Technology investment in the commercial real estate sector is higher than ever. One of the areas garnering strong investor interest is web search. In the context of commercial office space, the consumer value proposition of web search centers on making the otherwise complex process of finding your next workspace easy. And in an age when we increasingly transact for goods and services using our mobile device, the promise of an easier way to secure office space is inherently compelling.
However, as a 30-year practitioner in the office leasing arena, I view this promise as a fallacy for two primary reasons. Firstly, direct-to-consumer search sites only present tenants with a fraction of the available office space supply. Secondly, successful tenant leasing outcomes require a far more complex process than search-find-lease. Whether it’s a startup company leasing its first office or a mature company expanding into a new market, the quality of an office lease will have a material impact on a business’s employees and financials. Oversimplification of the process in favor of making it “easy” will generally result in a low-quality outcome. It’s important for companies, big and small, to more fully understand the larger picture of searching for office space.
Real estate search sites are compelling for investors because search is easy to scale and offers multiple sources of revenue, such as paid advertising, subscription or user fees, participation in transactions and/or commissions earned by transitioning site visitors to brokerage customers. For tenants, the process of leasing office space is challenging, time-consuming and often frustrating. Add to this the general expectation that transacting online is smarter, faster and easier, and the uneducated consumer may conclude that search sites make leasing as easy as buying groceries.
But the world of office space data is controlled by one company, CoStar, which has been around — and earning landlord trust — since the late 1980s. It is not a direct-to-consumer model, but rather data provided to the industry, to companies including my own firm and countless others. Landlords provide data to CoStar because they understand that in all major U.S. markets, brokerage firms largely rely on it to search for site options for their tenant customers. It might seem logical that landlords would push their availability data to anyone willing to promote it online, but that’s not the case. Landlords tend to be more protective of proprietary information relating to their asset and want to control how and where it appears.
Crafting The Search For Your Next Office
But for the tenant, isn’t leasing an office mostly about searching for the right space? In a word, no. At my firm, we advocate an approach where tenants must first create their ideal outcome, then build strategy and go get it with the help of subject-matter experts for the individual tasks. To ensure an optimal outcome, tenants must first fully assess the trade-offs associated with different variables, ranging from the type of building to the location to the amenities offered and much more. Once they have reconciled the cost/benefit of these variables, they can frame out the qualities of their ideal outcome. This framework becomes their target outcome, the achievement which is earned by implementing a specific market strategy.
Among the many front-end considerations are things like space design, construction, lease structure and flexibility, impact on financials and demographic alignment with a given market. A thoughtful tenant leasing process will look to create leverage by negotiating with multiple landlords to fuel competition. And the process will usually involve several rounds of offer-counter-offer before determining that a landlord has reached their point of indifference.
During the process, a good tenant advisor will inform every phase of the project with data. For example, understanding a landlord’s motivation and perspective requires knowledge of building-specific drivers that influence leverage. These may include debt and equity structure, lease rollover or submarket dynamics. Even in the self-service age of the online transactions, teaming with a trusted broker is still an essential step for tenants in search of new office space, because none of this data can be gleaned from a search site.
At best, direct-to-consumer search sites offer visitors a level of market perspective, albeit fragmented. But visitors should be wary of sites masquerading as an easy place to find an office, with the real purpose being to generate new customers for poorly executed, old-economy real estate brokerage. At their worst, search sites cause tenants to assess only a fraction of the available supply and transact with limited knowledge and planning, resulting in low-quality leases.
Searching available supply is one small part of the overall process required to lease office space. For tenants, it’s the most recognizable and identifiable element of the process; however, real estate brokers know that search is the lowest-value element of the space procurement process. The real value lies in properly defining what to search for and then engaging in a process that levels the playing field between landlord and tenant. Until a search site can offer all of this, tenants should proceed with caution and, generally, view web search as one of many potential sources of data.