San Diego Office Outlook - Lessons learned from Q1 2022

Accelerated demand for San Diego’s class A and B office inventory has had an effect on on vacancy rates coming into 2022. Expansion from local biotech firms absorbing vacant space with larger transactions requiring new construction are driving demand throughout Torrey Pines, Carmel Valley and Del Mar Heights.

Breakthrough Properties and Gemdale are building large lab campuses along the State Route 56 corridor that received pre-lease commitments totaling 850,000 square feet since the end of last year. BD Biosciences signed for 220,000 square feet at Torrey View and Neurocrine Biosciences leased roughly 630,000 square feet at Aperture Del Mar.

Alexandria Real Estate Equities pre-leased 430,000 square feet to Brisol Myers Squibb at the interchange of I-5 and I-805 at its Campus Point 4 building in Alexandria Point, where Amazon occupies more than 130,000 square feet.

Those large deals at upscale office properties have driven leasing during the first quarter in San Diego market to the highest quarterly total in more than 15 years, with over 2.5 million square feet of new leasing activity.

In turn, there has been a noticeable shift in where that activity is falling. 

Historically, leasing in urban locations in San Diego have led volume. However, since 2019, demand has shifted to suburban areas of San Diego, where many firms are choosing to locate near where their workers live. The pandemic work-from-home and subsequent ‘hub and spoke’ model adopted by larger businesses to accommodate suburban employee bases continues to keep vacancy low in suburban submarkets north of Hwy-52.

Companies forecasting their office space needs for the next 12 - 24 months should expect rates to increase in suburban markets, and inventory to remain low. However, there are hidden opportunities to reduce occupancy cost in the urban markets, specifically downtown San Diego, where the sublease inventory is still high and large blocks of space sit vacant for longer.

California stay-at-home order hurts Restaurant industry

To our hospitality friends:

WE ARE WITH YOU

Urging everyone in California to support all your local restaurants as they struggle through California’s new stay-at-home orders.

THINGS YOU CAN DO

1. Support your favorite restaurants that continue to operate outdoor service according to safe, CDC guidelines.

2. Buy GIFT CARDS from locally owned restaurants and give them out as holiday gifts.

3. When you order delivery, try and place your orders directly with the restaurant. Third-party apps take up to 30% of the value of the order. Let’s do what we can to give 100% of our support to the people creating our meals.

4. Share these tips with your friends and support the locally owned restaurants in your area.

This holiday season, let’s truly practice the act of giving.

#wereinthistogether #saverestaurants #ilovemycity

If you have any commercial leasing or purchasing questions call us ☎️ 858.356.2990 and Jamal will assist you. 

The Future of Customer Loyalty

Customer Loyalty. Its a term that gets thrown around often, but this year with online shopping and take-out orders dominating the landscape, repeat customers are essential to survival. Assuming you have a CRM (and you should) here's what should you do to stand out:

1. Personalized Touches:

-Adding hand written cards (like the one I recently received from my online order with Boochcraft) that thank your customer for their purchase

-Suggesting specifically curated additional items for your customer based on their buying history (you should have this data for returning customers)

-Asking how they enjoyed their last purchase of (insert item) from you

2. Convenient user interface: how quickly and comfortably your customer completes orders from you makes a difference. Make sure to thank them in a meaningful way

3. Flexibility:

-In store pick-up greetings feel like the traditional shopping experience

-Make curbside pick-up quick, easy and on-time (especially restaurants)

-Native delivery service (rather than 3rd party) rewards points

San Diego Retail: Minor Pain or Disability

Costar is dancing around the issue in this article. The pandemic is accelerating a trend that existed back when Corona was just a beer.

Yes the SD inventory is temporarily down due to the Parallel Capital's acquisition and repurposing of Horton Plaza, but that entire mall was long dead and 1/2 vacant pre-pandemic due to the loss of Nordstroms. As of now Parallel still plans on building/leasing 300k sf of retail on that site, whether they should is another question. So the current vacancy rates aren't really telling the story at all. Longstanding anchors have been upended due to a little thing called the internet, and people's preference to avoid salespeople while having their goods delivered. The subplot is...there's no one to meaningfully backfill them. Before you angrily spout stats about discount stores or Amazon distribution centers think this through; the discount crowd isn’t shopping at the remaining inline stores, and no one is coming to a center for an Amazon distribution center.

Locally, the recent loss of large occupiers (RIP Souplantation & Pier 1) from centers doesn't bode well for the smaller stores that depended on the foot traffic, but this was foreshadowed by the closure of well known national big box retailers over the last few years.

Look I want everyone to win, but they have to adapt to survive. Hopefully small/regional operators focus on their online presence and develop a community to generate sales; however the long term result of this points to smaller footprints/less inventory on-hand in stores across the board in my opinion. And that's just the burbs, CBD retailers are facing a potential population shift (on top of everything else) that may hurt sales for the foreseeable future. When do they start asking “why am I paying $84/sf to be surrounded by boarded up shops”?

However you cut it, our addiction to online shopping is the root of retail leasing woes, Covid-19 is just an accelerant.

Jamal Brown is the CEO of The Ocean Company, an exclusive tenant representation firm with offices in San Diego, Orange County and Los Angeles focusing on the leasing and acquisition of commercial real estate.

Main: 858.356.2990 | E-mail: jbrown@theoceanco.com | social: @theoceancompany

Office Occupiers Eye a Return To The Workplace

Recent interview w/the CEO of an international commercial real estate firm provides some insight while raising some interesting questions.

1. If the return to the office is a collaboration/new hire on-boarding/company culture play; how do we consistently promote company values/build team dynamics when the space is utilized fractionally?
2. It appears we will be moving towards greater square footage per employee, thereby increasing the overall office footprint. Does this mean we should expect to see a flight from quality due to rents? Larger footprints = increased overhead = reduced profit margins. What does this do to the class A office market?

3. Current uncertainty & its effect on leasing decisions should prompt landlords to offer robust concessions packages to tenants that will make long term commitments, however, we aren’t seeing that yet. When do landlords accept that we’re in a Tenant’s market?

Unfortunately, no one has all the answers. I am interested to hear your thoughts.

Jamal has negotiated thousands of leases on behalf of tenants since 2003 and continues to advise companies on their on-going real estate strategies.

How Parking Effects Your Business

Lets talk about: PARKING

We all hate parking far from the entrance to the restaurant, store, gym or workplace. Sometimes lack of parking stops us from even visiting these establishments...ok not work but you know it’s still annoying. Here is a breakdown by sector on how parking effects your patronage.

Retail: While this might be intuitive for suburban retailers who often enjoy 5.0/1,000 sf leased parking ratios, there are certain operators, like gyms, who need customers to be able to park and be a 30 second walk to the front door. In my experience w/@lafitness the time it takes to get from car to club is a huge factor in whether or not people visit your location. Urban retailers don’t always have the luxury of on-site parking and should locate in either a “destination” zone (most frequently traveled blocks) or nearest to public parking as possible.

Hospitality: similar in discussion to retailers, however, suburban sites should have “express” or “to-go” stalls adjacent the ADA stalls at the facility. Covid makes taking over your parking lot a necessity right now, but your to-go delivery speed is a still a factor...besides, who wants to pay Grub Hub, Uber Eats or Postmates 30% of your sale?! Urban food & beverage operators primarily want to locate where the people are and where their concept isn’t over saturated. Let’s face it, city living forces you to walk and we will gladly do so to get to our favorite places.

Office: for office tenants, parking can be a financial component that effects their bottom line. Most suburban office parking comes free of charge, except for you Santa Monica. Urban office parking can run $100-$300/stall/month and subsidizing your employee parking charges will substantially increase your monthly overhead.

Whatever sector you fit into, parking is an aspect of the real estate selection you need to pay attention to in order to ensure overall success.

Signs we've entered a tenant's market

Significant write down and sale of the U.S. Bank Tower, an iconic DTLA office property leads me to believe a few things.

🏢 Sluggish leasing activity as a result of the recession and the pandemic is cause for concern to landlords whose rent rolls aren’t showing long term stability.

❓Shadow vacancy, again as a result of the pandemic and recession, could result in a tsunami of new-to-market subleases further hampering velocity in leasing activity.

💰 Overwhelming signs that we’re at the end of the “landlord’s market” cycle mean future lease economics will be more tenant friendly including robust concessions packages.

Although we aren’t currently seeing a direct effect of economic stagnation reflected in leasing rates throughout Southern CA, I am sure 2021 will mark the beginning of a fresh cycle in the office market.

Getting Above Standard Tenant Improvements

Do you want great space that helps define your business and attract new clients? Is your company culture important to hiring and retaining top talent? If any of these statements resonate with you, then you cannot afford to accept standardized tenant improvements.

Above standard tenant improvements are typically any material used to improve your space that is above the common finishes the building owner utilizes . Usually the building owner has a list or book of all standard paint carpet, lighting and other flooring finishes that they are willing to provide to improve their space with. These may not showcase your businesses image, align with your company culture, or provide current/potential clients an idea of the caliber of your services. Many architectural firms, law firms and technology companies (just to name a few) need their space to make an impression on everyone who walks through their front doors. An architect uses their lobby to speak to their design capabilities, lawyers use this & other meeting areas to set the tone for their prowess and other businesses use their interior common areas to reinforce their brand & company values. 

Achieving a certain look and feel beyond what a landlord is offering typically comes at an additional cost of construction.  For example: building out 5,000 sf with building standard finishes may run $60/sf ($300,000); however, your company may want to add design elements to part or all of your space that will increase that number to $85/sf ($425,000). The $125,000 delta between these two numbers can be covered in the following ways.

1. Tenant pays for the difference: now most tenant rep brokers hate this as it isn’t ideal for companies without a large war chest. It consumes the tenant’s capital upfront and can typically be used better by the tenant to grow their business. In the event the tenant outgrows their space ahead of the natural lease expiration, they’ve sunk capital improving a space they didn’t use for the duration of their lease. 

2. Landlord amortization of the difference: this is the most common solution to a tenant improvement overage. The landlord factors the additional cost of the tenant improvements into the tenant’s rent over time. This keeps the tenant from paying for the improvements upfront but does raise their monthly/annual rent obligation. This can be accomplished as a $/psf rent increase or an annual percentage increase. Think of it as a loan on the difference from the landlord. Does the landlord make a return on this loan...of course. Does the tenant lose if they outgrow the space ahead of the lease expiration? Yes, but not as much as if they pay out of pocket for the improvement difference up front. 

3. Covering the difference through a loss in concessions: this is by far the most complicated and situation specific solution. If you have a savvy tenant representative, who knows your improvement costs will overrun a standard market landlord contribution; they will negotiate a robust rent abatement package, then reduce that once the improvement costs are known so that your rent cost/sf doesn’t increase dramatically. The drawback here is that most businesses use the rent abatement period to offset moving, furniture and other soft costs associated with new space. If those costs are minimal, this may be the best option for a business needing above standard tenant improvements. 

*Value Engineering: while not always strategy for covering the cost difference in negotiations, having a great project manager or construction team working with your business & tenant representative to cut construction costs after you’ve secured a certain $/sf in landlord supplied improvement funds can be to your benefit. Make sure your tenant representative negotiated a clause which allows your business to utilize any unused funds in the form of full or partial rent payments. 

If you need any help finding or negotiating on space, call us. We’re here to help. #findYOURspace

Avoiding Percentage Rent

If you’re an office tenant skip this one, it thankfully doesn’t apply to you - restaurant and retail space users should take notes. Your landlord is like that disgusting troll under the bridge in the story your mom used to read you. They want more than what’s fair because they think they’re in control. You’re about to pay them a monthly amount of rent, and your share of property taxes, property insurance and common area maintenance, in order to operate your business in their property. In addition, or sometimes in lieu of, they want their grubby little hands in your pocket by charging you a percentage of your (typically) gross sales...sometimes above a breakpoint but sometimes from the first dollar you earn. This is called percentage rent, and it’s absurdly legal.

As a rule of thumb your restaurant or retail store should never lease space that costs more than 6 - 10% of your projected gross sales. Seriously. Landlords who believe you have the ability to make millions of dollars in annual revenue in their space will try to parasitically attach themselves to your success using an overage percentage (DM me for details) or an absolute gross sales breakpoint on top of your rent. Whatever you sell above this breakpoint gets multiplied by your percentage and goes to the landlord. Seriously. Avoiding this is tough, but not impossible. First, know the conversation needs to be had upfront in lease negotiations and either make the percentage based on sales of something specific: i.e.: food sales, alcohol sales, super high end product you sell few of; or make your breakpoint so high you are UNLIKELY to hit it. Second, make the percentage a low number. Landlords are going to try something between 5 - 7% but it’s okay to laugh at them and offer 2 - 3%. Do not be afraid to walk away from the negotiating table in order to do this. Far too many restaurant owners fall in love with space and just agree to this nonsense. Unless you’re Tiffany’s you should stay far away from leases like these without protecting yourself, and if you need help, call us!

Jamal Brown has represented commercial tenants in lease negotiations for over 16 years.

5 Leasing Tips We Can Learn From Dogs

The two most persistent beings in the universe have to be dogs and children. Why are these little cutthroats so good at getting what they want? Here’s a few take aways we can we apply to the commercial leasing process which should help your company get what it needs.

1. Explore all your options: Dogs will stick their nose in everything just to figure out if it’s edible. At the onset of facility negotiations, you need to enroll as many desirable locations as possible. You also need to ask for everything that would make a facility contract compliment your business plan. Be strategic in the structure of the financial terms and the amount of exposure so your business can thrive.

2. Be Persistent: Ever had a dog beg for snacks/your dinner/belly rubs/a walk and then give up after one rebuke? Me neither. So when you don’t get a positive initial response to your requested lease terms, ask again. You may need to modify the language a little but go for what your business needs until you get it.

3. Play Dead: With a little training, dogs will do this for a reward. Sometimes it’s necessary in lease negotiations to take a step back, act offended, and let a landlord think their negotiation strategy killed a deal. More often than not you’ll reap the reward.

4. Leave Nothing Left: Whether it’s treats or steak bones, dogs rarely leave anything unfinished. Real estate costs are usually the 2nd or 3rd most costly expense your business will incur. You owe it to yourself and your employees to mitigate the fixed costs and your exposure to additional charges in negotiations. Grind multiple locations down simultaneously and don’t leave money on the table. Use each site as leverage against one another. Push hard until there’s nothing left.

5. Trust Your Pack: Dogs are a pretty good judge of character, and in their pack (human or canine) everyone plays their role. You need professional service providers throughout the leasing process. An experienced tenant representation broker to guide you through site selection and negotiation, a project manager to assist with construction pricing, scheduling and vendor coordination, and an attorney to negotiate and review lease language. Not only can you leverage these professionals to create the best outcome, you can spend more time focusing on your core business while they work for you. Lone wolves don’t accomplish much, you need a pack.

 Jamal Brown is the CEO of The Ocean Company, an exclusive tenant representation firm with offices in San Diego, Orange County and Los Angeles focusing on the leasing and acquisition of commercial real estate.

Main: 858.356.2990 | E-mail: jbrown@theoceanco.com | social: @theoceancompany

Not All Buildings Are Created Equal

All commercial buildings are not created equal. One of the most overlooked aspects of a building’s value to the tenant is the efficiency of that particular building when compared to another. This efficiency is in relation to the ratio of the space the tenant actually leases within their four walls (the usable square footage) and the amount of space attributed to all common areas of the building including the lobby, hallways, restrooms, common conference rooms, common kitchen areas, interior break areas, work out buildings, showers/lockers, phone and electrical rooms, and any other common use area that, when added to the usable square footage, makes up the rentable square footage. This ratio is called the building “core factor” (also referred to as “load factor”, “loss factor”, or “add-on factor”). Understanding core factors translates directly to the bottom line. Since building costs are typically near the top of the expense list, the savings can be dramatic in comparison to other expenses. Pay attention to the core factor.

Why Your Tech Company Should Choose San Diego

San Diego has long been regarded as a sleepy seaside city, home to defense contractors, military bases, and the legendary zoo. Our 262 sunshine days and heavy attention on our thriving tourist industry has done little to combat this. While Silicon Valley has historically overlooked the startup community in America’s Finest City there are signs of a change in dynamics as the cost of living, and doing business in San Francisco and Oakland become unpalatable. In fact, San Diego has more entrepreneurs per capita than San Francisco and San Jose according to Inc. Magazine which ranked San Diego as one of the top 5 cities for entrepreneurs. So why should companies and capitalists consider San Diego the next tech hub? Here are our top five reasons to ditch the Valley for the beach.

The Talent

San Diego has a number of higher learning institutions which produce thousands of savvy, innovative graduates. UCSD is an extremely competitive school who’s average applicant has a 4.0 GPA. Currently ranked 41st overall in the 2019 edition of Best Colleges in the nation, UCSD is ranked 19th for computer science. Roughly 50% of their graduates are trained in biology & engineering. More VC-backed entrepreneurs are emerging from UCSD than from Boston University: UCSD produced 349 entrepreneurs who founded 330 companies and raised $5.73 billion from the start of 2006 through to the end of June 2018, according to research by PitchBook

Major collaborators with the university include companies like Glaxo Smith Klein and CIRM. San Diego State University is ranked 5th for information technology and 19th in California for computer science. The entrepreneurial community at SDSU is very active and its Lavin Entrepreneurship Center was recently awarded the Nasdaq Center of Entrepreneurial Excellence award by the Global Consortium of Entrepreneurial Centers (GCEC). University of San Diego is currently ranked 90th (US News & world Report) in the nation and its Shirley-Marcos School of Engineering is currently ranked 12th in the country. Clearly San Diego is home to many talented young minds equipped with skills in the industries of tomorrow and the entrepreneurial spirit.

Why is this important? The recruiting war for talent, engineering, sales, customer success, business development, marketing, etc., is far less competitive in San Diego than in San Francisco. In a recent article, 44% of San Diego millennial workforce was considering leaving the region due to a lack of career advancement and wage growth. The median household income in San Diego is $80,000, far less than San Jose or San Francisco.

The Cost of Doing Business

California is well-known for its tech regions in the San Francisco Bay Area (San Francisco, the outer Bay Area regions, and Silicon Valley) and Los Angeles (Silicon Beach and growing presence in Culver City); however, the cost of running businesses there (facility costs and labor) far outpaces San Diego. Renting commercial office space in both San Francisco and Los Angeles comes at a premium when compared to San Diego (May 2019, Costar) when comparing similar product across all classes. According to a December 2018 report by Brex, San Diego startups spend about $207,000 per month, which is far less than the $369,000 per month spent by startups in San Francisco.

From Brex: 2018 State of Spend, written by Chris Read

While a higher burn rate for a startup may be tied to areas with greater access to top-tier venture capital, it certainly doesn’t correlate to a stronger business model. Hiring talent in San Diego will cost employers less than the next two tech regions in California, and the workforce in San Diego expects fewer additional financial perks than their counterparts. Venture capital is choosing San Diego tech startups over life science/biotech investments as they require less money and have a lower valuation. San Diego startups raised the largest amount of venture capital in the third quarter of 2018 since 1995: $907 million. (Venture Beat )

When considering their capital allocation and future reinvestment, many angels/funds will choose early stage tech companies. Once the next round (enter Private Equity or Softbank) is secured this provides greater liquidity.

Why is this important? San Diego’s superior cost of doing business means your company will experience greater growth over the same period by securing A players at a lower price tag. Even with the desire for higher wages from the San Diego millennial workforce, the cost of obtaining the best-of-the-best is an improvement over San Francisco.

The Growing Tech Community

San Diego has long been known the backyard for companies like Qualcomm and Illumnia.  While large companies like these do employ a significant part of the tech/biotech community, they also inspire new businesses in the region.  A number of startup companies founded by ex-Qualcomm employees have successfully grown over the years and spread the tech community footprint. San Diego’s tech community is split geographically into three regions; Carlsbad, Sorrento Valley/UTC, and Downtown. While these regions currently don’t interact as cohesively as The San Francisco Bay Area, semi-annual events like Startup Week and events held by San Diego Venture Group, Foundrs, ThinkTank, and Tech Coast Angels have incredible turnouts. Larger companies like Apple, Amazon and Dropbox have recently increased their presence in the region. Amazon expanded into an 85,000 SF facility and is developing a facility near the US/Mexico border on a 2 Million SF facility. Apple leased 97,000 SF (UTC) announcing it plans to hire 1,200 employees in the region over the next three years. In addition to this, incubators with backing from giants like GSK have increasingly played a role in the growing startup community. The increase of large co-working operators in all three tech regions continues to drive community as small businesses within leverage each other through their early stages. Co-working operators similar to Wolf, who watch their tenant’s grow may invest in them becoming a capital source in the angel round.

The Future

The relocation of companies like Bizness Apps, Wrike, and others have real estate developers launching speculative projects to court tech businesses. Stockdale Capital Partners recently won approval to convert downtown San Diego’s Horton Plaza into a 772,000 SF high tech campus. The project is estimated to create 4,000 jobs and build on the existing tech community in the area which already boasts 140 startups. Projects like Superblock, Makers Quarter and UCSD (which has a new campus underway downtown) are increasing the infrastructure needed to attract more tech companies and investment dollars. San Diego has all the necessary components to become the next west coast tech hub. The question is no longer ‘if’ but when.

 Jamal Brown is the CEO of The Ocean Company, an exclusive tenant representation firm with offices in San Diego, Orange County and Los Angeles focusing on the leasing and acquisition of commercial real estate.

Main: 858.356.2990 | E-mail: jbrown@theoceanco.com | social: @theoceancompany

5 Reasons You're Not Attracting Talent

Employers are experiencing difficulty matching open positions with extraordinary talent.

If your organization is having trouble attracting the best talent for the job you may be facing the following five common problems. Never fear, we've got a few solutions that will help your company stand out amongst the competition. 

 1. Obscurity 

During the Great Recession when jobs were scarce, employers could be selective about hiring the best of the best. We are currently at the height of the economic cycle and there are plenty open, well paying positions. Talent has to be wooed by more than money, you need a great company culture and job-related perks. In addition to all this you need to spread the word about these aspects of working with your business. If top talent doesn’t know about these aspects of your business through social media or your presence in the community you’ll have a tough time attracting them.

2. Workforce Fulfilment

The millennial workforce wants to feel like their efforts are having an impact. The solution to attracting the cream of the crop is in making sure your open positions have compelling descriptions tied into the overall company mission. It doesn't hurt to have a socially responsible company ethic either.

3. Location, Location, Location

You may have heard this mantra in real estate, but it also applies to workplace desirability. Today's young professionals tend to flock to desirable, often urban areas in walkable distance to social centers. These typically exist within densely populated hubs, and if you aren’t in them or nearby, you’ll have a hard time gaining their interest.

4. It’s all about your space

While you may not need a Facebook or Google style campus, your space says a lot about the company culture and what it’s like to work there. Does your space encourage collaboration, innovation, is your leadership accessible, and is the company brand reflected in its design? You never get a second chance to make a first impression so pay attention to what your space says about you. 

5. Do everything you can to keep existing talent

Sounds like a no-brained but your competitors are trying to recruit your talent daily. Not only that, but word of mouth about what it’s like to work with your organization may be dissuading other talented professionals from joining your team. Make sure your team is happy and well compensated. Develop with a strategic plan to improve employee engagement, heck, buy them lunch. Creating this type of work environment will land you referrals to other talent from your existing team, and your clients. Be prepared and aggressive and you’ll stand out amongst your industry peers, and talent pool.

Jamal Brown is the CEO of The Ocean Company, an exclusive tenant representation firm with offices in San Diego, Orange County and Los Angeles focusing on the leasing and acquisition of commercial real estate.

Main: 858.356.2990 | E-mail: jbrown@theoceanco.com | social: @theoceancompany