CORPORATE OFFICE PERSPECTIVES | APRIL 1, 2016

With the stock market down a few thousand points, big banks taking billions in write-offs on oil-related loans, China’s economy slowing down and uncertainty in the U.S. political arena, we could be doing a lot worse. Unemployment is basically as good as it can get and San Francisco Bay Area rents are still holding strong in spite of concerns over the Unicorns and lack of IPOs. Transbay migration from San Francisco over the hills to the I-680 corridor, and Santa Clara up to the Tri-Valley has lots of lookers, but as of this writing, only a few signed leases. If you’d like to see a cool Greater Bay Area office rental map, click here.

Tech is dramatically changing the way commercial buildings are being operated and managed. Data analytics can tie in energy usage of lighting, HVAC, plug loads, and, “Building data allows facilities to adjust more quickly to the work routines of employees, a key bridge to the second wave of change, which involves employee wellbeing and its impact on productivity. Organizations increasingly recognize the link between productivity and employee satisfaction, even as they struggle to reduce facility costs and average square feet per employee. Their executives read such things as the World Green Building Council report that says workers with access to daylight are 18% more productive. They think about interactive office design when they read an article like the recent one in the Harvard Business Review with data showing that when salespeople interact 10% more with coworkers from other teams, their sales grow by 10%.” Layout design integration with energy efficiency and wellbeing to control costs while enhancing employee productivity.” (Buildings, December 2015)

This just in: 4 million on top of 2 million square feet of planned headquarters office space for Apple! San Jose just unanimously approved up to 4,151,350 square feet of office, R&D and manufacturing space, which is on top of the 2.1 million square foot “spaceship” HQ project estimated to be completed next year. That’s enough space to accommodate 32,000 Appleites and it should keep the cost of housing in the area buoyant for years to come … (The Registry, January 26, 2016)

The 2016 winter/spring Allen Matkins / UCLA Anderson Forecast Commercial Real Estate Survey (or AMUAFCRE for short), “signals continued confidence among developers through 2018 – indicating both the probability of new supply and of opportunities for new investment.” (allenmatkins.com, January 27, 2016)

Colliers International factoids (in case you were curious): 16,300 professionals and staff operating in 67 countries and 502 offices, managing 1.7 billion square feet of commercial property and generating 2.3 billion of annual revenue. I feel comparatively so insignificant …

New startup for startups … Swivelfly is launching an online subscription furnishing service to help startups with new, expanding or shrinking office space furniture, with fast turnaround and maximum flexibility (colors, styles, and staying trendy while keeping it within the clients’ budget). (The Registry, February 9, 2016)  

Office project amenities – on recent tours of suburban office space in addition to the standard free common conference room(s), exercise facilities, and on-site food service, I have seen a number of new employee amenities popping up – bocce ball courts, sand volleyball, firepots surrounded by comfortable chairs, and outdoor basketball courts. Over in South San Francisco, as an enticement to attract lab and office users … “The first two-building phase, which will open in the third quarter, includes a marketplace-like food area on the ground floor as well as pool tables, table tennis and a two-lane bowling alley.” (SF Business Times, February 4, 2016)

Commercial and investment banks taking billions of dollars in write-downs due to loans on energy companies that apparently won’t be repaid, tech companies putting large blocks of office space on the sublease market, and overall San Francisco sublease space which in January 2015 was 1 million square feet as of February 2016 is now 1.7 million square feet. Are we approaching the peak of the market? (The Registry, February 24, 2016)

Deals and Rumors: In the tech capital of the world, San Francisco, WeWork leased 70,000 sf at 600 California St.; Uber took 49,000 sf at 1455 Market St., where Vevo leased 24,000 sf; Bain & Co is rumored to have leased 60,000 sf and Vy Capital – 20,000 sf, both at the new Salesforce Tower; Affirm sublet 60,000 sf at 1355 Market St.; Quantcast leased 95,000 sf at 795 Folsom St.; Airbnb may be looking at 100,000 sf at 999 Brannan St.; and DoubleDutch took 36,000 sf at 350 Rhode Island. In South San Francisco, Verily Life Sciences leased 400,000 sf at 249-279 E. Grand Ave. and YouTube (Google, just like Verily) bought the 554,000 sf Bayhill Office Center in San Bruno. In Alameda, Cost Plus leased 107,000 sf of office space at 1201 Marina Village. In Concord, Consumer Credit Counseling Center may have relocated to 24,000 sf at 1655 Grant. In Martinez, Contra Costa County leased 20,000 sf at 777 Arnold Drive. In San Ramon, BlackBerry leased 50,000 sf and Trumark Homes – 12,000 sf, both leases at 2600 Camino Ramon, Canadian Solar leased 10,000 sf at 2430 Camino Ramon and I represented Insight Global for 11,000 sf at 2420 Camino Ramon.

“A surging tech economy, some of the highest rates of leasing and pre-leasing ever recorded, a pipeline of under-construction projects so robust it’s near bursting, and an effective unemployment rate of zero during the final three months of the year and for the full year ended Dec. 31, 2015, are telegraphing to market observers that 2016 will mark the continuation of San Francisco’s “Glittering Age,” a period that has now spanned two years and for the first time has seen office rents in San Francisco surpass those in Manhattan, Colliers International has disclosed in its year-end office market research study.”  (The Registry, January 25, 2016)

“Monitoring systems and building controls are an integral piece of the net zero energy puzzle” (Buildings, January 1, 2016)

Findings include:

  • Contracts integration was rarely seamless
  • Efficiency is a priority
  • Occupants play a leading role
  • Facility managers should get involved early
  • Big building systems need strong central strategies.

For all the details on this go to www.newbuildings.org

Commercial tenants in California may be receiving significant increased bills for their operating expense passthroughs. Here are the possible reasons behind this – back in 2008 and 2009 during the Great Recession, when office and retail buildings tanked and rental rates cratered, many owners went to their local county and obtained property tax reductions. I spoke with the Assessor’s office and counties are now reassessing properties based on the dramatic rental rate increases. In any case, they can’t go higher than the factored base value, which the original assessed value was escalated at no more than 2% annually. Other operating expense increases – property management fees are tied to the gross rental income. So, in some cases skyrocketing rental rates means hefty property management fee increases. Some owners are predicting PG&E and water increases of 4 to 5%, and union janitorial and maintenance may also add to the overall increase.

For smaller-size office relocating tenants who do not have facility managers on board, here are a few key terms to double check: dishwasher, do you want or need one? Make sure it is specified on the plan as they probably won’t install one if it is not, same with garbage disposal, hook-up for ice maker, plug and hook up for coffee maker, water filter machine, 220 outlets for copiers, big appliances, if you have a refrigerator and vending machines, make sure there is enough room for the door swing.

According to BOMA (Building Owners and Managers Association) 2015 Office Experience report, rental income across the U.S. for office buildings rose 5.3% from 2013 to 2014, overall income rose 6.2%, and operating expenses increased to 6.1%. (Buildings, September 2015)

Yahoo is laying off 1,700 employees, Autodesk  announced 900 layoffs, the stock market is down 2,000 points, and even a recent SF Registry headline reads “CBRE: Leading Indicators for San Francisco Office Rents Faltering?” The article adds the caveat that it typically takes six months for a market correction to show up in the office leasing statistics, and demand as of now still exceeds supply. (The Registry, February 2, 2016)

Ken Rosen, real estate guru, in a January 21, 2016 forecast presentation predicted increasing job growth, less unemployment, and strong sales of homes and cars. Negative factors include China’s financial problems, excess liquidity, capital market volatility, and oil prices. He also believes the stock market will bounce back and the Feds will raise interest rates four times this year. (The Registry, January 29, 2016)

The Business Journals polled readers across the country to get a sense of how optimistic they are about their business in 2016: 42% anticipate modest growth, 23% feel it’s going to be a record revenue year, 15% think it will be flat, 9% expect revenue to go down, but not “horrible”, 6% are clueless and 5% (oil?) expect a significant drop in revenue.

On office productivity and space efficiency: I recently attended a legal seminar on the new software and scanning systems that allow easy search and indexing for documents. A CD can hold 50,000 pages, a DVD – 500,000 pages, and a 40 GB flash drive can store more than 3 million pages of documents, but it is the amazing software that allows you to quickly find what you are looking for.

All over the Bay Area, many commercial real estate investors are taking advantage of surging rental rates and frothy sales prices. As one recent example, according to The Registry, February 11, 2016, JP Morgan purchased the 440,000-square-foot Dublin Corporate Center in 2013 for $103 million and is now seeking offers in excess of $120 million. Not a bad return for a three-year hold.

Major institutional investors may be reducing somewhat their investments in commercial real estate as with the stock market down as much as it is their percentage of real estate holdings is now too high.

I was recently at a presentation given by John Williams, president of the San Francisco Federal Reserve Bank. Overall, the feeling was one of optimism with a 2% inflation target and a feeling around the room (mostly corporate executives) that a half percent interest hike later this year would not severely impact the economy.

A Net-Zero San Francisco 24,000 sf commercial building will produce more energy than it consumes. Features include 343 solar panels, rooftop solar thermal water heating system, solar-powered automated skylights, Big Ass Fans to promote airflow and more … (The Registry, January 21, 2016)

Two different viewpoints on the future of office space, both slightly biased … Seth Bland with Federal Realty, who is developing a six-story office building at San Jose’s Santana Row, stated, “The suburban office is a thing of the past. People are looking for diversity; not being insular. New office spaces provide the opportunity to interact and exchange thoughts.” At the same time, Alexander Mehran Jr., president of Sunset Development Company developing Bishop Ranch in San Ramon, says, “An environment where you can get a lot done in one place caters to the suburban worker,” said Mehran. “On top of living and working, that means great transportation programs, childcare, schools, downtown farmers’ markets and bike shares.” When these workers get in their 30s and 40s, and start thinking about buying a home and raising a family, San Ramon and the Tri-Valley will be a pretty attractive place to settle down in. (The Registry, March 7, 2016)

I’ll have many more photos for the next issue, as those of you with children living away from home at college, know how few and far between decent photos can be. Jordan is finishing his freshman year at Cal Poly in San Luis Obispo and totally loves it. By the time you read this in the first week of April, my dad and I will be spending a weekend visiting and touring the campus and its environs. Madison, my 13-year-old amazing daughter, is having a blast playing lacrosse. At her middle school, all the classes are in portables for the next two years while they build a new school. Jordan and Madison’s recent photos can be seen here.

Economists say that if unemployment was any lower than the current 4.7%, we would have an unhealthy overheated economy, leading to excess inflation. Yet, some regions in the U.S. are still impacted with too much unemployment such as Michigan and some of the rustbelt regions, while submarkets like San Francisco are fiercely competing for new hires. I have never listened to more political debates in my life, and yet with one candidate promising to make Apple produce in the U.S. instead of China (who wants to pay $6,000 for an iPhone?) and another wanting to make college and healthcare “free” (right, someone’s got to pay!), I’ll just be glad when November rolls around and we can get back to regular programming. We have little or no control over who is elected our new president or when the tech frenzy will plateau, but we do have an immense power to love our family, try to help those in need, and do what we can to improve the world, even just a bit, so it is a better place for our children and for their children. Cherish the moments as life is sometimes so fleeting, and thank you so much for reading this!

Sincerely,
Jeffrey Weil, MCR.h, SIOR, CCIM
Executive Vice President
Colliers International

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