CORPORATE OFFICE PERSPECTIVES | OCTOBER 1, 2018
Charles Dickens’ “A Tale of Two Cities” might be a good metaphor for the San Francisco Bay Area. In a crescent-shape going from San Francisco down the Peninsula into San Jose, there are millions and millions of square feet of new office buildings under construction, with San Francisco rents approaching $100/rsf per annum and tenant improvement costs in the $100 to 150/rsf range. The deal velocity is staggering. On the other side of the Bay, Oakland has several office towers under construction and the former Uber office renovation in downtown Oakland is quoting $72/rsf, so a bit cheaper than San Francisco, but still no bargain. When you go over the hills to the Tri-Valley and I-680 Corridor, there is 5.5 million square feet of vacant office space. Class A rents are in the $30-50/rsf range, often including free conference and exercise facilities and other tenant amenities. There are a number of major deals in the works (300,000 sf or so) but we also have a number of significant long-term and large sublease opportunities in the 60,000 to 120,000 sf range, some at incredible bargain prices. No new construction until rents for the most part go up 50 to 75%, and with the significant cost of relocation ($7/rsf) and tenant improvement costs ($30-60/rsf), the majority of tenants simply renew.
A recent Harvard Business School study of two Fortune 500 companies found that a cubicle-free workplace without private offices actually forces less face-to-face and more e-mailing and instant messaging. Employees have headphones on to drown out distracting noise. “There’s a natural human desire for privacy, and when we don’t have privacy, we find ways of achieving it.” (The Washington Post, July 18, 2018)
Headlines in the recent San Francisco Business Times “Leaving California”, discussing the recent tax changes and predicting that companies will be moving their people out of California … then a few pages later, “PwC plots SoMa move to build “workplace of the future”, leasing 200,000 square feet of office space in San Francisco.
At the recent Commercial Real Estate Allen Matkin’s / UCLA’s forecast, for California and overall, office space has reached the peak for this cycle with office rates as high as they will be for the foreseeable future. Warehouses are hot and for the East Bay, San Joaquin and Sacramento counties will remain sizzling for the next three years. Retail is still on its way down, with the exception of Silicon Valley. Multifamily is strong, but might soften with all the new planned construction. There is a 63% increase in planned multifamily construction.
Do giving tax breaks and / or subsidies to corporations to entice them to relocate to your community work? There have been a number of reports out that basically state, “Financial incentives do not spur economic activity!” Claims are made that construction jobs, local investment in the community, of course, new jobs … While these arguments seem sound, the reality is that financial incentives often fail to spur economic activity for several reasons. Such increased costs (labor and real estate costs go up for everyone, the cost of business grows), infrastructure congestion, and an increased probability of tax hikes. Just thinking about this when I read that Maryland just OK’d $8.5 billion in incentives to lure Amazon … (uca.edu/acre)
I am so glad we’re building new freeways and additional Transbay bridges and BART tunnels … NOT! Yet there is a huge push to build hundreds of thousands of new homes in the Bay Area to accommodate the hundreds of thousands of new tech jobs. In just one submarket, San Francisco’s Central South of Market “Planned projects total 8,320 homes and 8 million square feet of office space to accommodate up to 40,000 new jobs. In exchange for greenlighting projects, the city anticipates $2 billion in fees.” Where is the infrastructure for all this? (San Francisco Business Times, June 28, 2018)
Industrial land in the San Francisco East Bay is in super-high demand. Some of the submarkets have a 2% vacancy, and industrial land in areas where just a few years ago dirt was selling for $3 a square foot today report prices in the $20 a square foot range. I’ve heard of Southern Alameda industrial land goes for as much as $50/sf!
One of the best components of the workplace to invest in is the lunchroom / breakroom. This is where almost all of the employees go at some point in the day, and making this an energizing and enticing place to visit for all age groups and job functions is key:
- Mix and match furniture heights – Let folks choose how they stand or sit;
- Add soft seating – comfortable booths, a lounge feeling, throw pillows;
- Colors – make it lively, café-like;
- Provide great food and drink options, spending a little on quality coffee and free or subsidized snacks.
All of this can go a long way to keeping employees happy! (FacilityExecutive.com, May 31, 2018)
Deals and rumors: 10X Genomics is reportedly leasing 150,000 sf at 7068 Koll Center Pkwy in Pleasanton. In Dublin, TriNet expanded by 20,000 sf at Park Place. In Bishop Ranch, Franklin Templeton is rumored to be close to signing 50,000 rsf on Bollinger. In Emeryville, BeiGene is expanding to 21,000 sf at 1900 Powell St. In San Francisco, Amazon is taking an additional 176,000 sf to occupy 319,000 sf at 525 Market St.; PwC leased 200,000 sf at 405 Howard St.; Square Inc. took 104,000 sf at 1455 Market St.; Fintech leased 100,000 sf at 246 1st St., and Unity Technologies ApS signed for 145,000 sf at 657-662 Mission St. In South San Francisco, Alector leased 100,000 sf at 151 Oyster Point. In Emeryville, Tanium will be relocating 65,000 sf to 2100 Powell St. In Hayward, RefleXion leased 51,000 sf at 25821 Industrial Blvd. and 12,000 sf at 5820 Industrial Blvd.; Option Care Enterprises took 37,000 sf.
A number of the major commercial brokerage companies reported a spike in the cost of office tenant improvements. In some regions, the tenant improvement costs are rising much faster than the rental rates. Increases from 10 to 21% are hammering office landlords. “Key factors affecting the sudden rise in TI allowances include: 1) a significant increase in new inventory that impacted supply and demand dynamics nationally; 2) flight to quality, with tenants consistently moving to higher-quality offices to attract and retain talent; 3) a significant rise in construction costs by 15.5 percent; and 3) landlords’ attempts to offset peak rents with larger TI packages to sweeten leasing deals.” (NREI, July 17, 2018) In the Bay Area, some of the construction workers have relocated to less expensive regions where they can actually purchase a house, and the recent fires, floods and hurricanes have driven the cost of some building materials way up.
The I-680 Corridor and Tri-Valley regions have seen a significant increase in the amount of available office sublease space. At the end of 2017 we had 362,562 square feet of available sublease space, but today we have 765,059 square feet of sublease space.
How will autonomous cars affect how your employees commute, what impact on your building’s garage and what other effects on the way we do business? It is happening faster than you think. “By the end of this year, Waymo plans to launch the world’s first commercial ride-sharing service in the Phoenix metro area using entirely driverless vehicles … Within a few years, Waymo hopes to have as many as 62,000 fully self-driving vehicles operating on roads.” “Tesla expects to launch a fully hands-free version of its Autopilot system by mid-2019.” (Realtor Magazine, July – August, 2018)
Colliers just published its mid-year major office metro update, “In addition to major tech companies, coworking firms signed more large leases in Q2 2018 and have aggressive expansion plans. Landlords are responding with their own flexible workspace offerings.” Another notable quote: “The San Francisco Bay Area leads the top 10 markets and the gap is widening … Top rents in core San Francisco and Silicon Valley locations are striking distance of $100 per square foot.” Meanwhile, Class A office space with tons of bells and whistles run $30-36 an annual square foot in Pleasanton, San Ramon and Concord, and we have millions of square feet vacant and ready to occupy.
One more comment about governments offering huge economic incentives, tax breaks and subsidies to entice corporations to set up shop in their region. Yes, there can be “clawback” provisions whereby if the promised economic benefits of new jobs and increased economic prosperity do not occur, the company has to give back part or all of the inducement it received. Also, most of the time, one state or local government is dangling great inducements to entice a company to relocate, thereby creating a significant loss in the other region when the company leaves. “It’s economically moronic, even though it tracks a nationwide trend of Big Government handing over money to selected big businesses,” writes Thomas Patterson, chairman of the Goldwater Institute. “The subsidies are touted as necessary for job growth, to stimulate depressed regions and promote economic development. Unfortunately, they just don’t work.” This is still valid, even though this quote is from 2011. (citylab.com, December 16, 2011)
In the latest Business Facilities’ 14th Annual Rankings Report, California scored first place in the following categories … Solar Power Capacity & Employment, Manufacturing Employment, Food Processing, Semiconductors, Chemical Manufacturing, Bioscience Strength and R&D, and in the Metro Rankings California had three of the top 10 slots in Tech Hubs Employment, % of Employment and Tech Hubs job growth. It wasn’t scored, but California was probably way down the list for cost of living, business tax climate, and a host of other categories that states such as Wyoming, South Dakota and Alabama did well in.
Facebook, which has taken 3 million square feet of Bay Area office space in recent months, is reportedly in final negotiations for an additional 803,000 square feet of office space at Kylli’s Burlingame Point development. At the traditional tech worker ratio of 200 sf per employee, this represents almost 4,000 new jobs! (The Registry, August 17, 2018)
Office remodeling may result in deciding what to do with the old furniture. “The 3D Approach: Decommissioning, Donating, Dismantling.” Secondary office locations might see value in excess furniture. Non-profits might benefit from “gently” used items. Scrap dealers might take old furniture systems for salvage. “It is rare that any of these options will make money, and most will require funding from the organization to remove the items.” (Facility Executive, May 30, 2018)
Tech company hypothetical questions – should we expand our operations in the Midwest or the South where our employees can afford to buy a $200,000 decent home, where traffic isn’t jammed up all the time like the Bay Area, where state income taxes are far lower than California’s, where we might not be ravaged by massive fires or the ever-threatening major earthquake? Nah, let’s just lease another 301,000 square feet of brand new Class A office space in San Jose where it’s hard to find an old rancher for under a million dollars … “Splunk has formally signed a lease for a big expansion of its operations in San Jose’s Santana Row,” (Bay Area New Group, August 27, 2018)
FintechSoFi is leasing 100,000 square feet of San Francisco office space, and Unity Technologies ApS is expanding into 145,000 square feet of San Francisco office space. Didn’t they all read the headlines to expand outside of California?
My son Jordan has been living with me this past summer, working as an intern at the Walnut Creek Colliers office, and I was so blessed to go to meetings and business events with him. He enjoyed the internship and sees commercial real estate as a great career path after he graduates. He is also considering other opportunities in the fast paced tech world. So I guess I will have to wait and see what he decides! Madison, who turned 16 in August, is a high school sophomore and deep into her 12th soccer season with a U-19 team. It’s a weird feeling watching almost all the girls drive themselves to practices and games. My fiancé, Launa, and I had a wonderful summer visiting several different wedding venues, going on romantic weekend trips, and enjoying spending time with our 4 kids. We are very blessed, and excited about getting married next year. Launa’s son, Ryan, is a senior at the same school my daughter attends, and is busy applying to colleges on both the east and the west coasts. Lindsey, my soon-to-be stepdaughter, is a junior at UC Berkeley, and is in a dual degree program that sent her to the South of France for her first two years of study.
I hope your fall season is festive, be safe, and I look forward to your phone calls and emails!
