Corporate Office Perspectives | April 1, 2014

Slow and steady… other than a very few sub-regions of the United States where the office leasing activity is at a frenzied level (i.e., San Francisco), most of the country is experiencing a slow but steady recovery in the office sector. Class A rental rates have gone up, vacancy rates in many markets for the most part are very slowly inching downward, tenant concessions still exist but are diminishing (i.e., four months free rent versus six to nine months perhaps 18 months ago), and tenant improvement allowances are shrinking. Class B office rents, which in many sub-sectors of the country barely covered operating costs, and return of capital are now slowly getting to the point of actually providing an investment return to the ownership. This is all healthy, as a market with huge vacancy usually means a depressed economic environment, and a frenzied market often leads to stiff rent increases, forced relocation of non-profits and others unable to pay the higher freight, and eventual overbuilding as every developer and his cousin wants to jump on the same bandwagon. In most office markets not fortunate enough to have Google, Facebook, Twitter, LinkedIn or other rapidly growing and profitable tech companies, the tenant base of attorney firms, CPA’s, financial planners and corporate branches are either getting more workforce in the same or less square footage or are growing at very conservative levels. This is not a robust business climate for us office leasing specialists, but having a healthy market sure beats the alternative …

San Francisco office leasing continues to be more than robust. A recent headline in the San Francisco Business Times (1/7/14) read: “Pre-leasing frenzy soaks up spec offices with almost 75 % of all the office space under construction for 2014 delivery already leased and about half of the 2015 office construction pre-leased as well.” One report quoted Carl Shannon, managing director of developer Tishman Speyer, as follows, “We are blessed in San Francisco to have an economy which has overcome the shrinking that is going on in corporate America.” Shannon sees full-service gross rents reaching into the low $80 range per square foot annually in San Francisco. But the rising rents won’t scare off the big tech tenants, either. “The tenants that matter are not incented by saving rent,” Shannon said. “It’s all about, `How am I getting employees?’ Rents are a very small part of their expense.”

And for the rest of you who are concerned about too-high rental rates, call me as we have plenty of $20 to $35 square foot per year, full-service, Class A office space with all the amenities… free garage parking, free common conference centers, free on-site exercise facilities, BART and tens of thousands of happy, stable, hard working, suburban employees ready to come to work for you!

AROUND THE WEB

Commercial building utility expenses down 10% according to recent BOMA report based on study of 2,000 private sector buildings. However, at least here in California with our drought and anticipated cost spike in hydroelectric power, cost savings are expected to be short-lived. (Buildings 1.14)

Office design update: In an interview with Barbara Carlyle of Pivot Interiors (The Registry SF) on the future of office design: Pivot’s clients… “Understand that the workplace is a strategic financial investment, one that is paramount to attracting and retaining the best talent. Pivot is coaching our clients to think beyond `square foot per employee’ formulas. Our tagline for the past three years has been: Your Space. Your Story. Our research shows that by 2015, the majority of the U.S. workforce will be in their 20’s. That generation has their own unique perspective and expectations of what the office environment should be. They are looking for a place where personal connection to work and colleagues increases their productivity and effectiveness through a natural experience of interaction, creativity, and fun. People want to work in a natural environment that connects them to work and to each other.”

Electric vehicle charging stations – be the office or retail building that doesn’t offer this and you may be the building with fewer tenants and higher vacancies. As electric cars become mainstream, employees need to be able to plug in while at work. One advantage suburban offices have is land on which to put solar canopies. These solar stations turn sunlight into electricity (don’t ask what folks in Seattle or drivers on rain or snow days will do) but for the rest of us, a “smart plug” sends a text to the user when the charge is finished, and another app tells where the nearest available charger is. (Buildings January 2014)

In the headlines of the Feb. 21, 2014, San Francisco Business Times, “Too Much Of A Good Thing?” questioning whether SF has too many tech jobs. Let’s see, too many 20 and 30 year olds making $100,000 or more, running around eating out at local restaurants, shopping at local merchants, working for Google, LinkedIn, Salesforce – companies actually making tons of real money versus what, coal mining or pollution-generating blue-collar factories? Give me a break, I’m jealous.

Deals and Rumors:

In Walnut Creek Del Monte leased 27,000 sf at 2003 Oak Road, relocating from San Francisco. John Muir Health bought the 92,000 square foot office building at 5860 Owens Drive, Pleasanton from State Compensation. Dropbox leased 180,000 sf at 333 Brannan St. and expanded from 100,000 sf to 200,000 sf at 185 Berry St. in San Francisco. Le Port Schools took 23,000 sf at 50 Fell St.; Bank of America leased 265,000 sf at 555 California St. and 315 Montgomery St.; Eventbrite will be taking 100,000 sf at 155 Fifth St.; LiveFrye Inc. inked a 35,000 sf deal at One Kearny and Xerox leased 100,000 sf at 425 Market St.; Meritage Group leased 40,000 sf at the Ferry Building, reportedly at more than $90/sf; Bridge Housing leased 20,000 sf; Burr, Pilger, Mayer, Inc. took 20,000 sf and Fundtech leased 15,000 sf, all three deals done at 600 California St.; and Salesforce is rumored to be looking at 300,000 sf at 415 Mission St.

Cost-effective lighting retrofits can lead to huge savings:

1. Occupancy or vacancy sensors foreclosed spaces as conference spaces are occupied 30-70% of the time, offices 35% of the time, and bathrooms 10% of the time. Estimated payback: two years.
2. Daylight harvesting ($65 to $180 per workstation for sensors and wireless controls), ROI 5 years, daylight harvesting can save 10 to 35% of lighting energy.
3. Task lighting, reduce ceiling lighting, de-lamping costs $32 per employee, and LED task lighting at $164 comes to a 40% total lighting energy savings. (Buildings, January 2014)

The recent rumors of a possible sale of Safeway stores have severe negative implications for the Pleasanton, Calif. office market. In addition to the hundreds of thousands of square feet of office space Safeway headquarters either owns or leases, there are also a multitude of food supplier and vendor offices in Pleasanton with the sole reason for being there is Safeway HQ – remove that and you might remove many other companies office needs (and employees) as well.

In an interview published in the San Francisco Business Times 1/11/14, Primo Orpilla of Studio Q & A discussed current office layout trends. “Offices have evolved into more democratic spaces, with a much less hierarchical structure, and executives and management blended with staff. Gone are the cube farms, replaced by relaxed yet functional work environments. These days – because technology allows you to roam – you can work anywhere and there is a need for variety. The work place of the past was very sliced and linear, but new environments have people working on couches, in hallways, in the kitchen or a conference room – not just one place.”

The San Francisco East Bay office market is still lethargic with vacancy rates in the 10 to 16% range, but during the past month I experienced an upward “blip” I have not seen since 2001 before the dotcom melt down – spaces toured a week prior where the listing agent honestly admitted activity was slow and there were no active prospects, changed almost overnight. When I submitted a leasing proposal on behalf of different clients, I was told that within just a few days prior there were multiple tours and competing principals expected. No hype and just pertaining to smaller office sizes, but nonetheless a noteworthy “blip.”

AT&T will be downsizing 900,000 square feet at its San Ramon facility, which using a 200 sf per employee model, represents 4,500 jobs moving to Texas. Charles Schwab just announced it will be moving 1,000 jobs from San Francisco to Texas. I guess that is better than sending all those jobs to India or the Philippines …

#7 (out of 143) reasons to use an Exclusive Tenant Representation on your office lease renewal or relocation – at different points in time, and with each landlord having different “hot buttons” and lease concessions, the astute tenant rep broker, having spent his or her career knowing the differences between landlords, what deals were just signed with what rent, TI’s, lease concessions, etc. can guide the client toward maximum achievable concessions. One property owner may be willing to give a new five-year tenant six months free rent, while two doors down, another may play hard ball, only giving two months’ free rent. There is almost always no cost to the tenant for using a Tenant Rep broker, but oh so many benefits … It has to be win-win for both tenant and landlord…

San Francisco unemployment January 2010: 10%, but as of December 2013: 4.8%
Marin County unemployment: 4.2% (as of December 2013)

Jordan, who turns 17 this May, is a junior in high school and is totally immersed not just with school and Boy Scouts but most of all his Varsity Lacrosse team. He plays the long stick defense and loves the game. Rain or shine, we are out there in support and unlike Little League or softball where the games go on for hours, the lacrosse game is 48 minutes, plus a 10-minute time out. No instant replays and no commercials … Madison who is 11 1/2 and playing competitive softball, has two games a week (yup, hours-long apiece) and at least 2 to 3 practices. With summer too-rapidly approaching, we are now planning out the summer camps for Madison, and if anyone in the Alamo/Danville area has a great summer job for Jordan, please contact me … Their recent photos can be seen here.

I have friends who hit the tech jackpot and only work because they want to and enjoy what they are doing, and most of my other friends have fulfilling careers where their retirement is now pushed out an extra 5 to 10 years due to the Great Recession. I also have an increasing number of friends who served their 25 to 35 years, mostly in government and now are fully retired, but I have no friends who are out of work and unable to find a job. Maybe it is the region, or just the timing, but it seems America has plenty of opportunity and chance for those who make the effort to do something with their lives. Before every lacrosse game, we take our hats off, put our hands over our hearts and listen to the Star Spangled Banner, and this gives me a frequent but special time to give thanks for being an American and living in this most wonderful land of opportunity.

Please call me if you’d like the best office leasing and sales brokerage experience of your life, or help with any other facet of commercial real estate. I am here to serve you!