Shrinking Security Deposits Could Make the Next Downturn Tough for Creative Office Landlords

security deposit

Creative office landlords are having a difficult time getting security from tenants in the creative field.  One of the major drivers of creative office, especially in San Francisco, is the technology industry.  Start up companies, whose survival depends on continued venture capital funding, compose a very significant component of this market demand. In the dot com bust,  these tech tenants folded like a house of cards.  I lost 13 out of 14 of these tech tenants.  Yes, tech tenants are better capitalized than before.  However, instead of folding in six months, they can last a year or two, maybe. What is different the last time  is that we got whopper security deposits in the form of letter of credits–that ranged from one to three years rent.  Let me tell you, that really helped.  Today, it is hard to get a security deposit equal to six months of rent from these tenants.  Even if you can get more than a 12 month letter of credit–the bankruptcy laws have changed to limit a landlord to only a 12 month rent recovery in bankruptcy–even in the case of a letter of credit.

Also, a lot more creative office is being produced right now.  I don’t even know if the conversions are being counted in the new construction numbers in the brokerage market reports.

Los Angeles did better than San Francisco during the dot com bust since its creative tenancies are more diversified comprised of entertainment, advertising, media, design, and technology. Some landlords are trying to get credit technology companies like Google and Microsoft. But you cannot hold out only for those tenants.


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