CORPORATE OFFICE PERSPECTIVES | AUGUST 1, 2018
“Of the Bay Area residents who are still here, nearly half of those surveyed recently said they plan to move out of the region in the next few years, according to a poll released in June by the Bay Area Council.” (Bay Area News Group, July 15, 2018) Folks are leaving in droves, selling their expensive Bay Area homes they originally purchased for a fraction of today’s value, and heading out to other states to pay all cash for a much larger home on acreage and still have hundreds of thousands of dollars in their pocket. As I’ve mentioned in previous newsletters, Google, Facebook, Uber, and a long list of other tech firms just recently committed for many millions of square feet of new office space. With that, a very rough ballpark of new jobs, just in the Bay Area during the next few years includes 125,000 or more clean, high-paying new jobs. And lucky for them, all these fleeing folks are leaving vacant apartments, rental homes and for-sale homes. Will prices drop because of this transition? Probably not, but perhaps the rate of price escalations will stabilize.
San Francisco may face a shortage of available office space between now and 2022 when the next major office project will be completed. In a recent SF Business Times article, the tech biggies who have gobbled up millions and millions of square feet of San Francisco office space in recent years include Facebook, Google, Amazon, Salesforce, Uber, Dropbox, and Airbnb. As the article concludes, “As Tenanes (Facebook’s VP of global facilities and real estate) put it: Facebook’s strategy for growth is simply about ‘having enough space at the right time in the right location’.” For now, it appears, it’s the right time to be a big tech company that can hire in San Francisco.
The www.OfficeTimes.com website has been totally revamped and is getting great reviews for its information-packed commercial real estate focus. There are lots of tips for office tenants renewing leases or contemplating relocating. Sublease Central listing has tons of available bargain subleases, and there are directories for tenant improvement contractors, space planners, telecommunications, and all at www.OfficeTimes.com!
A terrific article titled “The Productivity Problem in Office Design” discusses a recent survey of 250,000 employees on workplace productivity. “Just 57% agree that their workplace enables them to work productively. The findings show that many employees are having to endure workplaces that fail to support their basic working day, obstructing their ability to positively contribute to business success. Segment those workplaces further, to those that have been surveyed shortly after relocation or refurbishment works have been undertaken, and the figures are even more worrying–only 18% of new workplaces surveyed deliver noticeable operational benefit.” There are two huge reasons to invest in a great workspace. First, happy employees in general are far more productive than unhappy employees. Secondly, hiring and employee retention are extremely important and a terrific workplace can make the difference in getting top talent, and in keeping great employees. (Facility Executive, May 30, 2018)
A recent report by PGIM Real Estate predicts investment returns will continue to be strong, but moving lower, and diversification across regions and investment sectors “is a necessary strategy”. Gateway markets are still going to be top of mind for investors and in the U.S., investment opportunities in suburban apartments, niche sectors and logistics are set for growth. (National Real Estate Investor, July 13, 2018)
CBRE had a recent office rent international report and it showed what a relative bargain San Francisco was compared to a number of other cities. Five-year average rents of $103/rsf compared with $138/rsf in Paris, $153 in parts of London, $189/rsf for Hong Kong, $200/rsf for Beijing or $306/rsf for Central Hong Kong. Ouch! … and some think $48/rsf is outrageous for Downtown Walnut Creek!
Here in the East Bay, the I-680 Corridor and Tri-Valley regions combined have 5,423,000 square feet of vacant office space, including 82 office suites totaling 765,059 square feet of sublease space! Come and get it!
I’ve been giving speeches at various organizations, forecasting the market, where we are headed, if we are in a bubble (or two), and in my presentation I mention Facebook’s lease last month of the last available office building in San Francisco, taking all 750,000 square feet, then, a few weeks later, leasing 1 million square feet of office space on the Peninsula, and just last week leasing an additional 750,000 square feet in Fremont. Well, it was recently announced Facebook just sublet 456,760 square feet from WeWork (which in turn had sublet from LinkedIn). Three million square feet leased in 30 days! At the normal 5-6/1000 square feet leased, this could mean 18,000 tech jobs are now available! (The Registry, June 21, 2018)
A very interesting article by John McNellis, principal at McNellis Partners, and a sometimes astute contrarian, on WeWork. The shared office company leases 14 million square feet of office space, is reportedly valued at $20 billion, has 220,000 “subtenants”, and needs a 60% occupancy to break even. They lost $934 million last year, and just raised $702 million by selling seven-year bonds that pay 7.875% interest. (The Registry, May 8, 2018) I Googled “Regus bankruptcy” and came up with the following on The Guardian website, “Regus, which rents serviced office space to businesses, prospered during the boom years of the late 90s as start-ups mushroomed. But it has fallen victim to the economic downturn, with an over-supply of office space driving rental values down in some of its markets and forcing it to retrench.” Regus filed for bankruptcy in January, 2003.
Everyone agrees the San Francisco Bay Area is way too expensive for just about everyone, so why would any tech company want to expand here? A recent article cites that Apple has plans to develop another 4.1 million square feet in North San Jose over 15 years, accommodating another 20,000 employees. This, along with Adobe expansion plans to add 3,000 employees and Google’s plan to add 20,000 to 50,000 employees in downtown San Jose will ensure the housing imbalance and unaffordability for years to come. (The Registry, May 17, 2018)
A recent quote by Fiona Grandi, national leader of strategic investments with the big CPA firm KPMG, caused me to think, how will this impact our future office space demand? “Five years ago the big push was to go paperless. Today the push is to be automated.” When we went paperless we needed a lot less office space, getting rid of file rooms, file cabinets, law libraries, etc. Automation means getting rid of … employees … (SF Business Times, June 21, 2018)
Office furniture types and materials are changing as worker flexibility and allowing different employees to work anywhere increases. In the “old” days of private offices and dedicated workstations, it was one employee sitting for years in the same chair at the same desk surface. Now workers want (or need) height adjustability, changing stations, laptop docks, and modular furniture that can accommodate multiple uses. Designers also note that a residential look is a top office trend, giving comfort to employees and having the workplace be a place they want to be, not just a job. (Buildings, May 4, 2018)
Deals and Rumors: Patelco will be moving to a 209,000 sf building it just bought at 3 Park Place in Dublin. In San Ramon, Foster Farms signed for 19,000 sf at Bishop Ranch 15 and a 50,000 sf lease is supposedly close to signing, also at Bishop Ranch. WeWork leased 35,000 sf at 1 Belvedere Drive in Mill Valley. Down the Peninsula, AbbVie is looking for 500,000 sf of bio space. Adverum Biotechnologies is taking 80,000 sf at 800/900 Saginaw Drive in Redwood City. Zoox leased 126,000 sf at 1149 Chess Drive in Foster City. IQVIA leased 10,000 sf at 1850 Gateway and WeWork took 95,000 sf at 400 Concar Drive in San Mateo. Denali Therapeutics leased 148,000 sf at Oyster Point, Britannia Cove in South San Francisco. In San Francisco, Cruise took 375,000 sf in three buildings: 301, 333, and 345 Brannan St. Affirm leased 46,000 sf at 550 Kearny St., Nektar Therapeutics signed for 136,000 sf at 360 Third St., Facebook leased a whopping 750,000 sf at Park Tower and Pearl Law leased 15,000 sf at the Merchants Exchange.
There is an industry organization for co-working operations, professionals, asset owners, service providers and investors called the Global Workspace Association. There are over 14,000 shared workspaces in the world today and for the United States there are 20 companies that have five or more locations. Landlords are looking more at various partnerships with the major co-working organizations. Companies may pay extra for term flexibility, but I’ve asked this question before, “How much of this space will be given back as soon as we hit our next recession?” (The Registry, June 25, 2018)
The San Francisco Bay Area may be leading the nation in terms of workplace transformation. “Competition among tech companies to attract and retain the most talented employees has also fueled a steady evolution of what can be expected in today’s workplace culture and physical spaces, for both office and R&D environments … Diane Stegmeier, founder of Stegmeier Consulting Group, has been researching changes in work environments for the past 20 years and has worked with organizations from all over the world to assist in change management. She’s found a great level of awareness among leaders in the Bay Area that workplace culture is an integral part of the overall work experience for employees, which has in turn influenced the built environment.” Companies are truly listening to employees and what they want and need in their work environment to be successful and as importantly, to be happy. This includes dealing with noise levels, distractions, need for privacy, and providing a variety of work space. Less space for individual employees, but greater amenity spaces. (The Registry, April 5, 2018)
Office Tracking – There are sensor systems that can track how long an employee is at a workstation, how many employees use a specific conference room for how long with how many attendees, how often your movable desk goes up or down, what types of desks or chairs employees prefer, there are even option programs that allow employees to see where their colleagues are, and you can turn it off if you want … maximizing space efficiently, giving employees the type of work environment when they want it, and reducing unused space. Big Brother is watching you! (Bisnow, June 13, 2018)
The article I previously quoted from, “The Productivity Problem in Office Design”, brought up an interesting point. We often think we should be designing office space for the younger generation, but this study of 250,000 employees surveyed found that the older employees had the more complex work activities, “The reality is that the under 25 demographic (global) represents just 4.4% of the workforce and have the lowest activity complexity. Collectively, the 35-44 and 45-54 age groups record the highest activity complexities—meaning they have the greatest need for dynamic workplace infrastructure.” (Facility Executive, May 30, 2018)
I give a lot of public speeches around the Bay Area on where our various commercial real estate markets are headed, what might happen in 2019, 2020 and beyond, so if your organization or company is looking for a fun and informative presentation, please send me an email at jeff.weil@colliers.com.
My daughter, Madison, turns 16 this month and will be a sophomore at San Ramon Valley High. If you live in Alamo and have any babysitting or dog-walking jobs for her, just email me. She is very responsible and it’s amazing how teenagers go through money – movies, bowling, Santa Cruz, snacks, Six Flags and on and on. Madison has taught herself to sing and play the ukulele and what a treat it is to hear her! Jordan, who is majoring in Industrial Technology in the School of Business at Cal Poly/San Luis Obispo, has been interning this summer at Colliers. Yes, I am an extremely proud dad and those of you who have had the pleasure of meeting or working with Jordan know why. Who knows if he’ll follow in his father’s career footsteps? Too soon to tell, but he totally has a knack for the business.
I have a relative who has a very dear friend going through personal illness with extreme pain and suffering, and I am now constantly reminded just how fragile our bodies and minds can be. This ill person refuses appropriate medical treatment, which exacerbates the situation, and my relative has been mentally devastated by her trauma. I’ve mentioned the Gratitude Journal I do daily to remind myself how much there is in my life to be grateful for. While it is easy to get caught up in the negatives of our world, for the most part, there is little we can do to change these. We can affect those we interact with, and a simple heartfelt compliment, thank you, or acknowledgement of another human can make most powerful and positive impact on another. Have a wonderful rest of your summer, and a positive impact on those around you!
Sincerely,
Jeffrey Weil, MCR.h, SIOR, CCIM
Executive Vice President
Colliers International
