Have Commercial Real Estate Prices Hit Bottom?

Even in San Francisco, opportunists are starting to buy office space. One is throwing an “SF is back” party.

Good Morning!

Here are today’s highlights:            

• The FTC is preparing litigation that could break up Amazon.

• White, male business owners are suing over alleged discrimination in pandemic relief.

• In Palo Alto, the owner of a landmark restaurant faces eviction for paying his rent a day late.

• Here’s how ecommerce businesses can protect themselves against an increasingly popular (and shameless) scam.

OPPORTUNITIES

Entrepreneurs are buying shuttered office space that once housed WeWork: “StartupHQ—the new owners of 156 Second St. in San Francisco’s SoMa neighborhood—is throwing an ‘SF Is Back’ party this Friday that’s meant to function as a kind of open-bar open house. The company, which owns, manages, and operates office space for startups, has taken advantage of a local ‘Doom Scoop’ trend line where cratering real estate values have presented great deals for those betting on the city’s eventual recovery. Earlier this summer, StartupHQ bought the 34,000-square-foot building for $6 million from a Canadian investor who paid more than twice that for it back in 2012, according to property records.”

• “The century-old property located a block away from Salesforce Park was completely vacant after troubled coworking startup WeWork shuttered its offices there during the pandemic.”

• “StartupHQ co-founders Steve Weir and Bardia Housman remain confident. Weir said they are following a similar playbook as the one they started the company with in 2011 at the tail end of the Great Financial Crisis.”

• “StartupHQ plans to put around $1 million into the property for new fixtures, infrastructure upgrades and cosmetic improvements with the idea of creating 131 offices of various sizes.” READ MORE

OFFICE SPACE

Meanwhile, WeWork warns it may not survive: “WeWork, once one of the world’s most valuable startups worth $47 billion, said Tuesday excess supply of commercial real estate, greater competition for flexible space, and uncertain economic conditions resulted in losses in the second quarter. The company has seen higher churn and lower demand than it anticipated, with memberships at its locations falling from a year ago, Interim Chief Executive Officer David Tolley said in its quarterly results.”

• “Recession fears and tech-industry job cuts have weighed on demand for co-working desks, part of broader turmoil affecting the commercial real-estate market because of employees’ reluctance to return to the office.” READ MORE

COMPETITION

The Federal Trade Commission is preparing litigation that could break up Amazon: “The FTC has been investigating the company on a number of fronts, and the coming case would be one of the most aggressive and high-profile moves in the Biden administration’s rocky effort to tame the power of tech giants. The wide-ranging lawsuit is expected as soon as [this month], and will likely challenge a host of Amazon’s business practices, said the people, who were granted anonymity to discuss a confidential matter. If successful, it could lead to a court-ordered restructuring of the $1.3 trillion empire ...”

• “The complaint is likely to focus on challenges to Amazon Prime, Amazon rules that the FTC says block lower prices on competing websites, and policies the FTC believes force merchants to use Amazon’s logistics and advertising services, according to some of the people.”

• “The FTC is also expected to claim that Amazon steers sellers to its own logistics services, which include shipping and warehousing, by rewarding them with better placement on the site, and punishing them when they don’t, some of the people said.”

• “The agency is concerned Amazon forces merchants to buy ads in order to get better placement in customer search results.” READ MORE

REGULATION

The Biden administration has imposed a new rule for federal projects: “The rule — unveiled by [Vice President Kamala] Harris during a trip to Philadelphia — represents one of the most aggressive administration actions to date to give workers a greater share of new federal investments in semiconductors, infrastructure, and clean energy. The measure aims to restore an old definition of the ‘prevailing wage,’ scrapped by President Ronald Reagan, that the Biden administration says would change pay standards on federal construction projects. Under the new rule, employers would be required to pay construction workers the equivalent of wages made by at least 30 percent of workers in a given trade and locality.”

• “Funding from President Biden’s Inflation Reduction Act has poured disproportionately into red states, with private developers of renewable energy projects seeking lower labor costs in parts of the country with nonunion workforces.”

• “The new rule, which updates the 1931 Davis-Bacon Act, is intended to ensure that labor unions are at the forefront of the projects resulting from the federal spending blitz.”

• “The American Prospect, which first broke news of the pending rule, reported that the Associated Builders and Contractors could file a lawsuit to stop it as soon as this week. Ben Brubeck, the organization’s vice president of regulatory, labor and state affairs, said in a statement that the administration’s decision ‘illegally increases regulatory burdens on small businesses, new industries, and more public works projects.’” READ MORE

LITIGATION

White, male business owners are suing for discrimination in its pandemic relief: “It has been a point of pride for state officials to give hundreds of millions of dollars in grants to small businesses owned by women and people of color to help them recover from the pandemic. Now the notion of prioritizing historically disadvantaged groups is being challenged in U.S. District Court in Boston by two white male business owners who have sued the State of Massachusetts alleging that a new grant program not open to them amounts to racial discrimination. The plaintiffs are represented by the Pacific Legal Foundation, a conservative law firm based in California.The firm, which is pursuing similar cases across the country, is seeking class action status for the case.”

• “The Massachusetts lawsuit, filed in May, has already had an impact: the state has agreed to temporarily delay awarding grants — ranging from $10,000 to $75,000 — which would have gone to businesses owned by women, immigrants, people of color, LGBTQ+ people, and others who are considered socially and economically disadvantaged.”

• “‘To paraphrase the Supreme Court, eliminating discrimination means all of it, and that should include government grants to small businesses,’ said Andrew Quinio, an attorney at Pacific Legal, which is representing the white entrepreneurs — Brian Dalton of the New England Firearms Academy in Woburn and John Troisi of Big Jack’s Auto Service & Towing in Dedham.”

• “Mina Makarious, a partner at law firm Anderson & Kreiger who specializes in public sector law and is not involved in the litigation, said the law may not be definitive at the moment, but that doesn’t mean entities should back away from diversity programs.”

• “‘If a client were asking me, should we drop all of these kinds of efforts? I would say no,’ said Makarious. ‘You just have a heightened bar from the Supreme Court to explain what you’re doing and why you’re doing it.’” READ MORE

The owner of a landmark business faces eviction over a late rent payment: “After 29 years of business in Palo Alto, Mike’s Diner Bar faces eviction, because owner Mike Wallau paid rent a day late following a family medical emergency. His rent was due July 17, but he was unable to drop off the rent check until the following day, he said, because he was at the hospital with his disabled daughter. In a letter dated July 20, his property manager, Eugenia Seraia of Ventana Property Services, returned his rent check of $22,052.81 and told him the property owners had initiated the eviction process.”

• “If the eviction proceeds, Mike’s Diner Bar will be the latest in a run of business closures that have faced the neighborhood, which has lost 15 businesses in five years and has still not recovered from the pandemic’s economic effects.”

• “About five years ago, Wallau took on a project to renovate the restaurant, expanding into the former Peninsula Hardware store. All told, he spent about $2 million and more than two years on the project. He reopened about eight months before the pandemic lockdowns began, and during the pandemic, his restaurant remained closed for 17 months.”

• “This isn’t the first time a late rent payment has triggered the threat of eviction for Mike’s Diner Bar. Last August, the owners filed paperwork with the Santa Clara County Superior Court alleging that Wallau owed $19,000 in back rent. Ultimately, he agreed to pay the back rent, submit rent on time and cover the owners’ attorney fees of about $5,000.”

• “‘I’ve been a good tenant for 29 years,’ he said. ‘I’ve served my community and donated to every church, school, and Little League team. These are the kind of businesses that support neighborhoods.’” READ MORE

ECOMMERCE

A viral TikTok video warns business owners about a package scam: “In a clip that's been viewed over one million times, [Australian clothing designer Kayla Thomas of REAKT Apparel] says a customer (who goes to her gym) placed an order for several items of clothing, but after the package was delivered, the customer claimed items were missing. ... ‘I'm thinking, How was that possible? Like, did I make a mistake? I was literally second-guessing myself,’ Thomas told viewers after she received the email that one of the shopper's three crop tops had allegedly not been sent to her. ‘So I emailed her back, and I was like, I will investigate this and get back to you ASAP.’”

• “When Thomas offered to deliver one right away, the girl asked if she could exchange it for a different shirt instead, which is when she started to get suspicious. She then decided to go to the gym's Instagram, where she knows the shopper is a frequent visitor — and was stunned by what she saw.”

• “‘I couldn't believe it. There she was that same day wearing the black crop that was apparently missing,’ Thomas told viewers. ‘And the weird part is she literally tagged me in the post, but I didn't see it because our account is private, and we don't follow each other.’ In a second video, Thomas said she messaged the girl multiple times and received no response.”

• “The moral of the story for small business owners: record your packages before sending them out to avoid getting scammed by customers who try to get more items from you for free.” READ MORE

STARTUPS

Ayana Bio, based in Boston, wants to make junk food good for you: “The company is dedicated to creating lab-grown plant materials for use in food, drinks, dietary supplements, sports nutrition products, and, perhaps, cheese doodles. And in July, it announced the opening of a new laboratory in the Seaport. ‘The reality is that most families, especially now with the cost of food skyrocketing, can’t afford to eat fresh food and have to reach for processed food,’ said Ayana Bio’s CEO, Frank Jaksch. ‘There’s an obvious solution: fix processed foods so they include actual nutritional value.’”

• “The idea is this: If Ayana Bio can create a Brussels sprout powder, for example, containing all of the nutritional benefits of the child-averse vegetable, and then sell it to a snack food company for incorporation into its recipe, the guilt could be removed from guilty pleasures.”

• “This concept is not entirely new. Companies have been creating plant powders for years (think matcha). But the difference is the ingredients Ayana Bio produces come from lab-grown plants rather than farmed plants.”

• “So far, Ayana Bio has launched two products, made from lemon balm and echinacea. The lab plans to release three more by the end of the year, choosing plants that are known to have health and wellness benefits or that are difficult to reliably obtain through traditional agricultural methods.” READ MORE

CYBERSECURITY

Small businesses are most at risk for ransomware attacks: “NordLocker tracked thousands of cases around the world from Jan. 1, 2020, to April 30, 2023, and found that small businesses in the United States and Canada were the most vulnerable to potential attacks, with businesses of 51 to 200 employees being the biggest target, followed by businesses with a headcount between 11 and 50. The big problem? Small businesses often are unable to allocate the resources to dedicated cybersecurity staff since everyone is, by their nature, performing multiple roles, said Tomas Smalakys, chief technology officer at NordLocker.”

• “‘Employees that work in small companies tend to wear many hats at once. Salespeople also take care of marketing, CEOs take care of hiring, and IT support take care of hardware needs, procurement, IT admin, and, if there’s any time left — cybersecurity. This makes companies easy targets,’ Smalakys said in a statement.”

• “Regularly back up your data and maintain multiple copies of those backups, including offline or offsite. That ensures the business can continue to function in the event of an attack.”

• “Educate employees on how to recognize phishing emails and to report potentially suspicious activities.” READ MORE

THE 21 HATS PODCAST

Can I Go Dig a Hole? This week, in episode 163, Liz Picarazzi, Jennifer Kerhin, and Sarah Segal talk about whether they ever wish they could go back to their corporate lives. For Liz, there was a period during the early days of Covid. For Jennifer, it was when she made the transition from a consulting business to an employee business. These days, none of them can imagine going back—although Sarah did have a rough week recently when she lost two clients. “It's just the way of the world,” she tells us. “When businesses are looking to cut costs, it’s outside agencies that go first. But when it's two of your largest clients in the span of a week, it's like, ‘Really? Can I go dig a hole, put myself in it, and just stay there forever?’”

• What she’s actually doing, as we discuss, is figuring out some new ways to attract more clients. We also discuss whether everyone needs a business plan and whether the three owners ever wonder if someone else would do a better job running their businesses.

• “‘When I actually put down a business plan in writing, I was able to say, No, to potential or current clients when they asked me for services that I didn't think were in my wheelhouse. Because before, when I was just sort of trying to make it through, sometimes I accepted work that I shouldn't have.’”

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren