The Evolution of the “Comp”

Remember the “telephone game” when you were a kid?

You’d whisper, “I had ham and eggs for breakfast this morning,” to the person to the right and by the time it made its way around the circle the last person would say, “Santa has ham for legs and just installed new flooring.”

telephone

Well the same thing happens when real estate comps are traded.

In commercial real estate brokerage the lease comparable or “comp” is a summary snapshot of a transaction that includes all the relevant deal points such as the rental rate, square footage, length of term and concessions. Simply put, it is one of the most accurate real-time indicators of what tenants are willing to pay to lease space in a market at a specific point in time.

Comps are traded predominantly amongst brokers, landlords, lenders and appraisers, however there is no central repository for this information.  Each party or their respective company or firm maintains their own proprietary database where this comparable information is kept; and this comes with its own challenges.

With such a fragmented method of assembling, compiling and maintaining this data it’s impossible to warrant its accuracy.  For example, I’ve received comps for the same transaction but from different brokerages, and they have all had conflicting information – inconsistencies in the lease expiration date, tenant improvement package, rental schedule,etc.

Also, there are severe limitations to only being able to search your own firm’s database.  What if the data you need existed somewhere out there but your firm didn’t have it?  Well then you’d just have to hunt around until you found it, which can be very time consuming.

CompStak is a new, crowd-sourced model that allows CRE professionals to contribute lease comps and then earn points for what they’ve submitted.  They can then trade the points that they’ve earned for details on other comps that are more relevant and important to them.

This is huge for a few reasons.  First, having a centralized database that everyone contributes to encourages data integrity and market transparency.  Simply put, verified, accurate data benefits everyone involved.  Second, being able to magnify the scope of a search by accessing a much larger, more robust database makes me a better-informed broker and ultimately, allows me to provide better service to my clients.

CompStak is currently available in San Francisco and Manhattan, with plans to eventually go national.  Personally, the service has already proven its worth in at least two recent transactions and I look forward to their continued success.

Hopefully now when I  say, “three months free with $25 per square foot in TI’s,” it doesn’t get translated into, “tree trunks free with $25 in bacon flavored toothpaste”.

Related news: Commercial Real Estate Tech Company CompStak Makes Bay Area Inroads

What I Learned While at 42Floors

Yesterday, I wrapped up a one-month consulting position with San Francisco-based 42Floors.com. As a tenant rep advisor that’s passionate about commercial real estate and technology, I jumped at the opportunity to join the team and get a feel for what it’s like to work within a fast paced startup in the midst of SoMa’s exciting technology boom.

The 42Floors Crew
The 42Floors Crew

In a nutshell, 42Floors is a free search engine for office listings in San Francisco and  New York, wrapped up in a gorgeous user interface.  The model itself isn’t exactly groundbreaking, except for the fact that their current focus is not on monetization, but on creating the absolute best user experience possible.

Here’s how it works.  The user searches active office space listings and when they find something they like, they submit their contact information and the handoff is made to the listing broker, who then follows up with them to schedule a tour of the space.  Nothing revolutionary there.  Where 42Floors really sets itself apart, however, is with their Concierge; a human being that uses a telephone to actually call you.  How many companies actually do that anymore, and for free?  Their only task is to make sure you’re happy, answer questions about the market and commercial real estate, and ultimately, that you’re successful in finding your new office space online through their website.

Don’t get me wrong, there are plenty of other great features that elevate the user experience, like robust filtering options, photo-intensive listings and rental estimates for properties that don’t publish their asking rents, but the Concierge addresses a gaping hole in the online listing arena: tenants not only need but deserve the advice of an expert that’s looking out for their interests.  This is something that gets lost when a tenant uses the internet to find an office space online and then cuts a direct deal with the landlord without being represented by an advisor.  With 42Floors Concierge, the tenant can receive guidance and assistance from a professional they can trust.

My big takeaway from my experience with helping 42Floors develop their concierge program, is that tenants will always need a human advocate, and 42Floors understands that.

Just like WebMD.com will never replace the role of the doctor, 42Floors.com will never replace the role of the tenant advisor – they exist to enhance and compliment the process, be it a trip to the hospital or signing a new office lease.

Moving Your Network to New Office Space

By: Morgan Spake
President, AGC

Moving to a new office means moving your internet and phone connections. There is a process called “Network Due Diligence” that answers the question, “Will my network function at the new office?” and addresses items related to cost, risk mitigation, fail over, and current contract obligations that need to be addressed prior to the move. Timing is critical and the process should commence no later than 90 days prior to the office relocation. Ideally, it is preferable to complete Network Due Diligence before the lease is signed, since it’s important to learn early on if quality, reliable and affordable internet connections are available at the new office. Your current Internet Service Provider may not have adequate service at the new address, so another provider that fits your tolerance for risk and budget must be identified and selected.

Internet Broker: Think of the ISP (internet service provider) as the landlord who wants to “rent” an internet connection to you based on 12, 24, or 36 month terms, and all enterprise grade bandwidth pricing can be adjusted based on competing offers. An Internet Broker can gather competing offers and actually drive your monthly costs lower. The Internet Broker receives a commission from the ISP and can therefore offer this free service to the client.

Cabling: A free evaluation will help determine the type and quantity of cables needed for your new office.  Many existing office spaces can be described as “plug and play”, where the cabling already is installed, however it is in your best interest to have the cabling tested, regardless. The space may have been divided, and the landlord does not keep records on, or guarantee pre-existing installed cabling.

Network Move Management: This is a service that allows you to outsource the entire network move operation whereby several companies are part of the network move such as: Cabling, Phone, IT, Riser Management and one or more Internet Service Providers. An experienced network move coordinator can guide your team through the decision making process during the network move.

Help! My Landlord Wants to Double My Rent!

ScaredIf you’re an office tenant in San Francisco (or any other market where vacancy is plummeting), there’s no doubt you’ll probably face a substantial rent hike upon your upcoming lease expiration. Since 2010, rents in the City have risen 39% and in 2012 alone, 24%; representing the biggest gain of any market in the world.

Relocating your office can be expensive and disruptive to your business, so if your first choice is to stay and renew, here are a few strategies that can help mitigate the rental increase.  The days of passive negotiation are gone; you need to be proactive.

  1. Renew your lease as early as you can.  The sooner you renew, the lower your rate will be.  Unfortunately, your landlord is also aware of this and typically will not renew your lease if too much term is remaining.  They’d much rather have you come back to negotiate at a later date, when rents are higher.  Every ownership is motivated by different things, however, so it doesn’t hurt to begin the dialogue early. 
  2. Explore options outside of your building.  Even if you fully intend to stay, you need to get out in the market and see what else is available.  You cannot expect to have any negotiating leverage with your landlord if their property is your ONLY option.
  3. Explore options within your current landlord’s portfolio.  If you’re getting priced out of your current office space, perhaps there’s a less expensive option elsewhere in the building on a lower floor, or even within another building your landlord owns.
  4. Reduce your square footage.  One of the most effective ways to reduce your monthly operating expenses is to simply lease less space.  Identify inefficiencies within your current space and consider consolidation or reconfiguration.  Are there employees in private offices that could be just as effective in a workstation?  Could employees who are out of the office regularly share a common workspace? There also might be an opportunity to “give back” some space upon your renewal whereby the landlord carves out a section of your office and builds a demising wall, thus reducing your rentable square footage.
  5. Hire a commercial real estate advisor.  Your broker is the best source of market information, and when you’re well-represented, your landlord knows you have access to valuable market information and may potentially relocate if they don’t offer you a fair deal.  But your broker also knows something your landlord does: renewing existing tenants is cheaper for the landlord than signing leases with new ones. Should you leave the building, the landlord will temporarily lose rent while the space is unoccupied. Also, brokerage commissions and tenant improvement allowances are typically higher on new leases.  Your broker will quantify these costs, translate them into real numbers your landlord can understand and then make a business case as to why your renewal rate should be lower than their current asking rate.

Rental increases are a natural part of the cycle and being prepared and proactive is the best way to mitigate an inevitable rental hike.  Ultimately, you’ll need to weigh out the two options of either staying in your space and softening the blow, or relocating to a less expensive building or submarket.

See also: When is the Best Time to Renew an Office Lease?

The Truth About Green Offices

As a San Francisco-based commercial real estate broker who specializes in helping office tenants create healthier, more energy-efficient work environments, it’s exciting to see the progress we’ve made in moving these issues to the forefront of the discussion.  The moniker “green” has gone from being “hippy”, to trendy, to en vogue, to cliché and now it’s the standard.  Call it what you will, but this framework of thinking is here to stay and will benefit not only us, but generations to follow.

outside

Having said that, and for lack of a better phrase, we need to keep it real and constantly remind ourselves that it’s not the perception of sustainability that matters, but the reality and implementation of it.  To the corporate decision makers that are reading this post, place the health of your employees and the sustenance of our earth first. Healthy employees are intrinsically happy, productive employees, and energy and waste reduction both on-site and within your supply chain directly and positively affects a company’s bottom line; these are facts.  Everyone wins.

I want to share what I feel are the most important decisions you can make when locating and operating your business, from a sustainability perspective.  It doesn’t matter the line of business you’re in, these are principles that can benefit us all.

Location, location, location.

Where you do business is just as important as how you do business.  If an option, give preference to high-density locations where your employees can commute to work via mass transit while eliminating their need to drive somewhere to get lunch or grab a coffee with a client.  Encourage and reward employees who bike or take a bus to work.  There are federal incentives available that can benefit you and your employees such as the Commuter Check program that can save companies up to 10% on their payroll tax expenses while saving their employees up to 40% on their commute costs.

Reduce, reuse, and yes, recycle.

Tearing down the construction of an entire floor in an office tower and building it back up with sustainable materials doesn’t make you “green”.  Too often I see perfectly useful tenant improvements demo’d and sent to a landfill while new resources are acquired and constructed.  Not only does this translate into unnecessary additional expenses for the office tenant, but it puts an unnecessary burden on our earth.  Identify spaces that more closely match your desired configuration, and you’ll reduce construction waste and monetary spending.  They’re out there, it just takes a little more effort.

Think beyond your company.

In addition to making better informed purchasing decisions within your office, are the values and mission of the vendors in your supply chain congruent with your own?  We vote with our purchasing dollars each time we place an order.  You, NOT the supplier, create demand.  Give preference to companies that are also taking pro-active steps to reduce their consumption and waste, such as your office supply vendor.  The market will punish companies that don’t, and reward those that do.  Change starts with you.

Reduce toxicity in the workplace.

Typical office environments have the potential to be highly toxic and can negatively affect the performance, happiness and productivity of your employees.  If you’re a decision maker, you have a responsibility to provide a safe, healthy workplace.  Give preference to properties with operable windows, abundant natural daylight and landlords that use low-voc paints and carpeting.  Segregate copiers in enclosed rooms with adequate ventilation.  Decorate your office with plants that are known to cleanse the air and remove chemical vapors while absorbing carbon dioxide.  Consider purchasing used or refurbished office furniture, as it has already off-gassed harmful chemicals and vapors.

Engage your employees.

The greenest tenant improvements in the world will be ineffective if the building’s occupants aren’t engaged, and whose sustainability goals aren’t aligned with the company’s. How the office is occupied is just as important as how it was built out.   Engage your employees by more than just openly sharing your sustainability plan, but also explaining why certain measures were implemented (i.e. the waterless urinals will save 250k gallons of water this year).  If new technologies have been implemented, explain how to use them.  Reward employees who are proactive in helping the company achieve their sustainability goals.  Make it convenient and easy for employees to recycle.    Provide filtered tap water for employees rather than purchasing water bottles.

Developing a sustainable real estate strategy is really nothing more than developing a smart real estate strategy.  Don’t just “go green” for show, but be sincere in your approach and you will reap the benefits.  The truth is, a green office will yield happier employees while positively impacting your bottom line, so do it right.

Energy Management Apps Any Organization Can Afford

Ashley

By Ashley Halligan, an analyst at Software Advice

As environmental policy, benchmark reporting laws, and a general social awareness become more common practice in day-to-day business practice, new technologies are being designed and implemented by slews of organizations to measure their environmental performance and overall impact. Software developers are designing entire suites centered around benchmarking performance, suggesting upgrades, identifying operational inefficiencies, and even gamifying occupant behavior to encourage compliance with an organization’s goals.

Some organizations may not have the capital to immediately invest in such systems, but still want to get on board with responsible consumption–and identify inefficiencies before they become too problematic or expensive to overcome. For those organizations able to implement full suites dedicated to such features, that’s fantastic. For others, however, there’s a slew of applications seaping into the market, making similar tools available to literally any organization. Addressing everything from holistic energy audits, to measuring air quality, and even providing ENERGY STAR benchmarking, here are two affordable–and one free–application, all organizations should know about.

Recently awarded second place in the Environmental Protection Agency’s Apps for Energy contest, Melon Power was designed following the White House’s Green Button initiative–encouraging energy providers to make consumption data widely available–both residential and commercial–to their customers. At $500 per building, this Web-based application takes Green Button distributed data covering a 12-month benchmarking period, calculates an ENERGY STAR score, then reports that data to the EPA’s Portfolio Manager, in compliance with state laws that have been rolled out thus far.

Another powerful app–ecoInsight Mobile Audit for iPad–performs full energy audits of a building’s performance following user-inputted data collected while doing a thorough walk through. This free application is a powerful tool allowing operators to input operational measurements such as area, space, light wattage, etc. Once a walkthrough is complete, data is uploaded to ecoInsight’s site–where upgrades are suggested and customer proposals can be drafted.

Lastly, the American Society of Heating, Refrigerating and Air Conditioning’s (ASHRAE) offers their HVAC ASHRAE 62.1-2010 for $19.99 which performs ventilation calculations based on user-entered data. This app distinguishes whether a building meets the industry-accepted ASHRAE standard for indoor air quality (IAQ) in commercial spaces. Additionally, given that IAQ is of importance in achieving certain LEED credits, this application can help an operator understand their current benchmark and if improvements need to be made to achieve the necessary credits.

These applications provide a great launching point for organizations wishing to assess and improve performance–whether for legal compliance, LEED certification–or simply, to demonstrate corporate social responsibility and a commitment to environmental performance. Read more about the applications and their features on the Software Advice blog: 3 Energy Management & Environmental Performance Apps Any Organization Can Afford. Feel free to reach out to me via ashley@softwareadvice.com with any suggestions or comments, or leave them below.


A Costly Time Bomb Could Be Hiding in Your Office Lease

The Restoration Clause is a seemingly harmless, fluffy little kitty that sleeps tucked away within an office lease… until you reach out to pet it and it jumps on your neck and claws your eyes out.

It is a legal obligation for a tenant to restore, at the landlord’s request, the premises back to the condition it was in before you moved in, and could be a very costly going away present to your landlord should they exercise their right.

Normally, a tenant can negotiate the teeth (or claws) out of this provision or have it deleted in its entirety, or many times the landlord won’t require the tenant to restore the space because the subsequent tenant will benefit from the leftover improvements.

So why are landlords now pushing harder for restoration in lease negotiations, and more frequently exercising this clause as leases expire?  Because there has been a 180° shift in how offices are being built out, and tenants are increasingly demanding “open plan” layouts rather than private office intensive build-outs.  Therefore, if the exiting tenant has landlord-centric restoration language in their lease and the new tenant wants an open office, you can be sure the landlord is going to stick that tenant with the cost of demolition.  That also means that if the incoming tenant desires an open plan and wants the landlord to tear down 30 perimeter private offices, the landlord is going to try its best to reserve their right to obligate that tenant to restore them at the end of their term if the new tenant doesn’t wants them back.

So what can a tenant do to protect themselves from this potential costly exposure?  First, fight hard in the initial lease negotiations to completely strike the restoration clause.  If the landlord won’t budge, then fall back on agreeing to restoration, but with the condition that the landlord must decide whether or not they’ll invoke their right BEFORE you conduct the work.  That way there, you’ll at least know before you spend the money whether or not you’ll be required to spend extra money (and effort) at the end of the term to restore your premises back to their original condition.  If the landlord won’t agree to those terms, then you’ll at least take out the guesswork and be in a better position to decide if this is still the right space for you and if the potential added expense is worth it.

If this little gem is already in your lease and you missed it because you weren’t represented by a real estate advisor, now’s a great time to call one up and have them conduct a lease review for you.  They’ll be able to provide you with their professional opinion of its implications, and may be able to provide a solution that could dampen or eliminate the exposure.