From Dan Mihalovich, Principal of Mihalovich Partners and Founder of The Space Place

If you're in search of intelligent life in the brokerage community... please enjoy this Editorial with my compliments.

In this Issue:

The last 10 years of our pearls of wisdom:

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San Francisco, CA 94111
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Thank You to Our Clients & Friends

We believe that representing tenants – and only tenants – is a noble cause, our specialty for over thirty years. We greatly appreciate our clients’ confidence and kind words about us, our level of advocacy and enthusiasm to negotiate aggressively ….. and mind the details while guiding the leasing process. Here’s to a spectacularly successful 2016.

Is the Office Market About to Tank?

There was an intriguing article just published in The Registry, “Sublease Space, a Bay Area Conundrum”. Take a spin through their piece, then consider my reply below. The success of your business may depend on this analysis:

Everyone has a “market position” to protect. This is an important reality whenever considering market analysis and the source of the opinion. I say the following as an office leasing industry veteran of 30+ years: Our industry’s record of predicting demand is, in the words of Simon Gray, second rate to recent births and imminent deaths.

Readership must see the forest through the trees: Cushman & Wakefield, CBRE and JLL cited as sources for this story are three of the five (the others are Colliers and Newmark Cornish & Carey) brokerage firms now in control of 75% of the listings for space available in San Francisco — controlling space in 400 buildings. Clearly, they stand to gain from promoting these clients’ interests, driving up rental rates and making as little of the changing landscape as possible. Is there a “tech wreck” coming? Let’s discuss below.

The Registry article ties C&W’s and JLL’s stats together to suggest that sublease offerings jumped by around 1 million square feet between 3Q2015 and today. Roughly speaking, the City now offers ~12 million square feet available. Consider this:

  • We don’t see a source of measurement from the story. Some of these firms focus their stats on only the “downtown” portion of the City — and ignore significant space available in outlying areas. Vacancy could well be higher than stated.
  • Over 1.2 million square feet came on the market during the past month in San Francisco. This is a combination of direct and sublease space. The article focuses on “sublease” space — which in common vernacular is not the same as "shadow space”. With rental rates hovering at historic highs (and highest in the nation), it’s feasible that hundreds of thousands or millions of square feet could return from tenants to landlords in openly negotiated termination agreements — and never hit the sublease market. Keep in mind that landlords don’t like to compete with their tenants’ sublease space offerings. In addition, “shadow space” which is currently not officially on the market but is known to be available or about to be listed. Simple examples: Tenants who’ve just signed leases to relocate are occupying space we know will hit the market, but may not be listed as available by their landlord for some months to come. Or, when a company like Zenefits goes into slow-mode and puts some of their space on the market for sublease — they may be offering additional of their space without actually listing it openly. Shadow space.
  • In similar fashion to the Dot Com, but far more dramatic during the current boom, tech companies yet to see a dime of profitability have made enormous space-grabs to accommodate growth which for many will never materialize. The excess isn’t considered Shadow Space just yet.

C&W and JLL go on to point out the obvious: “About half of the space available for sublease is coming from technology companies.” Tech companies have represented about half of the demand in the marketplace during the past few years. No surprise there. What is more clear — but of course not mentioned by any of the Big 5 — is the trend to fewer deals, slowing leasing activity in general and higher vacancy rates in and around San Francisco. Is it possible that we’ll see another 5 million square feet come on the market from tenants turning space to their landlords during the next year? Absolutely. The slow/paused flow of venture capital; the rapid change in valuations; excessive costs of competing to hire workers into this crazy-expensive housing market — all of these triggers (and many other global economic concerns) will turn the heat down in the office market. I marvel at industry soothsayers who have no background in analyzing or trading markets, and no brokerage experience. Frequently these are the heads of research for CRE companies. Referring to current market conditions as a “healthy” market is a clear telltale that the company spokesman represents the landlord community. There is nothing “healthy” for tenants about current conditions! Can firms such as the Big 5 not conjure and articulate market predictions? “We’ll see if the supply continues to exceed demand”: how sophomoric and irresponsible a commentary from one of the largest players in the marketplace. If supply doesn’t exceed demand, we’ll have zero vacancy. Nonsensical. The fact is that none of the landlord-centric brokerage firms can issue a bearish market report, for fear of losing their base of landlord clients. The Big 5 and other major landlord players are effectively bound and gagged as are the Wall Street companies — who never issue a bearish prognostication for the stock market. The fact is that current market conditions — average rates of $70+ — are not sustainable for the tenant community — and that we’re likely seeing the tip of the iceberg in fundamental market correction.

If your tech company leased 5 to 10 times its footprint to secure growth space, while concurrently fundraising to lift itself to eventual profitability — watch out below. As the correction occurs, which could happen rapidly, sublease and shadow space quickly dilutes values for direct long-term space. We’re already seeing a quick reduction in the number of large deals pending. Architects and general contractors are feeling it. Sellers are rightfully nervous. Anyone warehousing space at current rental rates for “when they expand operations again” may not survive long enough to use it. A lot of us in CRE get a bit jaded about soaring rental rates, since only a handful of us write our own rent checks. Referring to sublease space offerings, to downplay the pain and suffering tenants experience in the process, CBRE’s spokesman said, “…it’s not staying on the market that long. It frequently is [sub]leased within three to six months.” This isn’t just a callous comment. He fails to acknowledge tech companies’ monthly burn rates; the pressure from investors; and the possibility that those 3-6 months of vacancy, sublease transaction costs and the likelihood that subleasing is occurring at less rent that what they’re paying — all together could torpedo the company.

Think about our representing your interests in your next office leasing negotiation. Thanks.


Tenants – Here’s Round 3 in this discussion. Tech, clearly the driving demand factor in office markets around the country, gets its lifeblood from venture capital. So, where are we in the VC cycle NOW? If the flow of VC slows, crawls or evaporates, will the office markets collapse --- and if such a scenario is even likely in the foreseeable future, WHEN might this occur? Do you want to be “long” tech, or “short” it? We asked for an update (from last quarter) from a local brainbox – a venture capitalist whose tenured company has more than $1B invested in public and private tech. We agreed not to disclose the VC’s name, but here’s a direct quote:

His bottom line (full length version below): “The Fed is playing such a massive role in driving asset prices. It leads me to think we're range bound for now. If the data on the consumer side gets worse and the Fed becomes less accommodating, I’d be more bearish. Regardless, the environment is likely not great for Bay Area office leasing.”

“Several months have transpired since our last update. Over this period, the U.S. public equity complex has violently rallied from the mid-February bottom and then pulled back slightly of late. Across the board, fundamentals have been mixed against fairly low expectations throughout 1Q earnings season. Companies with any perceived earnings misses versus expectations, or with any sloppiness to their results have been punished, while companies with solid fundamentals and execution have performed well. Across the companies I follow, management teams appear to be fairly cautious, particularly in the more transactional and/ or cyclical business models.

In general, stocks appear to be less correlated with each other, and volatility has remained higher than it was for much of 2015. Central banks and global macro continue to drive trading activity. I anticipate that the market will remain in a fed-driven trading range. I think we are clearly later cycle than early as evidenced by slow growth, peaking profit margins, and some degree of fed tightening. That being said, I do not see a recessionary scenario in the near term. Employment remains solid and we are seeing decent wage growth. The consumer appears fairly healthy. I would become more bearish if fed tightening continues more aggressively, if global deflationary pressure/China worsens, or if initial jobless claims weaken (allowing us to build a stronger case that the consumer credit cycle is turning).

This environment has translated into a tepid IPO market. Year to date, we have seen just two IPOs in my space, raising < $450mm. The first (BATS) has traded well, while the latter (SCWX) is trading -5% from its issue price. I would expect more tech IPOs to come to market in 2H once the macro environment is more clear, as there is a large pipeline of late stage venture backed companies with strong growth that will need capital.

On the venture side, Q1 global venture funding was down -8.6% y/y and -7.9% q/q (source: cb insights). In North America, deal volume was up slightly sequentially from Q4 but was down 19.6% y/y (source: cb insights). We have seen a concentration of leadership where companies with strong fundamentals have been able to raise at higher valuations, while conversely companies with questions around growth and the viability of long term profitability have been less fortunate (See headlines regarding Zenefits, Doordash, Practice Fusion, et al). “Dumb money” continues to take a large share of volume—corporates accounted for 27% of 1Q16 volume, vs 22% in 1Q15 (source: cb insights).

All that being said, I am not on board with the WSJ cries of "The bubble is popping", as I think this analysis is largely reactionary and backwards looking. We have seen a bit of a correction, and the media has taken the opportunity to call the end of the cycle. Despite the correction, venture funds have raised $13B in 1Q16 and are well capitalized to continue to fund the ecosystem, albeit to fewer companies that are viewed as less risky winners. In aggregate, it is safe to say that we will see a slower environment than we have seen over the past few years, but not catastrophic. I remain cautious but not outright bearish.”

1Q 2016 Top Leasing Transactions

Tenant Address Sq Ft
AirBNB 999 Brannan 150,000
WeWork 600 California 73,000
Bain & Co. Salesforce Tower, 415 Mission 69,500
Restoration Hardware Pier 70 60,000
Twilio 375 Beale 58,000

Tenant Address Sq Ft
Verily/Google Alexandria Tech Campus, SSF 403,000
GoPro Clearview Bus Park, 3025 Clearview 111,000

EAST BAY COUNTIES (Alameda/Contra Costa)
Tenant Address Sq Ft
-- 300 Wind River Way, Alameda 74,000
-- 400 Wind River Way. Alameda 49,000
-- 2000 Franklin, Oakland 34,000
-- 2100 Powell, Emeryville 24,000
-- 1111 Broadway, Oakland 23,000

If Your Lease Will Expire Within The Next Three Years…

or if there is another compelling reason to discuss your firm's office leasing situation, please call us. For qualified tenants, we offer the following pre-contract services:

  • Free preliminary office lease and operating expense review;
  • Free consultation to discuss project management, Team formation and project schedule;
  • Market surveys and our specific tenant-driven leasing recommendations ; and
  • Assistance in selection and coordination of all Team members throughout planning and negotiation phases.

Vacancy Rates: Are Your Options Fading?

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 fading, as a result of leasing activity? Review the chart, below, and let's discuss.

HOW MANY BLOCKS OF SPACE ARE AVAILABLE FOR YOU? San Francisco County San Mateo County East Bay Counties
Q4’15 Q1’16
5,000–9,999 sq. ft. 233 274 Call us for more info
▲ 18%
10,000–19,999 125 151
▲ 21%
20,000–29,999 37 45
▲ 22%
30,000–39,999 19 19
40,000–49,999 12 14
▲ 17%
50,000+ 42 35
▼ 20%

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. To discuss your space needs in person, call 415-434-2820 or email

Five Brokerage Firms / 12M SqFt of Space / 420 Buildings Listed: How Do You Spell “Conflict of Interest”?

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 75% of the space in San Francisco?

The top companies controlling the most space available are NOT landlords….Rather, they are office leasing brokerage firms acting with the landlord’s interest in mind. They are:

Cushman & Wakefield
Newmark, Cornish & Carey

These brokerage firms control over 75% of all listings and are beholden to more than 400 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?

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