CORPORATE OFFICE PERSPECTIVES | JUNE 1, 2015

The San Francisco Bay Area commercial real estate frenzy continues, with hundreds of thousands of square feet of office space absorption during the past 60 days, still record low interest rates, and billions of dollars chasing a limited supply of investment real estate. This issue marks the 35th anniversary of OfficeTimes, which started with just a few hundred readers so many years ago, when Class A office rents were $1.30/rsf, leases were less than 10 pages long, and there were no cell phones in the U.S. back then – we, in sales, carried rolls of dimes and pay phones were abundant.

Once in a while I tune into talk show host, Dave Ramsey, while I am driving to appointments, and I am always amazed to hear caller after caller proudly declare that they are “debt free” after paying off car loans, student loans, credit cards, and yes, their home loans because the mortgage amount in mid-America is often $125,000 or less. I looked up average home values – in Iowa: $125,000; Nebraska: $135,000; Texas: $141,000; Florida: $170,000 … and California: $440,000; San Mateo: $970,000 and Saratoga $2.2 million. We in the Bay Area often lose sight of how totally out of line our housing market is as compared to the rest of the country.

The “Internet of Things” is hugely positive with so, so many benefits, but there may be scary potential downsides as well. With building systems increasingly integrated and controlled or at least accessible through the Internet, if Blue Cross or Target can get hacked and expose tens of millions of secure client files to outsiders, can’t a cyber-terrorist figure how to lock down a high-rise office building, perhaps inducing poisonous gas into the HVAC system or overriding security and allowing trucks filled with explosives access? In a recent article published on Facility Executive.com, January/February 2015,interesting issues in identity and access management were discussed.

Office Design 101 (Proof). A few steps from NerdWallet’s ping-pong table and the countertop with catered lunches sits a bar stocked with enough booze to get the entire office of 500 “Nerds,” the company’s nickname for employees, sloshed. It’s the star amenity in the 901 Market St. office that also has a nap room with a bunkbed, a yoga area and small dogs trotting around (San Francisco Business Times, Apr 24, 2015) … and to think in the old days just having free coffee and an annual holiday party were enough employee perks to keep employees happy …

Creative office designs: Sascha Wagner, president of Huntsman Architectural Group, says, “Large individual workstations and offices have given way to more open, collaborative settings and large communal spaces that are paired with lots of smaller, private places to make calls or do some heads-down work” … “More small enclosed videoconferencing spaces and enclosed collaborative spaces,” according to Randy Howder at Gensler , and Amy Tamburro at ASD Inc. said, “Would the employee prefer to work in a group at a high-top style table, or standing up in their own office, or a combination of both throughout the day?” Also it is designing office space with a residential feel, “since people spend more time at the office than at home. They are very interested in offering employees additional amenities, from cafes to video game areas and lounge-type spaces, even yoga or massage areas.” “Workplace privacy – visual and acoustical – are also becoming more important, with flexible furniture and equipment to accommodate workspaces,” according to Daniel Herriott at HOK. (San Francisco Business Times, Apr 24, 2015)

Walnut Creek, Concord and Pleasanton office rents continue to inch upwards, regardless of the double-digit vacancy rates, and for certain size spaces, some of the submarkets are flat out of available office space. If you want more than 17,000 sf of Class A office space in Downtown Walnut Creek, forget it, and the same goes if you need 100,000 sf in Downtown Oakland. Yet, rents have a long, long way to go before we start seeing new construction, and in some submarkets such as Downtown Walnut Creek, multifamily and retail competition for land will keep office developers at bay for a long time to come.

Right now you can purchase suburban Class A office buildings at the same per-square-foot prices as you can warehouse/flex buildings. On a NNN basis, the rental rates may even be the same, but the difference is in the cost of tenant turnover. Warehouse vacancies are single-digit and might cost the landlord a few bucks a foot for tenant improvements, whereas in Concord, California, where the office vacancy is currently 20%, a space might sit empty for 12-24 months, and the new tenant might require $20-30/rsf or more in tenant improvements.

Staying healthy in the office … Offices in San Francisco are now being built or retrofitted with a flair for fitness to recruit or retain workers and potentially boost productivity and creativity. Standing desks on open-floor plans, treadmill desks, more natural light, live plants, and bright colors can boost worker productivity. Out in the suburbs, an increasing number of office buildings feature free on-site exercise facilities with showers and lockers for employees. (San Francisco Business Times, Apr 24, 2015)

Deals and Rumors: Oakland is having an office leasing frenzy, with Otis McAllister leasing 17,000 sf at 360 Frank H. Ogawa Plaza, and Turner Construction taking 17,000 sf in the same building; Workers Comp Rating leased 41,000 sf at 1221 Broadway; Pandora expanded by 49,000 sf at 2100 Franklin St.; Turnitin took 48,000 sf at 2101 Webster, 99 Design signed for 14,000 sf at 2201 Broadway, and Paradigms will be expanding to 48,000 sf also at 2101 Webster St. In Pleasanton, Blackberry is rumored to be out for 50,000 sf, as is ServiceMax, and SmartZip Analytics leased 37,000 sf at 4480 Rosewood Dr. SAP reportedly signed an LOI for 150,000 sf in San Ramon, Donor Network West will be moving to 41,000 sf at 12667 Alcosta Blvd., and in Dublin, Cloud subleased 75,000 sf at Dublin Corporate Center. In Walnut Creek, Del Monte Foods expanded by 55,000 sf at 3003 Oak Rd., in Concord, WALSH Construction took 13,000 sf at 1390 Willow Pass Rd., and AmTrust North America leased 24,000 sf at 1655 Grant Ave. In San Francisco, Lending Club leased 120,000 sf at 595 Market St. and will occupy a total of 260,000 sf; TrueCar might have taken a full floor at 140 New Montgomery St.; Stripe signed the entire 510 Townsend St. building for 300,000 sf to be completed in 2017; Stack is rumored to be out for 50-75,000 sf, Xoom took 80,000 sf at 425 Market St, where ACN leased 53,000 sf, PSF took 26,000 sf, and TalkDesk just leased 13,000 sf at 535 Mission St.

A new tech tool may be in the future for new commercial developments. Studio 216 is developing virtual tours to show prospective tenants and buyers what it will feel like in a space not yet built, and I can see future versions being used to remotely experience a 360-degree feel of existing available office, retail and warehouse space as well. (SF Business Times, March 27, 2015)

Out in Tracy, California, FedEx just bought a 117-acre industrial parcel from Prologis to build a 467,000 square foot Northwest distribution facility, and Redline purchased 61 acres to put up a new 1-million-square-foot medical supply distribution center.

According to Wired magazine, 2.6% of Americans work remotely more than half the time, which accounts for 3.3 million people. However, 15% of remote workers express feelings of isolation without an office. “Many remote jobs are accessible to people without a college education. You can use your household data pipe to work in a virtual call center, take airline reservations, help people get health insurance, and more.” (Wired magazine, March 2015)

The TransBay office relocation avalanche may have started – GAP may be relocating from San Francisco to Rosewood Commons in Pleasanton, rumored to be signing a 185,000-square-foot office lease. My friends who specialize in Downtown Oakland office space report that just during the past 60 days, San Francisco companies of all sizes have descended on Oakland, searching for more affordable office locations. (The Registry, April 1, 2015)

“Internet of Things” can create huge savings in commercial buildings. As just one example, Comfy, an interactive temperature control system, is built on a machine-learning platform. Comfy gives individual workers a measure of control over the temperature in their space through a web portal or iPhone app, and over time learns what spaces are unoccupied in order to reduce or turn off heating or cooling. Savings can be 20% or more. (Buildings, March 2015)

Google’s new futuristic office campus — where the floors, ceilings and walls attach or detach from permanent street frames, using small cranes and robots to transform workspaces within hours. New ground-floor retail, markets and cultural spaces would allow the public inside the Google hive. The structures will be enveloped by glass canopies “as big as city blocks,” which would incorporate photovoltaics for alternative energy generation. The project is in North Bay shore, a 500-acre enclave on the edge of the San Francisco Bay. (Silicon Valley Business Journal, February 27, 2015) However, LinkedIn may be getting the lions’ share of the Mountain View office development allotment with portions of Google’s campus left on the drawing boards, but the battle will play during next 12 months.

Jordan, who just turned 18 last week, graduates from high school in two weeks and is off to Cal Poly. Two months ago his sister, dad, and he went for spring break to Cabo San Lucas, where he went ATVing in the desert, zip lining in the mountains, with plenty of beach and other activities in between. As of this writing, his lacrosse team is 14 and 3 and headed to the playoffs. Madison, who will be 13 in a few months, will also have played in her lacrosse playoffs, and is looking forward to an exciting camp-filled summer! Their recent photos can be seen here.

I recently attended a “Celebration of Life” for a wonderful commercial real estate broker associate, Jim McMasters, who passed away last month at a far-too-young of age. The CEO of SurveyMonkey, Dave Goldberg, fell off a treadmill while on vacation, unexpectedly passing away and leaving behind two young children. On the other side, I have friends and co-workers having babies, and more and more friends becoming grandparents (they must be much older friends, of course) … Life can be unpredictable, with twists and turns, but even with its valleys when everything can look so bleak, there is always something amazing and awesome just over the horizon.

Enjoy the summer, cherish the moment, and thank you for reading this!

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