June 5, 2016
Interviewed by: Zoe Hughes
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Ex-Google RE Head Tells Tenants: Negotiate Harder

Tenants have to be better negotiators and do more thorough due diligence on a building’s infrastructure and systems to avoid paying significant tenant improvement [TI] costs themselves.

Chris Coleman, the former global real estate lead at Google, Dropbox and who now represents the Android founder Andy Rubin, warns there is not enough expertise among corporate CRE executives in underwriting building infrastructure – with landlords taking “full advantage of the situation”. Many buildings, Coleman says, “are being upgraded on TI costs”.

Coleman talks about the dangers of open-plan offices and the need for small neighborhoods of workers within creative office space; the amenities being offered to workers and how increasing commuting times and a desire by millenials to set their own destiny could result in the growth of co-working spaces and satellite offices.

Tenants have to be better negotiators and do more thorough due diligence on a building’s infrastructure and systems to avoid paying significant tenant improvement [TI] costs themselves.

Chris Coleman, the former global real estate lead at Google, Dropbox and who now represents the Android founder Andy Rubin, warns there is not enough expertise among corporate CRE executives in underwriting building infrastructure – with landlords taking “full advantage of the situation”. Many buildings, Coleman says, “are being upgraded on TI costs”.

Coleman talks about the dangers of open-plan offices and the need for small neighborhoods of workers within creative office space; the amenities being offered to workers and how increasing commuting times and a desire by millenials to set their own destiny could result in the growth of co-working spaces and satellite offices.

Ex-Google RE Head Tells Tenants: Negotiate Harder
With Chris Coleman

Zoe Hughes, PrivcapRE: When anybody in commercial real estate talks about the future of this industry, it’s almost guaranteed to talk about technology, to include millennials and the way that even startups are changing our notions of real estate and our use of space. Today, we are joined by someone at the forefront of that alleged disruption, someone who I think will challenge our perceptions and our understanding and assumptions of the challenges ahead. Chris Coleman, thank you so much for joining us here today.

Chris Coleman, Playground.Global: Thank you, Zoe.

Hughes: Chris, you were formerly Global Real Estate Lead at Google, at Dropbox. You’re now representing Andy Rubin, the co-founder of Android as he creates a campus for his startup that is focusing on hardware-focused startups. I have to ask you, as the voice of the tenant, are we wasting too much money in terms of amenities in our spaces—our slides, or beer on tap? Give us a sense as to what tenants want today from their real estate.

Coleman: From a cost standpoint, the beer on tap and the slides—for some people—are amenities that delight. They delight. We’re delighting people for not much money, so it’s not that big a deal, really. I’ve been involved with many designs across the world and sometimes it gets to be a bit too much, from my perspective. But, generally speaking, it creates…a positive energy for people to collaborate and have fun and it takes the edge off of work.

Hughes: As you look to the office of the future, to real estate of the future—what do employees want?

Coleman: They want diversity. We found that out at Google very early on, so we did surveys and psychological surveys and tracked people in how they wanted to work and where they were working. This is going back 12 years.

We found that some people want it bright and energetic, some people want a quiet library-like setting or somebody wants to work out of the café all day or wherever those places are that fit your personality. That’s number one and that’s why you see all the diversity within the current designs happening all over the world. It’s wonderful that we’re finally out of the Herman Miller, Steelcase universe of “Dilbert” cubes.

Hughes: But there are challenges to this; I certainly read research reports where productivity is perhaps not as good. People are actually quite critical of the openplan offices. It’s very disrupting, very distracting.

Coleman: Yeah, we definitely have. I think it’s a fallacy that people think Google invented this openoffice environment, because we didn’t. In fact, we usually had a fairly mixed use of enclosed spaces for three or four people—sometimes two or one, but usually three or four—with a balance of open office in smaller neighborhoods. Because of the cost of construction and the densities that companies need to get to, you’re seeing bigger and bigger neighborhoods that are very distracting.

Hughes: What’s too big a neighborhood?

Coleman: That’s a good question. It depends on the function, certainly. It depends on the economics of the entity. Smaller is always better, so 10, 12 or 20 go crazy.

Once you get past 20, it’s getting to be difficult to work in. Then, nobody works in these neighborhoods, so now you’re spending real estate for 20 to 50 or 100 desks and nobody’s there because they can’t concentrate, so they’re taking up the amenity spaces, which there probably aren’t enough of. Then, they’re going down to Starbucks or to WeWork or just quitting their job altogether.

Hughes: Many people have said that, for some buildings, the buildings are not suitable for today’s needs. [They are] higher density, the elevators don’t work, there’s not enough bathroom space. How do landlords get better? Do they have open ears to what tenants need and are they actually picking the correct buildings in order to deliver the right product?

Coleman: In my experience, they are definitely not. In my last job, elevators were breaking down constantly and I’m getting killed by the executives saying, “Just fix it.” Bathrooms—in the morning, that’s when they’re mostly [in] highdensity use—there’s just not enough of them. It’s a big, big problem and it’s an expensive problem to fix. The other big one is mechanical systems. Most mechanical systems in older buildings are not going to suit these tenants and due diligence is not happening from people like me. I’d like to think that I do it quite well, but many people don’t and everyone’s growing so fast there’s not enough expertise in the system and it falls on the tenants to pick up these TI costs, which are significant. So, it minimizes what you can build in your space because the infrastructure that nobody sees and nobody really cares about until it’s broken is a big problem.

Hughes: Do they need to be underwriting much more significant capex as they buy these older buildings, these brick and beans that are so much in demand?

Coleman: As CREs, we and our brokers need to investigate more thoroughly and negotiate the leases better. But the supply and demand lately has been such that [you say] “Take it or leave it.” So, tenants are taking it. They’re spending a lot of money and it’s still broken because you can’t fix the elevators and/or the mechanical systems usually in a multi-tenant building because now you’re adding to the value of the building. You’re still paying market rent for even a Class “A” up the street and it’s a problem for people like me. Frankly, the landlords are taking full advantage of the situation and all these buildings are being upgraded on TI costs.

Hughes: Talk to me about the project you’re working on in Palo Alto. You are the owner representative for Andy Rubin, the co-founder of Android. This is a campus for his venture fund, which is really focusing on the hardware-focused startups.

Coleman: In this particular case, Andy Rubin had very specific wants and needs. A lot of it is catered to those desires and cash flow and capex and all the other things that go into these things.

This has been a unique project for me because it’s a bit outside the office—the purely office/café tech thing. He’s building a hardware shop with 3D printers and metal printers and all kinds of cool toys that I’ve never seen before so that they can prototype different aspects of the business for these startups. Most of the costs in the infrastructure go to the shop I’m describing. There’s a pretty good amount of juice going into that facility. And then kitchens.

Kitchens are expensive. They are full of difficult things that buildings need to account for and they’re painful for people like me.

Hughes: Why? Why are they so painful?

Coleman: You have in a room that’s, say, 20 by 20—a 20 foot by 20 foot kitchen where you’re cooking food. You’ve got drains every 10 feet. You’ve got six sinks in different disparate locations. You have to get grease traps and the smoke out of your building. You’ve got to get gas or electrical or all kinds of other infrastructure things into it and it’s quite expensive. Now, I’ve done it in high rises. To build a kitchen in the middle of the 20th floor of 100-story building is no easy feat. I’ve negotiated leases and done the due diligence and negotiated with the landlord saying, “I need a kitchen and it’s on the 20th floor. Can you do it?” And they’re looking around for any kind of duct that’s going to go beside the stairwell all the way through their building.

Hughes: How do you envision this job of a global real estate lead? How do you envision it changing in the next 10 to 15 years? What will you be doing in 10 years’ time? How will real estate change for you?

Coleman: Where it’s going in the future depends on the economy, obviously. I mean, if there’s a bump in the economy, everyone takes a breather. If expenses start to get a bit more under control from VCs and free money as it is in the economy right now, there might be a lull for a while. There’s plenty of beautiful spaces that are already built that people can go switch around and move into and hermit crab, if you will, on somebody else’s property after they fail. But I think these notions of density and of commuting and of the need to be free are changing with this new generation.

I think that people in their 20s and 30s—as they start to have children and their commute is two hours—are going to make some choices and they need to work now. So, I think you will start to see some satellite offices. You’ll start to see places where people—if you live in Brooklyn and you need to go to the doctor, but you work in Manhattan, you can actually go to the Brooklyn office for a bit. Maybe it’s only three people. Maybe it’s at a WeWork [site]. Maybe it’s at another kind of communal place that you can work.

Hughes: Do you think this co-working, this shared economy, shared office space…will actually grow?

Coleman: I think the entrepreneurial spirit of America and the world is growing exponentially, at this point. I think everyone would rather create their own destiny to create value for themselves and their family and their loved ones on their own terms. You’re seeing that more and more.

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