CORPORATE OFFICE PERSPECTIVES | OCTOBER 1, 2017

Some folks are surprised when they ask how the East Bay office market is and out along the I-680 Corridor, and when I reply to them that since 2007 and The Great Recession, overall office leasing has been lethargic. Class A office building sales have been brisk, with dozens of buildings trading hands just during the past two years, and rental rates in several submarkets like Downtown Walnut Creek have increased dramatically, but overall our vacancy rate is around 11% and larger office transactions of more than 20,000 square feet have been few and far between. What we need to get the market really moving is new construction as the top law and CPA firms often want to be in the newest, classiest building in town, but our rental rates have a long upward way to go before new buildings pencil out, and much of the formerly available office land has been sold for residential or mixed-use developments. If you want action, just go to San Francisco …

With increasingly more sophisticated sensors, and computer analyzing programming light years ahead of just a few years ago, there are, probably, consultants who study a workplace and quantitatively ascertain what combination of layout design, wellness amenities, lighting, sunlight, temperature, type of desks, variety of work environments, and all the other factors that go into an office to maximize employee satisfaction as well as work productivity. We had metrics of square feet per employee back in the old days – now a totally new form metrics might emerge that includes employee retention, absenteeism, happiness, job performance, etc. to tie everything controllable in an office environment in terms the CFO can understand and support.

The East Bay is expected to see a higher job growth rate in 2017 as compared to San Francisco, San Mateo, and Santa Clara County, according to Beacon Economics, due to the cost and shortage of housing in the other two counties as well as a lack of skilled labor. (Bay Area News Group, July 12, 2017)

According to Colliers International, office vacancies in the San Francisco Bay Area, Manhattan and Seattle all had sub-10% vacancy rates with San Francisco the lowest at 6.1%. Manhattan has 14.7 million square feet of office space under construction with half of this preleased and with this huge office market, there isn’t any fear of overbuilding. Los Angeles has 4.1 million square feet expected to be completed within the next 12 months, which could impact rents. (GlobeSt.com, August 10, 2017)

Facebook is working on an expansion of its’ Menlo Park campus to include 1.75 million square feet of offices, 1,500 housing units, 125,000 sf of retail space as well as a cultural and visitor center. This Willow Campus will be open and accessible to the community. (Bay Area News Group, July 7, 2017)

The HR department not only has to deal with the significant differences Baby Boomers (who are working in later years far more than their predecessors) vs. the Millennials or the up and coming Generation Z. Kids coming out of college today never knew a world without smartphones or the Internet, expect immediate answers at Google speed, can work anywhere, whereas Baby Boomers may have a more challenging time giving up a dedicated work space with their family photo on their desks … And then there are the Life Stage differences for the employees who are raising young children, seeking affordable housing, not too many hours drive from work, and the aging Baby Boomers who can’t handle a two-story walk-up office or lack of privacy once they get to the office.

As someone who represents just tenants on office lease relocations and renewals, this industry can be very one-sided on a number of different levels. Office lease contracts for the most part are written by and for the landlords and are almost always biased in favor of the property owner. Another example – there is no formal office tenants’ organization to protect and enhance tenants’ rights. However, there is an owners group, Building Owners Management Association (BOMA), and on June 27, 2017 it was announced that they will be introducing new building measurement standards for 2017. The last time BOMA revised these standards, office buildings, mysteriously grew by 5 to 15 percent, with load factors and rentable square foot calculations increasing to the tenants’ disadvantage. “Items like balconies and rooftop terraces may be included in rentable area,” David Fingret of Extreme Measures Inc. said. (Bisnow, June 27, 2017)

It might not work in Phoenix during July or August when it’s 115 degrees, or in Minnesota in January, but in San Francisco Campsyte has launched its’ outdoor coworking space concept, turning underutilized parking lots into shared workstations, with printing, Wi-Fi, free  coffee and beer on tap, and for private meetings, there are vintage trailers. There is even a camp kitchen and central campfire to socialize and network around. For more info, click here. (The Registry, July 11, 2017)

Hurricane Harvey’s impact on commercial real estate: – In addition to 17% of refining capacity delayed since the hurricane recently hit (Goldman Sachs), the Houston office market has been suffering for several years due to low barrel prices, with office vacancies jumping to 20% this past quarter, and a large portion of Class B and C office supply may be completely wiped out by the storm. With most damaged homes not covered by flood insurance, it is not clear who will be paying and when to rebuild. That will be a boon for Home Depot and Lowe’s once we get to that stage of recovery. (Bisnow, August 28, 2017)

I recently saw one of the futures of office space, a Mercedes Benz with four seats facing each other around a small conference table, driverless, of course, so you can have meetings while on the way to more meetings …

Deals and Rumors: Amazon reportedly is out, looking at Northern California locations for a 50,000 employee office facility … In San Francisco, Airbnb signed a 287,000 sf lease at 650 Townsend St.; Amazon signed a 180,000 sf lease at 525 Market St.; Pentaho leased 19,000 sf and Landmark Worldwide took 14,000 sf, both deals were done at 353 Sacramento St.; WeWork took 75,000 sf and Salesforce leased another 150,000 sf, both leases at Salesforce Tower, and the big news was Facebook leasing 432,000 sf at 181 Fremont St. In Walnut Creek, Easter Seals signed for 52,000 sf at Walnut Creek Executive Center in Shadelands.

Employees increasingly want a voice in how their work environment is designed. No longer a top-down, one size fits all dictated by the C-Suite, workers want a say in whether they sit at benches, workstations, have small private pods or mini-offices, couch seating for informal meetings, etc.

The larger firms can offer employees a wide range of work environments, giving their employees a choice of open space, private office ‘pods’, working lunchrooms, small privates collaboration areas and more. However, the bulk of American businesses are in the under-5,000 square foot category and may be limited by the amount of space leased in what variety of work types they can offer, let alone the free lunches and dinners by gourmet chefs often found at the larger company facilities.

In a recent SIOR Report, Spring 2017, there was a discussion of the new “sharing” in commercial real estate. WeWork is a multi-billion dollar phenomenon, leasing space and then charging top dollar for desk space by the month, week or hour. Now with technology there is Flexe, which rents out underutilized warehouse space for pallet space; Clutter aggregates underutilized self-storage space; Storefront markets vacant retail space for temporary pop-up stores; Spacious offers empty tables in restaurants between lunchtime and dinnertime for business or group meetings … just waiting for Brokerages where you can hire underutilized commercial real estate brokers by specialty by the hour for specific projects …

There are increasingly sophisticated analytic sensors in office furniture that can track how long someone is sitting at their desk, how efficiently cubicles, benching, and conference rooms are being utilized, leading to an entirely new type of consulting that helps companies decide what types of office environments work best for their particular type of work and type of employee. In the future unassigned desking will be the norm.

Intel has a short online video showing how tech can enhance the office environment. It starts where an app tells the driver what parking spaces are available, sensors scan the employee, allowing access through security, the smartphone telling you which desk is yours for the day (or hour), and on and on. A little scary … You walk into a room, it knows the temperature you prefer and what furniture you need.

I recently attended a presentation by Guy Bjerke, director of Community Reuse Planning at the City of Concord on the Concord Naval Weapons Station redevelopment. This 5,028-acre property is planned for 12,000 new housing units, 29,000 new residents, a 120-acre higher education facility, 6 million square feet of commercial space and more than 65% of the area will be reserved for parks, trails and open space. If you are interested in buying a home or open a business in this massive redevelopment, you will just have to wait. Legal transfers of ownership may start next year, and significant infrastructure will take several years with first phase completion expected in 2022. For more information, go to www.concordreuseproject.org.

Google Glass is back, and may become a significant part of a number of workplaces as Google has spent the past two years working with experts to create customized software for business solutions. Mechanics can have both hands free while accessing parts and detailed online schematics orders can be fulfilled quicker, and medical record-keeping can be made much more efficient with the usage of “Glass”. Stay tuned as more and more practical business applications find their way to the workplace. (Bay Area News Group, July 18, 2017)

According to SIOR Report, Spring 2017, “Blockchain is the technical infrastructure that underlies digital currencies like Bitcoin and Ethereum, with an encrypted, distributed, and immutable general ledger that eliminates the need for third-party authentication. Securency is a start-up currently testing a method of stripping the leases out of a building and securitizing them for trade in the financial markets, thereby unlocking the value of the future cash-flows.”

Factoids about San Ramon’s Bishop Ranch, courtesy of the San Francisco Business Times: 600 companies, of which 400 are under 5,000 square feet, employing 30,000 employees in 10 million square feet of office space. Under construction is Phase One of City Center Bishop Ranch with 75 retail stores, a full-service wine and dine movie theater, a fitness center and service businesses. Phase Two will add 500 residential units and a 169-room hotel.

It’s hard to believe, but during the past 35 years the length of solo Bay Area driver commuting hasn’t changed much. In 2015 it averaged 28 minutes and back in 1980 it was 24 minutes. Compared to most other large metro areas, the Bay Area has the most predictable commute times due to our good weather and the largest network of carpool lanes outside of L.A. – 88% of workers in Santa Clara County live in that county and have average commute times under 25 minutes. Workers living in Brentwood, Antioch and Oakley spend nearly 40 minutes commuting. (Bay Area News Group, February 2, 2015)

Open layouts may cost more in terms of the higher employee densities, requiring additional restrooms, and electrical distribution; however, with minimal fixed walls there are significant savings in flexibility and serious rent savings in being able to pack more employees into smaller spaces. Workday just remodeled a 100,000 sf former Safeway HQ in Pleasanton, with open lounges off each elevator bank, “some with one-on-one booths lined along the wall, others with standing tables and others with more traditional tables for group meetings. The different designs encourage employees to travel between floors to find the space that works best for them.” (SF Business Times, August 10, 2017)

E-commerce is changing industrial real estate in a big way: 30 years ago, clear height warehouses were 18 to 24 foot clear, then as recently as 5 to 10 years ago, 32-foot clear was standard, changing a few years ago to 36-foot clear and today 40-foot clear heights is the standard for industrial buildings of 500K sf or larger. (Bisnow, August 25, 2017)

I was very sad to see my 20-year-old son Jordan head back off to Cal Poly, where he is a junior, but he loves that college and college life. During the summer we hung out, went white water rafting, bowling, poker games with my friends and Jordan and I had many great meals together. Madison, who recently turned 15, also had a terrific summer, spending a month at camp in Santa Rosa and then was a Walnut Creek summer camp counselor learning the ropes. Madison is a freshman at San Ramon Valley High School and, surprisingly, really enjoys school.

For the past 18 years, I have maintained a webpage with the pictures of my kids, Madison and Jordan, to share their latest adventures. However, my webmaster has just informed me that because of the “kids’ photos” page, my business website has been delisted by Google, so, unfortunately, we can’t post photos anymore. Sorry!

I usually try to impart some sage wisdom or thoughts at the conclusion of each newsletter, but with all the calamity going on around me in the world right now, as I write this, wise words seem to elude me. North Korea, hurricanes, fires, DACA, so much swirling around us … Please give your loved ones an extra hug from me, and I know that somehow everything will turn out okay!

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