Corporate Office Perspectives | December 1, 2013
Recently I’ve been giving a number of speeches and presentations, including one on the Bay Area commercial real estate market. One needs to keep the audience excited (or at least attentive) so I talk about the San Francisco tech phenomenon, with kids in their 20s and 30s flocking to San Francisco from all over the country (and other parts of the world, for that matter), eager to get in on the Internet Gold Rush of our decade. Sitting at long desk-benches with headphones for virtual isolation from fellow co-workers, these techies (7 to 10 percent of who bike to work, the majority of the rest take Muni or Bart) are creating so many new ways the rest of us will work, shop, play and gracefully age. Companies provide bicycle storage rooms and showers, bring in free gourmet lunches and dinners, a number allow your dog to join you, your doctor comes to your office for a checkup — all to keep you happily employed. My talk also discusses all the new East Bay retail developments, with block after block of new Walnut Creek two-to four-story residential over retail. However, when it comes time to inject excitement about the East Bay office market, I get stuck. Few significant leases, no new construction, same old CPA, lawyer and insurance company offices, and other than Workday, there is little tech excitement… and no way will just about any office building owner allow you to bring your dog to work! For the most part, office vacancies hover around 15 percent (better than the national average of 17 percent) but unless you think an old-line environmental engineering office or real estate law firm operation is sexy or cool, we in the East Bay are just typical Main-Stream Americans… and there is nothing wrong with that!
“Like 70% of offices in the U.S. these days, Square’s new San Francisco Market Street headquarters is designed to be open and collaborative.” Designed to attract tech employees, the main floor is 100,000 square feet. The goal was to make the big office feel small by adding/including Main Street amenities like a full coffee shop with two full-time baristas, a library with real books and 27 cabanas enclosed on two sides for “private time.” The company venture and fitness center is located on another floor. “Off the boulevard are rows of tables that provide a “touchdown space” for the workers, who are organized into “neighborhoods” based on their jobs. Instead of individual cubicles or desks, these spaces are home bases for employees to place pictures of their kids, store personal items and recharge their computers, she said.” No one has an office with a window view. Instead, there are couches and chairs near the windows for everyone to enjoy. (The SF Gate 2013)
If you are looking for commercial real estate financing, the Colliers Mortgage group reports there is lots of money for decent financing or refinancing, non-recourse, assumable and at fixed-rates running about 2 percent over ten-year United States Treasury.
You think your office space is expensive? Office space costs almost $20/sf per month in Hong Kong, and $18/sf per month ($222/sf per year) in London’s West End. The rumors that they only hire tiny workers to fit behind skinny desks are not true (National Real Estate Investor 2013)
Work out while you work … “A growing number of Americans are standing, walking and even cycling their way through the workday at treadmill desks, standup desks or other moving work stations.” You can walk on a treadmill while you make phone calls and sort e-mail. I wonder if you turn in your budget on Excel while tread-milling, does this make your budget a moving target? (Contra Costa Times 2013)
How will the aging boomer population affect the design of office space as well as change the types of occupancy? “Today, 10,000 Baby Boomers reached 65. The same thing happened yesterday and the same thing will happen tomorrow. In fact every day, for the next 15 years 10,000 Baby Boomers will reach that age Milestone.” What does this mean for the many two-story smaller office buildings without elevators, both to the aging CPA’s, lawyers and insurance agents housed on second floor offices still unable to retire, as well as their aging clientele, an increasing number who may be arriving with a walker or wheelchair? What does this mean even for Class A buildings with inconvenient disabled parking or which are less accessible for aging customers using public transportation?
Silicon Valley companies have taken more than 700,000 square feet of office space in San Francisco during the past year, from tiny start-ups to big giants like Cisco and LinkedIn. The talent, which is pouring in from all over the United States to be part of this new Internet Gold Rush, is the reason for this. (San Francisco Business Times 2013)
According to the United States Green Building Council, San Francisco has the highest number of LEED Platinum and Gold-Certified Commercial projects in the nation, with 155 projects in comparison to second-place holder, Chicago, with 148 projects. On the other side of the report card, San Francisco earned an “F” as the least-affordable major United States city. (The median home price is now $706,400!) (San Francisco Business Times 2013)
“How big data centers can cut greenhouse gas emissions by 88%…” according to new Stanford research, simply by switching to efficient, off-the-shelf equipment and improving energy management, data centers could be significantly more sustainable. (Buildings 2013)
The FASB accounting rule changes that have been underway for the past four years, which would require corporations to capitalize their property leases on their balance sheets, is still stuck in the muck of negotiation. Congressman Brad Sherman predicts that the new rules would automatically add $2 trillion to the financial statements of U.S. companies, increasing debt ratios which might compel firms to cut spending to deleverage their books. “It could also raise the cost of capital and trigger loan covenant violations amongst the vast majority of businesses that use the generally accepted accounting principles (GAAP).” (CoStar GROUP 2013)
One of many reasons the San Francisco Bay Area is a booming tech center lies in the fact that Google has purchased more than 200 companies, since 2010 … The secondary impact of these purchases may have increased its Bay Area office presence… (San Jose Mercury News 2013)
The San Francisco Bay Area is expected to be a job magnet for the entire United States for years to come. By 2040, the Bay Area will claim nearly 2.55 percent of all United States jobs, with 75 percent of these jobs expected to come from business and professional services, the health and educational sectors, and leisure and hospitality. (The Registry SF 2013)
Solar installations grew 76 percent in 2012 and are now the fastest-growing energy source in the United States. Growth in the commercial market was only a small part of this, comprising 7,000 of the 90,000 solar installations. (Buildings 2013)
According to Rich Martini of the Colliers Multi-Family Investments Group, the Real Facts-Meyers Research Group tracks 28 multi-family metros across the country and ranks those metros according to 11 indicators, including: rent increases, occupancy, job growth, multi-family permit levels and estimated cap rates for stabilized properties. The top three metros (markets) are as follows: San Francisco at number 1, Oakland region at at number 2 and San Jose at at number 3.
The North I-680/East County industrial market has come back strong, coming back from a 15 percent vacancy rate in 2011 to an effective rate today of 8 percent. Similarly in Solano County, the 17 percent vacancy rate has dropped to an effective current vacancy rate of 5 percent.
Office collaboration through open design – The Big Ass Fan Company (BAF) designed its new 80,000 square foot headquarters with an almost total open floor plan. The design has only one executive office, a cantina, clinic and meeting rooms, and an acoustical deck that absorbs and dissolves sound. Six conference rooms and fifteen breakout rooms allow for a wide variety of meeting functions. (Buildings 2013)
A recent article published in the National Real Estate Investor, October 2013, predicts that tech office growth will eventually spread outside the current core areas of San Francisco, New York, Chicago to elsewhere that have lower labor costs and rents, and where there are more incentives to business. Whether this becomes reality remains to be seen, but there are a lot of suburban Landlords to whom this will be music to their ears.
Big block office space and big rents – there are reports out predicting Manhattan will record 60 or more 100,000 square foot office deals in 2013, with 46 of these more than $100 per square foot for annual rent. Major tenants may be downsizing the square foot per employee ratio (from 250 square feet per employee down to 150-175 square feet per employee) thereby enabling justification of signing at top market new building rents. (National Real Estate Investor 2013)
The largest net zero energy building in the world is the Phoenix regional office of DPR Construction. The LEED-NC Platinum facility features an 87-foot solar chimney that enables a passive cooling system, releasing hot air out of the building while drawing cooler air in; 90 operable windows working in tandem with the energy monitoring system to open and close based on indoor and outdoor temperatures.; solar optical tubular day lighting devices harnessing light from rooftop domes and bring it into the workspace; a “vampire” switch cuts off 90 percent of plug loads at night; and photovoltaic-covered canopies cover half of the parking lot, generating energy power to offset the buildings annual energy needs. This solar array moved the building from net-zero to its current grid-positive performance. (Buildings 2013)
Downtown Walnut Creek Main Street retail space is getting expensive, now that Broadway Plaza has given lease termination notices to about 40 tenants in the way of their new remodel. I have heard of downtown store rates of $5.00 per square foot triple net. Ouch! Of course, compared to Manhattan where prime retail rents can exceed $150/sf per month everything is relative…
Light industry/warehouse space – Concord/East County, our guys have leased more than 1 million square feet of space just during the past 18 months…
Big blocks of office space available in the San Francisco East Bay … Concord has several 200,000 square foot office availabilities, and if you want 1 million square feet all at the same office campus, both San Ramon and Pleasanton can accommodate.
CoStar reports that the nation’s equity REITS are selling large amounts of industrial property and in turn purchasing office properties, at a spread that “has almost doubled so far this year as compared to last year”… does this mean significant office rent increases are in the tea leaves? (CoStar GROUP 2013)
Increase in San Francisco tech jobs 2012 to present: 36 percent; number of tech companies in San Francisco: 1,892; San Francisco unemployment rate, August 2013 is 5.6 percent; rate for California 8.9 percent, according to the (San Francisco Business Times)
Jordan, who is a junior in high school, is fortunate to really enjoy school, and his Lacrosse pre-season practices are in full swing. We are now in college choice discussions, and all the parents who have gone through this know what this process entails. Madison, his 11-year old sister getting ready for the 2014 softball season and is a little less enthusiastic about elementary school, but loves the field trips and school activities. Their latest photos can be viewed here.
Always do the right thing, take the high road, do what you say you will do, give everything you do with 150% effort – the commercial real estate industry and life in general always has its up and downs, and it does not matter how many years or how many decades you have been involved in your profession and in life, curve-balls can come out of nowhere. Sometimes they smack you in the side of your head, and when you recover and the birds stop singing in your ears, you stand back up, shake it off and do your best to get back in the game. Occasionally a curve ball hits your bat just the right way and soars out over the fence for the home run. One thing is for sure – unless you keep getting back up to bat, you will never see what type of impact you will have … Enjoy the upcoming holidays, call me for all of your commercial real estate requirements and live life in gratitude!
Jeffrey S. Weil
