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Slack, Lime And Other Big Tenants On The Importance Of Choosing The Right Landlord

Even in an owner's market like San Francisco, Slack, Lime and other big tenants are judicious in whom they choose to partner with, Buchalter Law Firm's Manuel Fishman and Lime's Patrick Mondi told Bisnow last week.

Despite Proposition M limiting office development, citywide asking rents at $80 per SF and unemployment at 1.8%, tech tenants are notoriously choosy.

Salaries can only climb so high, so companies competing to attract and retain employees in one of the world's most expensive workforces realize that appealing office space, and a landlord's ability to allow for that space, are crucial.

Slack's San Francisco HQ

"You need to get the right owner that's going to do value-add," Fishman, an expert in tenant improvement agreements, said at Bisnow's Bay Area State of Office event on Thursday.

Patrick Mondi, senior director of global real estate for Lime, the S.F.-based micro-mobility transportation company, agrees. During his time with Uber, Mondi led real estate deals including the company's $180M sale of Oakland's Uptown Station and the land lease for Uber's new Mission Bay headquarters adjacent to Chase Center

"We were partial building owners and were looking at it from that standpoint," Mondi said.

At the same time, an ideal value-add approach entails different things for different tenants. Messaging software company Slack has 11 offices around the world, all of which are very intentionally located downtown. That keeps them close to transit and amid many cafés, restaurants and grocery stores, according to Director of Global Real Estate Development Linda Shaw.

"It's also about knowing your tenant," Shaw said. "Slack, unlike a lot of tech companies, doesn't provide three meals a day. We provide two meals a week. Go support the community." 

For Slack, that strategy resulted in the nixing of a potential coffee bar in the lobby of its 500 Howard St. HQ in San Francisco, a decision that was part of a prolonged dialogue between Slack, architect Studio O+A and Chicago-based Heitman, the landlord. 

500 Howard St.

"The discussions around the lobby with [Heitman] took a couple months, maybe 15 meetings, and many different designs," said Studio O+A Director Dan Kretchmer, who worked with general contractor SE Builders on the project.

The parties ended up agreeing on the design for a lobby more consistent with the Pacific Coast Trail theme of Slack's new HQ.

In many tenant improvement negotiations, the biggest challenge for tenants is convincing the building owner that both sides have fairly aligned interests, which is especially the case with older buildings.

For instance, Lime, which has offices in several states and countries, moved its HQ from San Mateo to 85 Second St. in S.F. in December, taking up about 42K SF in what was a long-empty building built around 1900. 

"These older buildings really present themselves for great design and collaboration opportunities and are value-accretive in terms of attracting the type of employees everyone wants," Mondi said. 

To allow their tenants to attract employees and for their buildings to add value, landlords have to get with the times and put trust in the tenant's vision, Shaw and Fishman said. 

While Slack has moved into 500 Howard, the newly public company continues to engage in similar discussions with its newer landlords, having just delivered new offices in Denver and Chicago and working to lease a flagship New York location.

Lime's 85 Second St. San Francisco location

"It's about building that trust that the team we're putting together can do the work and keep your building safe and intact and add value," Shaw said.

"We're all trying to overcome: 'You're touching the structure of my building; I need you to restore it,'" Fishman said. "The answer is no. You don't get it. I'm touching your building because it needs to be in the 21st century. It's an inflection point in the industry."

How tenant improvements are split and costs are kept under control is another way companies are evaluating potential landlords. A tenant improvement allowance being applied to ensure compliance with the Americans with Disabilities Act or a DAS (Distributed Antenna Systems) infrastructure, when it should be the responsibility of the landlord, can indirectly affect a company's ability to recruit and retain employees, according to Skyline Construction Vice President of Operations Jessica Callahan.

"As building owners become more sophisticated, these exposures shift onto the tenant to pay for during their build," she said. "Ultimately, what's sacrificed [by a shift of TI dollars] is the look and feel, because with dollars that get spent in the mechanical and electrical infrastructure, employees don't always get to see."

To Fishman, who has been in an abundance of tenant-landlord negotiations, the implication of the tight labor market for landlords is clear.

"You've got to figure out what your ownership is able to do before you can attract a tenant like Slack or Lime," Fishman said.

2019 Bay Area State of Office