What Do Brokers Do When They Can’t Even Give Office Space Away?

Roblox was the 2022 definition of a tech unicorn, as far as real estate was concerned. It wasn't about valuation or fundraising; the company behind the popular all-ages online gaming platform both promoted an in-person, in-office corporate culture and was growing. 

It was a rare creature: a tech firm looking for space to expand in the San Francisco Bay Area.

Last week, Roblox signed a new deal for a space swap at the Bay Meadows project in San Mateo, California, adding about 100K SF after trading offices with tech firm Guidewire. This was in addition to space the firm already took at the development in March 2022, when JLL Executive Managing Directors Bart Lammersen and Hugh Scott oversaw the signing of a lease for two buildings totaling 430K SF. It was one of the larger office deals in the Bay Area and Silicon Valley last year.

For the JLL team, the deal was a victory due in part to favorable conditions: A long-term client sought growth in a down market, so there was plenty of open Class-A space at great prices. But it also highlighted the amount of homework and extended timelines required for large office leases during the current slump. Lammersen called the process a “very interesting puzzle” because his team had to piece together job forecasting, workforce demands, office utilization and the impact of hybrid work during the process.

Eighteen months of analysis went into the initial deal, which also required six months of negotiation and beating out some competitive interest from other potential tenants. 

Brokers need to see that kind of time commitment as a standard right now, Lammersen said. If you are waiting for the client to say, “Let’s go,” instead of sticking with them during quarterly, monthly, weekly meetings to understand their needs, Lammersen said, you “won’t be in the conversation.”

“We were able to get very attractive terms in our lease, better than we would have done pre-pandemic by a long shot,” he said. “But the demand was driven by the business, not by saying, ‘Hey, the market is down.’”

The office market is filled with incredible opportunities for tenants, but brokers are limited by firms unwilling or uncomfortable making long-term real estate decisions during a period of financial instability and uncertainty around the future of remote work. JLL’s Scott said in San Francisco, rents for “non-view” spaces have dropped 20%-30%, free rent concessions are up 30%-40%, and security deposits for spaces dropped 50%, all in a market where seven-to-10-year leases, once standard, are being supplanted by deals for as few as five years.  

“I have a client who had average office space, and they offered to give it away to a tenant who would just have to pay operating expenses, and they simply couldn’t give it away,” Lammersen said.

Talking with the brokers behind three comparatively large lease deals in the Bay Area, New York City and Dallas over the past year, it is clear that commercial real estate firms are leaning on established relationships and focusing as much or more on client services, workplace analysis and long-term planning than they are on the traditional nuts and bolts of locking down new leases. 

That shift is playing out in the earnings reports of big brokerages, including CBRE, which recently announced that nontransactional revenue will make up the majority of its profit this year.

Tim Dempsey, vice chairman in CBRE's consulting division and part of the team that re-signed Fox Corp. to a 20-year lease at its 1.2M SF Manhattan HQ in January, said his colleagues are spending increased time on sensitivity analysis around potential real estate footprints due to shifts in the workforce. While negotiations for the Fox deal started in 2019 before being impacted by the pandemic, the end result included a lot more contract flexibility, including expansion options and contraction rights, for the tenant than it would have received pre-pandemic.

“What I say to young brokers who perhaps just want to do transactional work is that this is a time where you build longstanding relationships with your clients,” Dempsey said.

Brokers also need to look past traditional clients, including tech and big business, which simply aren’t as active. JLL’s Trevor Franke signed a 31K SF deal in February for Lucid Private Offices, a coworking company looking for a new Plano, Texas, location. The deal in a soon-to-open new office counted as a big transaction during this slow period.

“We’re definitely prospecting, and the tenants looking for 25K SF or less are really the active flow we’re looking at right now,” Franke said. “Pay attention to those regional and local entrepreneurial companies.”

Per a recent CoStar analysis, 65% of leases signed in the first 45 days of 2023 were for 15K SF or less, 5% more than the same time last year. At the same time, leases for more than 100K SF accounted for just 9.1% of leases in the first 45 days of 2023, a decline from 11.6% last year and 19% in 2019. 

And, of course, companies are zeroing in on Class-A space during the much-reported flight to quality. The vast majority of leases getting signed today are in the top-of-the-market buildings since new offices need to “take any excuse out of the equation,” Lammersen said.

But the number of great deals on the table simply can’t entice a client that isn't ready, and office deals are few and far between. But that doesn’t mean brokers aren’t busy.

Brokers are increasingly coordinating with workplace strategy groups and doing so for a much longer period of time than pre-pandemic. Clients don’t want to rush out and see potential offices; they want to spend months on workplace analysis and dig into local labor pools. Before, brokers may have had to convince a chief financial officer or CEO of a new space. Now, the chief people officer and human resources leaders are more intimately involved in every real estate decision.

“The journey is longer,” said CBRE CEO of the New York Tri-State Region Mary Ann Tighe, who was also a key player in the Fox deal. “You’re starting from a 90-to-120-day analysis of the workplace before you actually get into real estate.”

“You’ve got to be on your front foot, engaging with clients, working on contingency plans,” Lammersen said. “This isn’t going to be, ‘Hey, the lease is up in 18 months,’ it’s going to be a lot of subjective, arbitrary decisions.”

Brokers said they are optimistic that as the year progresses, they will have a better sense of real, long-term office demand. Franke said the question is just how far back the pendulum will swing. He also believes there will simply be fewer deals, so it is important to “figure out how to get through this reckoning.”

Finding deals right now may be more about the right client than the right space. Tighe said just because it is a good real estate deal doesn’t mean it is good for the business.

“To do a deal of scale in this environment, you have to have utterly confident management,” she said. “You need an executive team who can walk straight through the tumult of a moment.”