CORPORATE OFFICE PERSPECTIVES | APRIL 1, 2018

The Bay Area office market continues to spin furiously, with leasing activity and rental rates for the most part holding steady. New office development on the Peninsula and in Oakland will eventually alleviate the pressure of the lack of office inventory, but for now, its office demand is still robust. Along the I-680 Corridor we are seeing a handful of 20,000 square foot office tenants either expanding from or relocating out of San Francisco and Oakland. With 5 million square feet of vacant and available office space along the I-680 Corridor and in the Tri-Valley, we have plenty of space to accommodate more such relocation.

According to a recent national office report by Colliers International on February 15, 2018, “The major office markets in the U.S. remain healthy, as tech tenants continue to lead the charge. The majority of leasing by tech firms is pure expansion, and there is no slowdown in sight.” Class A leasing activity is robust and tenants are willing to pay more to be in the best space in town.

We have hundreds or thousands of folks leaving California and the Bay Area because our housing costs are so crazy high, and at the same time we have hundreds or thousands of folks coming to California and the Bay Area because we have so many high-paying tech jobs available. We have very little available housing inventory and in many areas the average house on the market goes from listed to escrow in under 10 days. Go figure! I’ve heard of people selling their 1,400-square-foot Santa Clara rancher for $1.3 million and buying 20 acres, a house, a large barn and other out buildings in the state of Washington, for example, for $350,000, and retiring on the differential. One doesn’t even have to leave crazy California to find an affordable home. I just checked www.realtor.comand for $269,000, you can buy a 1,855-square-foot home on a quarter acre of land … just don’t expect to find many high-paying jobs in Weed, California …

In Site Selection of January 2018, California was either at the top or near the bottom ranking for various economic and business benchmarks. Out of 50 U.S. states, California was #1 in higher ed. R&D expenditure, #2 in information technology and innovation, but #48 in business tax climate and # 47 in lowest cost of electricity. It was also #1 in GDP. Population (2017) 39,611,295, Median household income: $65,223.

Past SIOR President Geoffrey Kasselman predicts that office space may one day be occupied 24/7, and there are major users “that may rhyme with Zamazon and Zoogle that are trying to negotiate with large-portfolio commercial landlords now — they want a landing pad on the top of their buildings so they can recharge the drone on the top of their building so they can go on to the next building.” It reminds me of the old days when cell towers were the hot ticket … (Westfaironline.com, January 22, 2018)

I was at our annual Northern California SIOR Developer forecast. Industrial developers mentioned how much Bay Area industrial land has spiked in recent years, one citing a parcel they bought in 2015 for $15/sf now worth $40/sf, how city fees have also skyrocketed and building materials have gone through the roof. Amazon appears to be the second-largest employer in the U.S. with an insatiable warehouse appetite. Questioned about whether we are in a bubble, “The Bay Area is banging along the top,” according to Carl Shannon, senior managing director for Tishman Speyer.

San Ramon’s Bishop Ranch new City Center retail has announced a number of tenants, including a 30,000-square-foot health club and spa, Equinox, Williams-Sonoma, Artisan Burgers, Fieldwork Brewing Company, Boba Guys and Ramen Hiroshi. Previously announced was The Lot, a 10-screen luxury cinema and dining destination. The 300,000-square-foot City Center is expected to open this November. (The Registry, February 7, 2018)

An excellent article written by Dave Sandlin, SIOR from the Colliers’ San Jose office and published in the Winter 2017 SIOR Report, has a number of interesting factoids. Eight of the top 10 tech companies are in the U.S., and of these, five are headquartered in Silicon Valley (Apple, Facebook, Google, Intel and Cisco). One third of all venture capital raised in the United States is invested in San Francisco Bay Area companies, and since the recession ended, this region has added 700,000 net new jobs.

For those convinced that standing desks are the healthiest things for offices since sliced bread, in a study just published in the journal Ergonomics, standing at a desk for a long period of time can create “discomfort and deteriorating mental reactiveness,” as the Washington Post reports.” “Standing too long can lead to back pain and the swelling of veins. As Newsweek reported, a 12-year study of more than 7,000 office workers in the American Journal of Epidemiology found people who often stood at work were nearly twice as likely to develop heart disease as opposed to those that sat more often.” (Bay Area News Group, February 26, 2018)

Prestigious law firms and other image-conscious office tenants may be wary of locating in an office building which has a major co-working tenancy. These shared office environments cater to creative, out-of-the box thinkers at a high density ratio, which might result in lines waiting for the elevator or restrooms and casual workers in shorts, flip flops and bringing their dog or pet pig to work. On the other hand, an incubator full of start-up companies might be a gold mine for emerging future growth clients and lucrative fees …

Most landlords are honest, fair and have integrity in their business dealings with tenants. However, on occasion there are a few landlords not so honest and for these a fair lease audit clause is a “must”. The tenant must be able to verify the landlord’s calculations and allocation of CAM, building expenses, property taxes, etc. and have a reasonable time period and process in which to do so. There should not be too short a time period, with 90 to 180 days more reasonable than a 30-day limit after the receipt of the reconciliation statement. The tenant should also not be constrained to hire only a CPA from a major accounting firms as there are excellent and experienced lease auditors who work on a contingency fee basis … (SIOR, Quarter 4, 2017)

Deals and Rumors: In San Ramon’s Bishop Ranch, Golden State Overnight leased 17,000 sf at 4000 Executive Parkway, Armanino CPAs expanded by 15,000 sf at BR-15, ARC Document Solutions relocated from Walnut Creek to 23,000 sf at 2303 Camino Ramon and Surplus Lines Insurance took 14,000 sf, also at Bishop Ranch. In Walnut Creek, Berry Appleman & Leiden leased 20,000 sf at 100 Pringle. Up in Concord, Cerus inked 65,000 sf of office and lab at 1200 Concord Blvd. In Oakland, Arup leased 16,000 sf at 1330 Broadway. Jumping across the Bay, Robinhood took 39,000 sf in Menlo Park. Z00X leased 125,000 sf at 149 Chess in Foster City. In San Francisco, Canopy leased 11,000 in Jackson Square; PwC may be looking for new space to replace its existing 165,000 sf at 3 Embarcadero Center; Tempo Automation took 42,000 sf for its HQ and manufacturing at 250 Alameda St.; Swift Navigation signed for 15,000 sf at 650 Townsend St.; and Venable Signs is taking 40,000 sf at 101 California St.

A new ballot initiative will try to separate commercial from residential properties with respect to California’s Prop 13, which could lead to dramatically higher commercial property tax rates and resulting in higher rental rates. Commercial properties below $2 million would be exempt. If it passes, the current cap of an annual 2% increase in property taxes would be replaced by market value. Ouch! (Bay Area News Group, February 6, 2018)

Not sure if this is a signal of a change in office market conditions or just a coincidence, but recently out here in the burbs of Contra Costa we have had a flurry of office building open houses and promotions. Breakfast open houses, luncheons … we’ll see how long this trend continues. However, if prospects were beating down the doors, I’m not sure how many free lunches would be out there …

Double-dipping – office landlords generally have an annual rental increase, which in our region is a 3% per year rent bump, and there is also an operating expense pass-through increase, which usually takes the base year or first year of the lease as a benchmark and then the tenant pays their prorata share of any increase in following years. This covers increases in PG&E, janitorial, property tax, insurance, water, sewer, garbage and management. Using a $4/rsf Class A monthly rent as an example, $1/rsf of this might be for the operating expense portion. Therefore, the 3% increase is also on this $1/rsf which is already covered by the operating expense pass-through, thereby giving the landlord a double-dip in rent increase / reimbursement.

In Santa Clara, California, the median time for an existing home on the market is nine days, from listing to escrow. In Alameda County it is 13 days. In Contra Costa County it is 16 days. The median San Mateo home goes for $1.5 million and for $1.48 million in San Francisco … Talk about frothy and frenzied! (Bay Area News Group, January 23, 2018)

“The integration of Smart Home-like systems for offices are poised to disrupt business operations not just for global interaction between businesses, but hyperlocal workflows as well.” Integrating functions from indoor lighting, booking meeting rooms, turning on and off subsections of HVAC and using AI to optimize automated systems. The article mentioned seven categories of concepts benefitting from AI and Smart-Home for business: project management, electronic accounting services, greater access to collaboration, cybersecurity, video conferencing, chatbots, cloud infrastructure. (DisruptCRE, February 5, 2018)

According to Geraldine Serrano of the Bedford Team, who specializes in cost segregation, regarding the New Trump Tax Bill, “As a result of the new tax bill, one of the biggest changes for commercial real estate buyers is in the area of bonus depreciation. The bottom line is that buyers are now eligible to deduct 100% of all assets that can be identified as having a depreciable life of 20 years or less. So, the basic reasons, and benefits, of having a cost segregation study completed on newly purchased property has increased dramatically. A quality study can typically amount to an immediate deduction equal to anywhere between 20% to 45% of the basis of your newly acquired building. Not only that, but the rules are retroactive to purchases made after September 27, 2017, and, now include multi-family properties, not just commercial real estate.”

Way back in my April 1, 1989 Newsletter, I mentioned that Walnut Creek Shadelands office building owners who paid $155-175/sf for 90,000 – 200,000 sf office projects “were not getting breakeven returns with full-service effective rents in the $12/sf per annum range: (yes, $1.00/rsf per month!). Here we are in 2018, 29 years later, and there are still Shadelands office building owners challenged to get decent returns even at $2.00/rsf full-service monthly rents after deducting operating expenses ($0.65 to 0.75/rsf), tenant improvements ($15 to 30/rsf or more), commissions and legal fees.

If you want a great resource for East Bay office furniture dealers, space planners, telecommunications vendors, tenant improvement contractors and lots of other commercial real estate service providers, please check out “Resources” section at www.officetimes.com.

I usually don’t write about industrial deals or transactions in states other than California, but this one is most noteworthy. In October 2017, Foxconn announced it will build a 20-million-square-foot manufacturing facility in Mount Pleasant, Wisconsin. It will employ 10,000 construction workers and produce 13,000 new manufacturing jobs over the next five years, and the entire facility will be completed by the end of 2020. Wow! (Business Facilities, February 12, 2018)

Please call me if you need an office, store or warehouse, want to buy or sell an apartment house, need to refinance your commercial property or anything else regarding commercial real estate just about anywhere in the world!

While cleaning up old (2014) research material, I stumbled on the article “Cost Efficient, Open-space Office Designs: Ditching Desks — and Privacy” – companies bragging how they are getting employees to work at computer terminals standing, no dedicated spaces, everyone “floats,” and squeezing the same number of employees into a quarter of the space previously occupied. Well, it totally did not work. Hiring, employee retention and worker happiness mandates workers’ need to be able to find private space when they need it, have flexible workspace, and tons of amenities. This gets per square foot per employee up, but also gets way more productivity, less absenteeism and much happier employees!

According to the San Francisco Business Times, San Francisco has the second-highest construction costs in the world. This is “because of complex, burdensome approvals, a severe labor shortage and easy paths for opponents to delay projects.” One project estimated construction costs of $425,000 per unit to build apartments. The high price of housing has sent construction workers to move to lower-cost regions, increasing the worker shortage. For the office space sector, I’ve heard of office tenant improvement costs in the $100 to 150 per square foot range.

Jordan, who turns 21 next month, will be a Senior at Cal Poly San Luis Obispo next year, and is still loving college life. In June he heads to Israel for Birthright and then back to the Bay Area to work this summer at hopefully a commercial real estate firm as a summer intern. Madison will be working her first full-time summer job and we’ll tell you more about this in the next newsletter. Her Freshman year at San Ramon Valley High School has been great, and I am most grateful to be raising a 15-year-old teen daughter!

I’ve mentioned before that I keep a Gratitude Journal and each morning I write a short paragraph of what I am truly grateful for. Most of us are so blessed with living in this beautiful and bountiful Unites States, and, regardless of your politics, “it isn’t so bad!” Low unemployment, affordable gas and airline prices, and seemingly endless food choices, entertainment venues, great books to read, movies to watch, friends and family to hang out with, and a community support system – I know there are millions of less fortunate, and more and more of my friends are devoting portions of their lives and finances in giving back to help those in desperate need of assistance and support of all kinds. No easy answers and sometimes it is helping solve these difficult questions and issues that adds so much to life’s meaning. Please give a special hug to your children, parents or siblings as we move down this journey of life together!

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