley BT Commercial 0.9% 216,523 19
19 The Presidio Trust 0.8% 198,398 38
20 *TRI Commercial / CORFAC International 0.7% 173,232 49
21 HC&M Commercial Properties, Inc. 0.5% 125,570 14
22 Johnson Hoke Ltd 0.5% 124,359 5
23 JRT Realty Group, Inc. 0.5% 108,738 1
24 Starboard TCN Worldwide Real Estate 0.4% 102,323 53
25 Dunhill Partners West 0.3% 66,489 2
  Total   23,388,949  

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