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San Francisco Tech Tenants Use Their Attractiveness To Leverage Lease Terms

Even though office market conditions favor landlords in San Francisco, large office tenants are using their clout to shape leases and office design. Big tech tenants, especially ones taking entire buildings, know they are the holy grail of tenants for San Francisco landlords, and are using that to get what they want out of their offices.

A rendering of Kilroy Realty's The Exchange, which Dropbox leased in historic fashion in 2017

“The trend is hunting and chasing the biggest, most creditworthy tenants,” JLL Executive Vice President Tom Poser said.

Landlords prefer these big tenants because building owners do not have to spend as much on upfront tenant improvement costs. These tenants understand their position and are using that to add to their leasing leverage, Poser said. Big companies looking at multiple locations can pit landlords against each other, he said.

Tech tenants have been particularly active in San Francisco lately with Dropbox taking all of Kilroy Realty’s The Exchange at 16th and Uber planning to build a massive urban campus in Mission Bay. Facebook took all of the office space at 181 Fremont last year and several major tech tenants are in talks for space at Park Tower, one of San Francisco’s remaining large-scale Class-A projects under construction. In 2017, tech tenants leased over 3M SF with seven tech companies garnering over 150K SF.

While landing the golden goose of a full-building tenant can result in lower costs, it can come with its risks. Owners have to rely on one company to do well, Poser said. On the other hand, multi-tenant building owners have less risk of having an entire building vacant during down periods even though they have to spend more upfront on tenant improvements.

Poser said leasing terms depend on the type of landlord, not just the tenants in play. Long-term core asset holders will spend the time to add and improve the property to attract new tenants and build long-term relationships with tenants. These buildings tend to do well during recessions.

Short-term holders that want to sell the building within a year or two tend to focus more on what a potential buyer would want out of a building. Tenants often get better concessions from a landlord if they know the landlord will sell a building, he said.

Buyers often prefer empty buildings that they can re-tenant at market-rate prices. If a building is 100% occupied, tenants could be paying rents from five or more years ago, which are well below market-rate prices of $70/SF, Poser said. That gives a new buyer less wiggle room to increase revenue and invest in building improvements.

How Company Culture Is Overtaking Real Estate

JLL Vice President Tom Poser with his son, Charlie, daughter, Lulu, son, Eddie, and wife, Sarah

Regardless of landlord, both large and small companies are pushing more for high-quality real estate that can help those companies develop and preserve their culture and keep employees happy.  

“Culture trumps real estate,” Poser said.

In San Francisco there is a lot of competition not just for office space, but for talent, he said. Employees can choose from a lot of places to work and have more leverage to dictate their employment terms, and sometimes that means bringing a dog to work, Poser said.

Leases often include long clauses that dictate how many dogs a tenant can have, the size of the dog and allowed breeds, he said. Dogs have to have appropriate shots and certificates. Some leases will outline what happens if a dog bites people on more than one occasion, he said.

While large tech tenants sometimes the ability to dictate a building's design to accommodate pets, startups do not have that power. Instead they have to rely on tailored site selection to get what they want out of a building, Poser said. One of JLL’s clients looking for 20K SF in SoMa said it would only look for buildings that allow dogs.

Allowing pets at work is just one of the ways employers are focusing in on retention and creating productive work environments, something that was not as big of a focus five to 10 years ago, Poser said. That has meant paying more for real estate.

“If you’re too price sensitive you will cost yourself the best employees and cost yourself culture,” Poser said. “Real estate is second and not first today.”

Offices have open plans with lots of breakout areas, small phone booths and collaborative spaces with lounge seating. Executive offices are going away to allow more natural light throughout an office instead of for a select few offices, he said.

Small tenants also will pay for the high-quality plug-and-play spaces since it means less upfront cost to get set up, and there are a lot more choices at a variety of price points throughout San Francisco, he said.

Because clients are different now than they were five years ago, JLL has expanded its services to include access to employee engagement experts and productivity experts and professionals who have nothing to do with the leasing process, but can provide expertise on determining a company’s culture and what that looks like in a space and how to attract the right employees.

 “[Tech tenants] are not just following the trend. They are actively leading the trend,” he said.

CORRECTION, APRIL 15, 7:42 P.M. PT: A previous version of the article had an incorrect job title for JLL Executive Vice President Tom Poser. The article has been updated.