CORPORATE OFFICE PERSPECTIVES | AUGUST 1, 2015

The San Francisco Bay Area market continues to sizzle along, with San Francisco, the Peninsula and Silicon Valley leading the way. Oakland is humming with overflow requirements leaving San Francisco for rents half or less and at some point Oakland, with a Class A office vacancy downtown at 8 percent will run out of space as there are no new office projects under construction. The Tri-Valley region including Pleasanton, Dublin and San Ramon has 2.3 million square feet of Class A and B office space waiting, as does the I-680 market with an additional 1.4 million square feet of vacant Class A space.

The “Cool Factor” in today’s office design … Rebecca Weld published a blog on this, and numerous designers have similarly commented that employees today choose to work, not because they have to, but because they want to. Non-tech companies are jumping on the bandwagon to find their own versions of cool. According to One Workplace, “Essentially, the office needs to become an ecosystem of interconnected and interdependent spaces that support the physical, cognitive and emotional wellbeing of people. Companies are increasingly realizing that some interpretation of a cool work environment actually results in attracting top talent which translates into superior productivity and stellar job performances. No longer are only the ultra-hot Facebook, Twitter, Linked In and Google-type campuses boasting hip, happy workplaces with ping pong pool tables, volleyball and trendy interiors. According to a study by Accenture, 60% of respondents in the 2015 Gen Y crowd place significant emphasis on a positive work environment and would settle for a lower salary if necessary to have that.” (Hillhouseconstruction.com Blog, May 18, 2015)

“As companies extol the values of collaboration and save on real estate by inching back toward the bullpen offices of the 1950s, workers given a choice would still really rather have an office. One study from The Center for the Built Environment at UC Berkeley asked workers about satisfaction with speech privacy and noise. The results? “In private offices, people were the happiest,” says CBE researcher David Lehrer. “In shared offices, people were also pretty happy. The satisfaction really dropped in any of the other conditions after that.” One of the top issues with open layouts is noise transmission. Steve Orfield, the president of Orfield Laboratories, studied acoustics and other elements of office design for the past 40 years, commented that for the most part sound masking won’t make a difference most of the time. (Tri-State Livestock News, May 2015)

“Silicon Valley startup Ubiquitous Energy has begun to manufacture the world’s first transparent solar cells.” It is an invisible film that can stick to any surface to generate power. Just imagine a future where office buildings actually generate more power than used and sell the excess back to the grid. (National Real Estate Investor, Second Quarter 2015)

The future of the Concord Naval Weapons Station in Northern California: 5,046 acres, $6 billion estimated cost of build-out, 12,000+ housing units, 10-year time frame for first phase, and 6 million square feet of commercial space. (San Francisco Business Times, April 2015)

Play foosball at work, become more productive … “Even the features that seem least work-related, such as game tables, can actually increase productivity by allowing employees to refresh, regroup and take in a change of scenery.” (Buildings, May 2015)Popular wellness features: sit-to-stand stations, treadmill desks, walking routes, ergonomic chairs adjusted to the user, healthy snacks, team exercise opportunities, foosball, video games, pool and ping pong.

Deals and Rumors: In San Francisco, FitBit leased 164,000 sf at 199 Front St.; Stripe took 300,000 sf at 510 Townsend St.; Sony expanded to 63,000 sf at 400 2nd St.; Slack sublet 49,000 sf over at 155 5th St.; Instacart took 56,000 sf at 50 Beale St.; Lending Club will be moving to 122,000 sf at 595 Market St., and NRG Energy leased 51,000 sf at 100 California St. In Pleasanton, I helped D+H, Inc. to extend their lease of 30,000 sf at 5000 Franklin Drive and Diebold took 12,000 sf at 4255 Hopyard Rd. Over in Dublin, PG&E leased 25,000 sf at 5875 Arnold Rd. Up in San Ramon, Adapt will be relocating to 49,000 sf at 4550 Norris Canyon Rd, and Bank of the West just expanded on Alcosta Blvd. by 15,000 sf. Up in Walnut Creek, YapStone expanded by 25,000 to 50,000 sf at 2121 North California Blvd. and in Concord, AssetMark took another 24,000 sf at 1655 Grant St., where AmTrust Financial Services also doubled in size from 25,000 to 50,000 sf. In Oakland, Oakland Unified School District has doubled to 98,000 sf at 1000 Broadway; 99designs is moving to a 14,000 sf office at 2201 Broadway from San Francisco; and Sunset Magazine leased 20,000 sf at 55 Harrison St. In Fremont, Thoratec Corporation expanded from 13,000 to 23,000 sf at 2859 Bayview Drive. OnQ Solutions is relocating to 28,000 sf at 24520 Clawiter Road in Hayward.

The San Francisco Business Times, June 26, 2015 published a list of all the future office / R&D buildings for San Francisco: 8,384,000 square feet are currently under construction (almost all of which is pre-leased), 5,084,000 square feet have been approved, and 13,684,800 square feet are planned and competing for approval. Wow!

The future of office workspace – “Millennials are rapidly changing business culture and the real estate environment across the Bay Area. Set to make up 75 percent of the workforce by 2025, this younger generation is less interested in driving, and 77 percent plan to live in the urban core ….” (The Registry, July 1 2015) While I can understand not wanting to drive, with increasing gridlock and road congestion, at some point these Millennials will grow up, decide to own a house with a decent public school system and, most likely, move out to the suburbs … until then, public transit office development will be the way to go.

Mini-windmills on office building roofs – a number of years ago I predicted roofing systems integrated with solar collectors. I’ve written about office building window glass that collects solar energy, and I also predicted mini-wind turbines on office buildings. “Intel is turning the roof of its Santa Clara headquarters into a mini-wind farm with what it says is one of the largest micro-turbine arrays in the country.” (San Jose Mercury News, May 21, 2015) Just wait, these types of devices will keep getting more and more efficient and we will soon see the day when commercial buildings generate more electricity than they use. Now if we can solve our California water issues.

Talk to your tenants … Monanetworks.com has a tool for property managers and building owners to easily communicate with tenants, as well as a space for everyone in the building to share information. I can just see the flurry of comments between tenants if the owner jacks up the operating expenses and zaps everyone with their new bill (don’t laugh; right now I am dealing with a landlord who spiked the pass-throughs 40 percent in one year!) But overall, probably, it is a great management tool … (The Registry, June 23, 2015)

The City of Walnut Creek has an energy efficiency rebate program for commercial properties and small businesses with up to $2,500 in rebates, and on top of this, there is a regional rebate program for Alameda and Contra Costa counties which combined could cover up to 75 percent of energy efficiency improvement costs. Businesses must first complete the Business Energy Services Team Program which is a free, no obligation lighting and energy assessment. Please contact the Energy Services Program at bestprogram@dnvgl.com for more information. (San Jose Mercury News, July 2, 2015)

Colliers International Law Firm Services 2015 report cites a space reduction of 15 to 32 percent for the top 200 law firms that are currently re-working their spaces, 48 percent outsource E-Discovery, 35 percent outsource document review, and 18 percent outsource legal research. By 2018 50 percent of the legal workforce will be Millennials.

When will new office construction begin in the East Bay? Oakland may be the first sub-region as current office rents of $36 per annum full-service suggest viable new construction with three-year lead time for completion. The big gamble is accurately predicting there will still be strong office demand three years from now. Out in Contra Costa, new office construction is much further out in the horizon for several key factors. Concord, with a 20 percent vacancy rate, offers full-service Class A annual rents, including structured garage parking, free fitness centers and conference facilities, of $24 to 26/sf ft and it will take double these rents to justify new construction. At the other end of the I-680 corridor, Pleasanton/San Ramon has millions of square feet of vacant Class A office space, with $30 to 32/sf annual rents which again will have to double before new construction is justified. In the middle is Walnut Creek with $35 to 48/sf annual office rents, but multi-family and retail have bid up the price of land so it is not viable anywhere on the horizon for new office construction.

With the summer upon us, some states have had too much water and others like California are in a four-year drought. Interest rates are still low, but like the past three years, most expect them to rise, and how will this affect home purchases and commercial cap rates? Everyone except the VCR repairman seems busy, but other than tech companies, most industries are still cautious with expansion plans; the back office jobs that used to go out to the suburbs, in some cases, head to Salt Lake City, Austin and other less expensive locations with a good workforce. However, for the most part, jobs end up in India, The Philippines and Indonesia. Almost everyone I know is happy, but as I write this, a plumbing crew is digging up my front yard in search of a broken water main and I shudder to think of the pending bill. I’m still happy, but my kids may have a smaller inheritance to look forward to … their recent photos can be seen here.

If you ever have any questions about any aspect of commercial real estate, call me … Colliers International has 502 offices in 67 countries and we should be able to help you out anywhere. Thanks for reading this!

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